The Hames Report

The Third Industrial Revolution

Our industrial civilization is at a crossroads. Oil and the other fossil fuel energies that make up the industrial way of life are sunsetting, and the technologies made from and propelled by these energies are antiquated. The entire industrial infrastructure built off of fossil fuels is aging and in disrepair. The result is that unemployment is rising to dangerous levels all over the world. Governments, businesses and consumers are awash in debt and living standards are declining everywhere. A record one billion human beings - nearly one seventh of the human race - face hunger and starvation. Worse, climate change from fossil fuel-based industrial activity looms on the horizon, imperiling our own species’ very ability to survive.

Since the beginning of the Great Recession in the summer of 2008, governments, the business community, and civil society have been embroiled in a fierce debate over how to restart the global economy. While austerity measures and fiscal, labor, and market reforms will all be necessary, they are not sufficient to re-grow the economy. Let me explain by way of an anecdote. Just months after arriving in office, the new Chancellor of Germany, Angela Merkel, asked me to come to Berlin to help her administration address the question of how to create new jobs and grow the German economy in the twenty-first century. I began my remarks by asking the chancellor, “How do you grow the German economy, the EU economy, or, for that matter, the global economy, in the last stages of a great energy era and an industrial revolution built on it?”

It is becoming increasingly clear that the Second Industrial Revolution is dying and that industrial induced CO2 emissions are threatening the viability of life on Earth. What we need now is a bold new economic narrative that can take us into a sustainable post-carbon future. Finding that new vision requires an understanding of the technological forces that precipitate the profound transformations in society.

A New Economic Narrative

The great economic revolutions in history occur when new communication technologies converge with new energy systems. New energy revolutions make possible more expansive and integrated trade. Accompanying communication revolutions manage the new complex commercial activities made possible by the new energy flows. In the 19th century, cheap steam powered print technology and the introduction of public schools gave rise to a print-literate work force with the communication skills to manage the increased flow of commercial activity made possible by coal and steam power technology, ushering in the First Industrial Revolution. In the 20th century, centralized electricity communication - the telephone, and later radio and television - became the communication medium to manage a more complex and dispersed oil, auto, and suburban era, and the mass consumer culture of the Second Industrial Revolution.

Today, Internet technology and renewable energies are beginning to merge to create a new infrastructure for a Third Industrial Revolution (TIR) that will change the way power is distributed in the 21st century. In the coming era, hundreds of millions of people will produce their own renewable energy in their homes, offices, and factories and share green electricity with each other in an “Energy Internet” just like we now generate and share information online.

The establishment of a Third Industrial Revolution [TIR] infrastructure will create thousands of new businesses and millions of jobs and lay the basis for a sustainable global economy in the 21st century. However, let me add a cautionary note. Like every other communication and energy infrastructure in history, the various pillars of a Third Industrial Revolution must be laid down simultaneously or the foundation will not hold. That’s because each pillar can only function in relationship to the others.

The five pillars of the Third Industrial Revolution are (1) shifting to renewable energy; (2) transforming the building stock of every continent into micro–power plants to collect renewable energies on-site; (3) deploying hydrogen and other storage technologies in every building and throughout the infrastructure to store intermittent energies; (4) using Internet technology to transform the power grid of every continent into an energy internet that acts just like the Internet (when millions of buildings are generating a small amount of renewable energy locally, on-site, they can sell surplus green electricity back to the grid and share it with their continental neighbors); and (5) transitioning the transport fleet to electric plug-in and fuel cell vehicles that can buy and sell green electricity on a smart, continental, interactive power grid.

The creation of a renewable energy regime, loaded by buildings, partially stored in the form of hydrogen, distributed via a green electricity Internet, and connected to plug-in, zero-emission transport, opens the door to a Third Industrial Revolution. The entire system is interactive, integrated, and seamless. When these five pillars come together, they make up an indivisible technological platform—an emergent system whose properties and functions are qualitatively different from the sum of its parts. In other words, the synergies between the pillars create a new economic paradigm that can transform the world.

The public/private financing of the Third Industrial Revolution infrastructure build-out across the world will be at the very top of the agenda for the international banking and financial community in the first half of the 21st century.

