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The Myth of the 4th Industrial Revolution

Louis XV of France is reported to have presciently said, “After me the deluge…”  That awareness that things could not go on as they had been was lost on Louis XVI, whose court behaved as if the real France was not falling apart around them.  It was only the appointment with Mme Guillotine that clarified the folly of their beliefs.

The courtiers of the modern corporate elite also danced in their version of Versailles at Davos in Switzerland.  Initially, they were emotionally deflated.  None knew why stock markets were tumbling, oil and commodity prices were crashing, the Chinese engine of growth was seized, and zero percent interest rates and quantitative easing had failed.  For a brief moment, they peered into the abyss of their own destruction.  Within the week, however, the courtiers regained their energy and confidence… technology was going to save the day after all.

The vision that came out of Davos 2016 has been encapsulated in the spectre of the fourth industrial revolution – the internet of things, the singularity, the knowledge economy and the zero-carbon economy all rolled into one.  Where, a century ago, people laboured in mines, quarries, mills and factories, in the twenty-first century we will be working digitally.  Virtualisation will replace many of the physical products we currently consume with low-cost digital versions.  Those physical products that we do need to produce will be built in fully automated smart-factories.  Meanwhile, we humans will make our living in a new wave of tech businesses and cloud-based creative industries.

The image is appealing.  Smart cloud-based businesses operated remotely using smartphones and tablets will deliver virtual products and services at almost no cost.  Traditional business overheads such as factories and offices will be a thing of the past as a new generation of tech entrepreneurs learn to operate multi-million pound businesses out of the local coffee shop.

In this environment, we will all enjoy more leisure time.  And it will be the things we do with that leisure time – listening to music, playing games, reading e-books, etc – that will determine the shape of the businesses that emerge.

If this all sounds a little familiar, it is because we have heard it all before.  In the wake of World War Two, as the military wanted to expand its nuclear arsenal, and as politicians wanted to increase employment, nuclear power was sold to us as a revolution that would provide “energy too cheap to meter.”  A couple of decades later, the development of the personal computer promised to usher in an age of leisure in which we would all be working a 16-hour week.  By the turn of the century, with smartphones, cloud computing and social media proliferating, the bright uplands of the promised age of leisure was, we were told, just around the corner.

Far from creating an age of leisure, each of these technological revolutions served only to further depress the incomes of the majority of the population of the OECD countries – i.e. the global consumers.  From the late 1970s, real work and real industry was simply offshored so that those people still in employment in the UK, USA and Europe no longer witnessed the foundations on which our economy rests.  No longer grounded in the reality of coal-powered industry and oil-powered transportation, we were able to delude ourselves into thinking that we could run an entirely digital economy.  Indeed, we even lost sight of the fact that the cloud – on which the knowledge economy depends – runs on coal!  The whole infrastructure of transmission lines, communications satellites and data centres uses more electricity than Germany and Japan combined.  Worse still, most of that infrastructure needs to be located in the coldest regions of the planet in order to reduce the need for (electric-powered) cooling.  However, these locations often render renewable energy generation difficult to deploy and uneconomical to operate; leaving us even more dependent on fossil fuels.

While a smartphone or a tablet computer takes hardly any electricity to recharge, watching just one hour of streamed video is the equivalent of running two modern household refrigerators for a week!  It is just that the energy consumption occurs out of sight.

Energy is a problem because of the diminishing returns involved.  The truth is that we have already consumed the most cost-effective sources of coal, gas and oil.  There is still plenty there, or course.  It is just that what remains is harder to access, and itself requires much more energy to convert into a useable product – nobody spends time and money washing and cooking tar sands or hydraulically fracturing shale deposits when there is an easy reservoir of light sweet crude next door.  So while the world is not going to run out of fossil fuels to power its next “revolution”, it is going to have to pay a lot more for them.

We must also consider the impact of climate change policies.  Even if there is plenty of coal, gas and oil in the ground, there is also growing political pressure to leave it where it is.  Whether this pressure manifests as public disinvestment from the extractive industries or from carbon (and other punitive) taxes from governments, the end result is likely to be ever more expensive energy costs for the wider economy.  One way or another, high energy costs (either paid for directly, or subsidised through taxation) mean less consumption elsewhere in the economy.  This has an immediate impact on the other hidden side of the knowledge economy – the manufacture of the smartphones, tablets, and the ITC infrastructure that the next industrial revolution is meant to be based upon.

The only reason we have these technologies and the infrastructure they depend upon is the combination of diffuse mass consumption and concentrated mass production.  That is, without global demand for the products, coupled to mass use of the ITC networks, the cloud would collapse.  But manufacturing the hardware involves centralised (and cheap) mass production in places like China (Apple) and Vietnam (Samsung) where employment rights and environmental protection have been largely ignored.

There is a diminishing returns problem here too.  The raw materials required to make an i-phone are imported into China from around the world.  But the ore grades for the minerals have declined – mining companies have to move and process increasing volumes of ore in order to extract the same amount of metal.  In practice, this means consuming increasing amounts of (increasingly expensive) energy in order to maintain production.

As countries like China become more affluent, they are less tolerant of the social and environmental consequences of providing cheap technology to consumers in the West.  Wages have been rising, and the government is under considerable pressure to curb pollution.  Whatever else this means, one thing is certain – the cost of the knowledge economy hardware is going to get more expensive.

Finally, we need to consider transportation costs.  Because while we might imagine the knowledge economy workers being driven around in electric-powered driverless Google cars, we have yet to figure out a way of running cargo planes and ships on electricity.  For the foreseeable future, our transportation system is going to run on oil.  While this is currently cheap as a result of the US fracking boom and the OPEC refusal to curb production, energy insiders are increasingly concerned about the massive disinvestment from future exploration and production which looks set to generate severe shortages once the world has burned through the current glut.

Despite the claim that the USA has a century of gas and oil in shale plays, Energy Information Agency data suggests that the USA actually has three years’ worth of oil and eight years’ of gas.  Nor are the Russians or Saudis promising any big rises in production in future.  Indeed, both states need an increasing proportion of their production to power their domestic economy so that by 2030, they may no longer be able to export oil at all.

In practice, of course, the OECD countries and the USA in particular can use efficiency savings to curb their dependence on imported oil and gas.  But in practice, they will only do so after supplies have run short and prices have spiked upward.  In such circumstances we are unlikely to be able to deploy renewables and nuclear in sufficient volumes to replace oil and gas.  Even switching to fuel efficient and electric cars (an easy fix for the USA if they had done it when oil prices spiked in 2006) would take around 25 years to complete.

What all of this means is that the cost of running a knowledge economy of the kind envisaged at Davos is likely to be beyond us.  OECD consumers – whose spending drives the global economy – are going to be spending more of their income on non-discretionary items like energy, food and fuel in future.  This means they are going to have less to spend on new smartphones or, indeed, on paying the phone charges and downloading the digital products that make the cloud viable.

Governments – particularly those in the OECD countries – have tried to wind the clock back to the days before 2008.  In doing so, they have failed to ensure the system’s future.  As Kurt Cobb notes:

“Central banks and governments have not recognized that the end of cheap energy, the end of a benign climate and the end of geopolitical stability imply radical restructuring for the way in which we govern ourselves. Instead, we have been treated to extraordinary attempts to return us to business-as-usual.”

The so-called “fourth industrial revolution” – largely a re-imagining of business as usual with a veneer of technological baubles – is likely anything but the revolution the Davos elite are praying for.  What we may be witnessing is the global economy’s last shake of the dice.

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