The Shift To Lateral Power

The Third Industrial Revolution is the last of the great Industrial Revolutions and will lay the foundational infrastructure for an emerging collaborative age. Its completion will signal the end of a two-hundred-year commercial saga characterized by industrious thinking, entrepreneurial markets, and mass labor workforces and the beginning of a new era marked by collaborative behavior, social networks and professional and technical workforces. In the coming half century, the conventional, centralized business operations of the First and Second Industrial Revolutions will increasingly be subsumed by the distributed business practices of the Third Industrial Revolution; and the traditional, hierarchical organization of economic and political power will give way to lateral power organized nodally across society.

Lateral power is a new force in the world. Steve Jobs and the other innovators of his generation took us from expensive centralized main-frame computers, owned and controlled by a handful of global companies, to cheap desktop computers and cell phones, allowing billions of people to connect up with one another in peer-to-peer networks in the social spaces of the internet. The democratization of communications has enabled nearly one third of the human population on earth to share music, knowledge, news and social life on an open playing field, marking one of the great evolutionary advances in the history of our species.

But as impressive as this accomplishment is, it is only half of the story. The new, green energy industries are improving performance and reducing costs at an ever accelerating rate. And just as the generation and distribution of information is becoming nearly free, renewable energies will also. The sun, wind, biomass, geothermal heat and hydropower are available to everyone and, like information, are never used up.

When Internet communications manage green energy, every human being on earth becomes his or her own source of power, both literally and figuratively. Billions of human beings sharing their renewable energy laterally on a continental green electricity internet creates the foundation for the democratization of the global economy and a more just society.

Distributed Capitalism

Energy regimes shape the nature of civilizations - how they are organized, how the fruits of commerce and trade are distributed, how political power is exercised, and how social relations are conducted. To understand how the new Third Industrial Revolution infrastructure is likely to dramatically change the distribution of economic power in the twenty-first century, it is helpful to step back and examine how the fossil fuel–based First and Second Industrial Revolutions reordered power relations over the course of the nineteenth and twentieth centuries.

Fossil fuels - coal, oil, and natural gas - are elite energies for the simple reason that they are found only in select places. They require a significant military investment to secure their access and continual geopolitical management to assure their availability. They also require top down command and control systems and massive concentrations of capital to move them from underground to the end users. The ability to centralize production and distribution - the essence of modern capitalism - is critical to the effective performance of the system as a whole. The centralized energy infrastructure, in turn, sets the conditions for the rest of the economy, encouraging similar business models across every sector.

Virtually all of the other critical industries that emerged from the oil culture - modern finance, telecommunications, automotive, power and utilities, and commercial construction - and that feed off of the fossil fuel spigot were similarly predisposed to bigness in order to achieve their own economies of scale. And, like the oil industry, they require huge sums of capital to operate and are organized in a centralized fashion.

Three of the four largest companies in the world today are oil companies - Royal Dutch Shell, Exxon Mobil, and BP. Underneath these giant energy companies are some five hundred global companies representing every sector and industry - with a combined revenue of $22.5 trillion, which is the equivalent of one-third of the world’s $62 trillion GDP - that are inseparably connected to and dependent on fossil fuels for their very survival.

The emerging Third Industrial Revolution, by contrast, is organized around distributed renewable energies that are found everywhere and are, for the most part, free - sun, wind, hydro, geothermal heat, biomass, and ocean waves and tides. These dispersed energies will be collected at millions of local sites and then bundled and shared with others over a continental green electricity internet to achieve optimum energy levels and maintain a high-performing, sustainable economy. The distributed nature of renewable energies necessitates collaborative rather than hierarchical command and control mechanisms.

This new lateral energy regime establishes the organizational model for the countless economic activities that multiply from it. A more distributed and collaborative industrial revolution, in turn, invariably leads to a more distributed sharing of the wealth generated.

The extraordinary capital costs of owning and operating giant centralized telephone, radio, and television communications technology and fossil fuel and nuclear power plants in markets is giving way to the new “distributed capitalism,” in which the low entry costs in lateral networks make it possible for virtually everyone to become a potential entrepreneur and collaborator, creating and sharing information and energy in open commons. Witness twenty something young men creating Google, Facebook, and other global information networks, literally in their college dorm rooms and thousands of small businesses converting their buildings to green micro power plants and connecting with one another in regional electricity networks.

What I am describing is a fundamental change in the way capitalism functions that is now unfolding across the economy and reshaping how companies conduct business. The shrinking of transaction costs in the music business and publishing field with the emergence of file sharing of music, eBooks, and news blogs, is wreaking havoc on these traditional industries. We can expect similar disruptive impacts as the diminishing transaction costs of green energy allow manufacturers, service industries, and retailers to produce and share goods and services in vast economic networks with very little outlay of financial capital.

Democratizing Manufacturing

For example, consider manufacturing. Nothing is more suggestive of the industrial way of life than highly capitalized, giant, centralized factories equipped with heavy machines and attended by blue-collar workforces, churning out mass-produced products on assembly lines. But what if millions of people could manufacture batches or even single manufactured items in their own homes or businesses, cheaper, quicker, and with the same quality control as the most advanced state-of the-art factories on earth?

While the TIR economy allows millions of people to produce their own virtual information and energy, a new digital manufacturing revolution now opens up the possibility of following suit in the production of durable goods. In the new era, everyone can potentially be their own manufacturer as well as their own internet site and power company. The process is called 3-D printing; and although it sounds like science fiction, it is already coming online, and promises to change the entire way we think of industrial production. Think about pushing the print button on your computer and sending a digital file to an inkjet printer, except, with 3-D printing, the machine runs off a three-dimensional product. Using computer aided design, software directs the 3-D printer to build successive layers of the product using powder, molten plastic, or metals to create the material scaffolding. The 3-D printer can produce multiple copies just like a photocopy machine. All sorts of goods, from jewelry to mobile phones, auto and aircraft parts, medical implants, and batteries are being “printed out” in what is being termed “additive manufacturing,” distinguishing it from the “subtractive manufacturing,” which involves cutting down and pairing off materials and then attaching them together.

3-D entrepreneurs are particularly bullish about additive manufacturing, because the process requires as little as 10 percent of the raw material expended in traditional manufacturing and uses less energy than conventional factory production, thus greatly reducing the cost.

In the same way that the Internet radically reduced entry costs in generating and disseminating information, giving rise to new businesses like Google and Facebook, additive manufacturing has the potential to greatly reduce the cost of producing hard goods, making entry costs sufficiently lower to encourage hundreds of thousands of mini manufacturers—small and medium size enterprises (SMEs) - to challenge and potentially outcompete the giant manufacturing companies that were at the center of the First and Second Industrial Revolution economies.

Already, a spate of new start-up companies are entering the 3-D printing market with names like Within Technologies, Digital Forming, Shape Ways, Rapid Quality Manufacturing, Stratasys, Bespoke Innovations, 3D Systems, MakerBot Industries, Freedom of Creation, LGM, and Contour Crafting and are determined to reinvent the very idea of manufacturing in the Third Industrial era.

The energy saved at every step of the digital manufacturing process, from reduction in materials used, to less energy expended in making the product, when applied across the global economy, adds up to a qualitative increase in energy efficiency beyond anything imaginable in the First and Second Industrial Revolutions. When the energy used to power the production process is renewable and also generated on site, the full impact of a lateral Third Industrial Revolution becomes strikingly apparent. Since approximately 84 percent of the productivity gains in the manufacturing and service industries are attributable to increases in thermodynamic efficiencies - only 14 percent of productivity gains are the result of capital invested per worker - we begin to grasp the significance of the enormous surge in productivity that will accompany the Third Industrial Revolution and what it will mean for society.

Near Zero Cost Marketing and Logistics

The democratization of manufacturing is being accompanied by the tumbling costs of marketing. Because of the centralized nature of the communication technologies of the first and second industrial revolutions - newspapers, magazines, radio, and television - marketing costs were high and favored giant firms who could afford to devote substantial funds to market their products and services. The internet has transformed marketing from a significant expense to a negligible cost, allowing start ups and small and medium size enterprises to market their goods and services on internet sites that stretch over virtual space, enabling them to compete and even out compete many of the giant business enterprises of the 21st century.

Consider Etsy, a brash, web start-up company that has taken off in the past seven years. Etsy was founded by a young New York University graduate, Rob Kalin, who made furniture in his apartment. Frustrated that he had no way to connect with potential buyers interested in hand-crafted furniture, Kalin teamed up with a few friends and put up a website designed to bring individual craftsmen of all kinds, from around the world, together with prospective buyers. The site has become a global virtual showroom, where millions of buyers and thousands of sellers from more than fifty countries are connecting, breathing new life into craft production—an art that had largely disappeared with the advent of modern industrial capitalism.

Connecting multitudes of sellers and buyers in virtual space is almost free. By replacing all of the middlemen - from wholesalers to retailers - with a distributed virtual network of sellers and buyers and eliminating the transaction costs that are marked up at every stage in the marketing process, Etsy has created a new global craft bazaar that scales laterally rather than hierarchically, and markets goods collaboratively rather than top-down.

Etsy brings another dimension to the market - the personalization of relationships between seller and buyer. The website hosts chat rooms, coordinates online craft shows, and conducts seminars, allowing sellers and buyers to interact, exchange ideas, customize products, and create social bonds that can last a lifetime. Giant, global companies mass-producing standardized products on assembly lines operated by anonymous workforces can’t compete with the kind of intimate one-to-one relationship between artisan and patron.

Although still in its infancy, Etsy is a quickly growing enterprise. In 2011, Etsy’s sales topped nearly $500 million. In a recent conversation, Kalin told me that his mission is to help foster “empathic consciousness” in the global economic arena and lay the foundation for a more inclusive society. His vision of connecting up “millions of local living economies that will create a sense of community in the economy again” is the essence of the Third Industrial Revolution model. Etsy is only one of hundreds of global Internet companies that are bringing together producers and consumers in virtual marketing spaces and, in the process, democratizing marketing costs across the global economy.

As the new 3-D technology becomes more widespread, on site, just in time customized manufacturing of products will also reduce logistics costs with the possibility of huge energy savings. The cost of transporting products will plummet in the coming decades because an increasing array of goods will be produced locally in thousands of micro-manufacturing plants and transported regionally by trucks powered by green electricity and hydrogen generated on site.

The lateral scaling of the Third Industrial Revolution allows small and medium size enterprises to flourish. Still, global companies will not disappear. Rather, they will increasingly metamorphose from primary producers and distributers to aggregators. In the new economic era, their role will be to coordinate and manage the multiple networks that move commerce and trade across the value chain.

New Business Models and Jobs in the 21st Century

Germany is leading the way into the new economic era. The Federal Government has teamed up with six regions across Germany to test the introduction of an energy internet that will allow tens of thousands of German businesses and millions of home owners to collect renewable energies on site, store them in the form of hydrogen, and share green electricity across Germany in a smart energy internet. Entire communities are transforming their commercial and residential buildings into green micro-power plants. To date, more than 1 million buildings in Germany have been converted into partial green micro power plants. Companies like Siemens, Bosch and Daimler are creating sophisticated new IT software, hardware, appliances and vehicles, that will merge distributed Internet communication with distributed energy, to create smart buildings, infrastructure, and green mobility for the cities of the future.

The transition to the Third Industrial Revolution will require a wholesale reconfiguration of the entire economic infrastructure of each country, creating millions of jobs and countless new goods and services. Nations will need to invest in renewable energy technology on a massive scale; convert millions of buildings into green micro power plants; embed hydrogen and other storage technology throughout the national infrastructure; lay down a green energy internet; and transform the automobile from the internal combustion engine to electric plug-in and fuel cell cars.

The remaking of each nation’s infrastructure and the retooling of industries is going to require a massive retraining of workers on a scale matching the professional and vocational training at the onset of the First and Second Industrial Revolutions. The new high tech workforce of the Third Industrial Revolution will need to be skilled in renewable energy technologies, green construction, IT and embedded computing, nanotechnology, sustainable chemistry, fuel-cell development, digital power grid management, hybrid electric and hydrogen-powered transport and hundreds of other technical fields.

Entrepreneurs and managers will need to be educated to take advantage of cutting edge business models, including distributed and collaborative research and development strategies, open source and networked commerce, performance contracting, shared savings agreements, and sustainable low-carbon logistics and supply chain management. The skill levels and managerial styles of the Third Industrial Revolution workforce will be qualitatively different from those of the workforce of the Second Industrial Revolution.

The lateral scaling of the Third Industrial Revolution shifts the fulcrum of power from centralized global companies to distributed small and medium size enterprise networks. The rapid decline in transaction costs brought on by The Third Industrial Revolution are leading to the democratization of information, energy, manufacturing, marketing, and logistics, and the ushering in of a new era of distributed capitalism that is likely to change the very way we think of commercial life. The Third Industrial Revolution offers the hope that we can arrive at a sustainable post-carbon era by mid-century. We have the science, the technology, and the game plan to make it happen. Now it is a question of whether we will recognize the economic possibilities that lie ahead and muster the will to get there in time.

This article was written by Jeremy Rifkin and is reprinted here with his permission. Jeremy is the author of The New York Times best selling book, The Third Industrial Revolution, How Lateral Power is Transforming Energy, the Economy, and the World. He is an adviser to the European Union and to heads of state around the world. He is a senior lecturer at the Wharton School’s Executive Education Program at the University of Pennsylvania and the president of the Foundation on Economic Trends in Washington, D.C.

Economies of Scope

The competitive dynamics of industrial capitalism are well-known, and they are all about economies of scale. Producing more of a unit enables companies to drive the unit price down and thus outcompete the competition. Multinational corporations and global brands now have very complex value chains, in which various parts of a product are mass-produced in different parts of the world.

Nevertheless, the system has obvious weaknesses. One weakness is that it tends towards monocultures, both agricultural and industrial. An example is the dependence of the Chinese coastal economy on exports.

Because competition drives prices down the dominant western players changed their strategy in the 1980s. They abandoned costly western workers, moved low-profit industrial production to low-wage countries, and expanded the intellectual property (IP) regime using patents, copyrights and trademarks. As Thijs Markus has written, if you want to sell $5 shoes for $150 in the West, you'd better have one heck of a repressive IP regime in place. Hence the need for SOPA, PIPA, ACTA and other attempts to criminalise the right to share.

But there is, of course, a more fundamental problem: the whole system of globalising the advantages of scale fundamentally rests on cheap global transportation and, thus, the continuous availability of fossil fuels. Once the era of cheap oil ends it is more than likely that the whole regime will come tumbling down. Competing on the basis of scale, even if it is still effective today, ultimately can only be played by those who do not care about the destruction of our planet. What game can the others play? Rising fossil fuel prices mean that innovation and competition have to find another outlet.

Actually, it's about inventing another game altogether.

This type of economic transition has played out before. In the late fifth century, as the Roman Empire was coming to an end, Christian communities prefigured the values of a coming era of relocalisation based not on an economy of scale, but on an economy of scope - in which the cost of production becomes lower through shared infrastructure costs.

As the Roman Empire decayed and supplies of gold and slaves became gradually more problematic, the smarter landowners started to free their slaves, but bound them contractually to the land as "coloni", or serfs. Meanwhile, the increasingly taxed and bankrupted freeholders sought protection from the very same landowners. Thus, one side of the equation was localisation, since the system could no longer bear the global scale of the empire. But the new post-Roman system also invented a new system of innovation, based on the advantages of scope, not scale.

Indeed, as the cities were emptying out, the Christians invented monasteries as a new type of agrarian knowledge centre. The Christian Church actually functioned as a global open design community. Monks and manuscripts travelled, and with it the many innovations of the worker-monks. While Europe initially decayed as the remnants of the Roman empire crumbled, eventually, after the first European social revolution in the 10th century, this new system created the seeds for the first medieval industrial revolution.

Between the 10th and 13th centuries, Europe started blossoming once again, based on a unified culture of knowledge. Its population doubled and its beautiful cities, many of which were run democratically by the guild councils, grew again. Peer-to-peer universities were founded in Bologna in the 11th century. This first renaissance was based on economies of scope, a unified body of knowledge that European intellectuals and artisans could build on. The guilds may have had their secrets, but they took them with them wherever cathedrals were built.

The same experience happened in 1989 when isolated Cuba was no longer able to rely on the Soviet system's advantages of scale. The Cuban crisis of 1989 prefigured the current world situation: the country experienced its very own peak oil situation when the Soviets abruptly stopped delivering oil at below world market prices.

While the Cubans initially went back to using donkeys, its government launched several interesting initiatives. It allowed some entrepreneurship by granting more autonomy to local agricultural co-operatives, and mobilised the population's grassroots knowledge. But perhaps most importantly, Cuba created several agricultural institutes with the goal of spreading local innovations. Whatever the other faults of the country's totalitarian system, this open design experiment succeeded beyond all expectations. As documented by Bill McKibben and a number of documentaries, Cuba now produces more nutritious and organic food, using less fossil fuel, because sharing knowledge created economies of scope. Agricultural innovations could spread quickly across the country and be adopted by everyone.

Indeed, economies of scale work well in periods of energy ascent, when the supply of energy is plentiful and increasing, but work less well in periods of energy descent. In these circumstances, economies of scope are needed. These types of economies are exactly what peer production (which encompasses open knowledge, free culture, free software, open and shared designs, open hardware and distributed manufacturing) is all about.

Our current system is based on the belief of infinite growth and the endless availability of resources, despite the fact that we live on a finite planet. Let's call this pseudo-abundance. The system also holds that innovations should be privatised and only available by permission, or for a hefty price, making sharing of knowledge and culture a crime, Let's call this enforced artificial scarcity.

Peer production methodologies are based on the exact opposite tenets. Peer production communities believe that knowledge is a commons for all to share. Therefore no innovation can be withheld from the human population as a whole. In fact, withholding a life-saving or world-saving innovation is seen as distinctly unethical. Peer production designs for distribution, inclusion and small-scale fabrication. Planned obsolescence, which is a feature and not a bug of the current system, is totally alien to peer production logics. In other words, sustainability is a feature of open design communities, not a bug.

So what are the economies of scope of this new age? They come in two flavours: the mutualising of knowledge and the mutualising of tangible resources.

The first principle is easy to understand. When an individual doesn't know something, it's more likely that a community, whether local or virtual, does know. Hence, the mutualising of knowledge and crowd-accelerated innovation are now well-known features of the collaborative economy. But the advantage of scope is created when that knowledge is shared and can be used by others. With this social innovation the cost of production that depends on knowledge can be dramatically reduced.

Take the example of the Nutrient Dense Project. This global community of agrarian workers and citizen scientists experiments with better nutrients to obtain better quality food. They carry out joint research on nutrients in various soils and climate zones, which can benefit not just the participating community but, potentially, the whole of humankind. Strategies based on privatising intellectual property cannot obtain such advantages of scope - at least not at that level. Or take the example of the urban homestead of the Dervaes family in Los Angeles who managed to produce 6,000 pounds of food annually on a tiny city plot. Because they share their productivity innovations many other people have learned how to improve their own lots.

The second principle, of sharing physical resources, is exemplified by the trend towards collaborative consumption. The general idea is the same. I may lack a certain tool, skill or service, but it is likely that someone else in a community has it, and that other person could share, rent or barter it. There's no need to all possess the same tool if we can access it when we need it. Hence the proliferation of peer-to-peer marketplaces.

Let's take an illustrative example: car-sharing. Car-sharing projects can be mutualised through the intermediary of a private company which owns the cars (like ZipCar), through peer-to-peer marketplaces that link car users to one another (like RelayRides), or through public entities (like Autolib, in Paris). But they all achieve economies of scope. According to a study cited by ZipCar, for every rented car there are 15 fewer owned cars on the road. Furthermore, car-sharing members drove 31 per cent less than when they owned a vehicle. So, in 2009 alone, car-sharing diminished global carbon dioxide emissions by nearly half a million tonnes.

What will the new system look like if economies of scope become the norm, replacing economies of scale as the primary driver of the economy? Global open design communities could be accompanied by a global network of micro-factories producing locally, such as the ones that open-source car companies like Local Motors and Wikispeed are proposing.

This would require organisations to organise their material activities in order to minimise the common costs of the various networks and not just in terms of sharing knowledge. In other words, who will play the role that the Catholic Church and its roaming monks played in the Middle Ages? This was not just an open design community but an effective material organisation giving leadership to a whole continent-wide cultural sphere. Do we have a potential peer-to-peer version of this that can operate globally? The answer to this question will be for a future article.

Michel Bauwens is a theorist, writer and a founder of the Peer-to-Peer Foundation. He is also an Honorary Fellow of the Asian Foresight Institute. This essay was first published in the opinion pages of Al Jazeera on the 22^nd March 2012 and is reproduced here with the author’s permission.

 

For the Common Good

According to the Asian Development Bank the fall in the value of financial assets may have reached $50,000 billion, with estimated losses in Asia (excluding Japan) of at least $9,625 billion. Many developing nations face a financing gap of between $270 billion and $700 billion a year as capital continues to flow out of their countries. Clearly the problem facing the global economy is not just a recession. It could more accurately be described as a long process of de-leveraging and deflation which may take ten years or more to fully resolve.

Two things are equally certain: (i) the export‐based models of Asia will falter and (ii) the vital restructuring of domestic markets will take longer than expected in an under‐capitalized context.

Better times may eventually emerge. Or at least they have done in the past. In the meantime what can be done to provide for those who sit idly by, or who lose their jobs (and much of their identity in the process) through no fault of their own. Furthermore what should be done to prevent hundreds of thousands of university graduates from facing the alarming prospect of long-term unemployment?

A prolonged period of economic recovery will squander the talents of millions of people. It will also deprive them of the opportunity to learn, consolidate and augment vital skills and expertise. And of course it risks fracturing generational knowledge. If governments dither, and the corporate elite is permitted to cling to old ways and privileges, lengthy periods of inactivity could lead to significant social unrest and dislocation among young people and the unemployed, thus adding to the further de-stabilization of already fragile communities.

As we wait for a restructuring of financial markets and the de-leveraging of assets, are there alternatives we should be considering? Are there policies and opportunities that could grow greater value, more rapidly, in return for public investments, other than shoveling more people into markets that may take years to restructure?

The positive and hopeful answer is ‘yes’ there is. It has to do with stimulating the potential for what we call social innovation. This is the realm of Internet-mediated production that leverages the capacities of open social networks to achieve better positive externalities.

To understand the logic of this promise, we can look to a less severe, but nevertheless serious economic crisis; the Internet ‘dot-com’ collapse in 2000-2001. All the pundits had been predicting, then as now, that without sufficient capital innovation would come to a grinding halt. In fact the very opposite occurred. Almost everything we now take for granted (in terms of Web 2.0 and the emergence of social and participatory media) was born in the crucible of that downturn. Innovation did not slow down; it actually increased during the investment drought. 

This fact, though often ignored, reveals an extraordinary new tendency at work: capitalism is progressively divorced from entrepreneurship, especially where entrepreneurship is a networked activity taking place through open platforms of collaboration, which may or may not require serious infusions of capital. 

Internet technology fundamentally changes the relationship between innovation and capital. Before the Internet, in the world of ‘creative destruction’ decreed by economist Joseph Schumpeter, innovators needed capital for their research. That research would then need to be protected through copyright and patents and further funds were needed to build the factories and manufacturing plants needed for production.

In the post-Schumpeterian world, however, geography has become immaterial. The Internet allows entrepreneurs from around the globe to come together to collaborate, generating new knowledge and products on the cheap.

Paradoxically, the new entrepreneurs only need capital when they are successful and the servers risk crashing from overload. Think about Bittorrent, the most important software for exchanging multimedia content over the internet. Bittorrent was created by a single programmer, self-financed through his personal credit cards, with zero institutional funding.

Although the Internet has empowered many individuals to launch game-changing innovations, like Linus Torvalds [Linux], Shawn Fanning [Napster]and Richard Stallman [free software] for example, the real story of the Internet is its ability to enable large-scale communities of collaboration. These collaborations are not limited to knowledge and software, but extend to everything that knowledge and software enables, including manufacturing. Anything that needs to be physically produced, needs to be ‘virtually designed’ in the first place.

The phenomenon of networked collaboration (often called ‘social innovation’ or ‘social production’) is increasingly responsible for nearly all innovation. In an era when most educated people are interconnected through multiple networks of their choice, the idea that all valuable activity occurs within a discrete enterprise via the marketplace is an outmoded conceit. Further, the idea that one is either an active ‘producer’ or a passive ‘consumer’ (but not both) is a dangerous anachronism.

Nowadays, conventional boundaries between design and production are blurring. No single firm can rely on its own proprietary systems. No closed company can hope to compete with an open business ecology practicing co-design, co-creation or crowdsourcing in all its various forms. 

An important corollary of enabling such open business ecologies is a new attitude to intellectual
property rights. Companies wishing to benefit from the use of open platforms serving business ecosystems must invariably adopt new attitudes concerning the ownership and sharing of ideas. In these ecosystems generosity is a fundamental driver from which collective benefits are derived – rather than any exclusive private gain. As a consequence those companies that enable and empower social innovation and that use open forms of intellectual property, are more successful in attracting cooperation. They can grow their business on the social exchange that occurs in a thriving knowledge commons – even as everyone else also benefits from such participation. 

Traditionalists may scoff, but the system is fantastically productive - and innovative. The Linux open-source economy is now estimated to be a $36 billion market and that is just one of countless free software-based sectors. Chris Anderson of Wired magazine estimates the annual total value produced through social innovation at around $300 billion.

One of the most robust sub-sectors of this economy is user-generated content. The new successful companies like Google, YouTube, Flickr, Twitter and all the rest, are not creating value themselves, but rather enabling user communities to create value through their well-designed, user-friendly platforms.

As a general principle all successful social production systems end up generating vibrant business ecologies that both profit from the knowledge commons while helping to sustain it. IBM now reaps more than half its revenues from Linux-related services and support (more than its own patent portfolio in fact) yet its participation in the Linux community has fortified the social communities and open knowledge exchange within Linux circles. In Latin American countries like Ecuador and in some states in India such as Kerala, nearly every free software programmer has a job.

But what does this mean for the current economic crisis? What are the implications concerning the plight of today’s underemployed and unemployed? For one thing it means that the distinction between working productively for a wage, and idly waiting for jobs that are fast disappearing, is crumbling. All the technical and intellectual tools are now available to allow people, both young and old, to engage in the production of social and economic value. In so doing they are able to sustain their work experience (or knowledge capital), nurture their social life (or relationship capital) and enhance their professional reputation. All three will be crucial in keeping them employable. More importantly all three will substantially increase their potential and future capabilities.

Businesses can benefit too and in any number of ways. For example, by active participation in new open business ecosystems, rather than by hiding within closed, proprietary cocoons, companies can more easily discover emerging consumer trends and needs. By helping sustain the social commons that generates innovation, companies can also create all manner of value-added products and services thus sustaining an infrastructure of cooperation while ensuring ecosystem viability.

But what can and should be the imperatives of the state in this process? What is the role of a ‘partner state’ in enabling and empowering social production to occur? There can be no doubt that public authorities can and should do a great deal to facilitate social production – for example giving people opportunities to continue developing their skills and knowledge; assisting businesses to develop innovative, competitive products and services; and aiding the reconstruction of a more resilient economy.

There are several factors facing government authorities wishing to participate in such a vision. First, a fully functional broadband infrastructure must be made a high priority. In particular, this needs to reach rural and inner-city residents alike so that their talents can be tapped and that scalable cooperation can be achieved. 

Second, governments need to educate business owners and the public about the role of the commons in innovation and business development. Governments could, for example, create a Commons Institute which promotes cooperative practices in key areas of community life and business. The Commons Institute would teach users about open licenses for business and explain their benefits. In Brest, France, city authorities have been instrumental in supporting and sustaining the social production of their citizens. This has not only enriched local cultural life, but attracted more tourists to the city. This idea can also be extended to the creation of public ‘co-working spaces’ linked to processes of business incubation.

Third, public authorities should themselves start to incubate innovation. In Toronto, for example, the Open Source Business Resource has been instrumental in supporting free software start-ups. This has helped forge a local business ecology and an open source service industry that supports local businesses in their adaptive processes.

Fourth, government agencies should offer various forms of patronage (in the form of awards, grants and procurement contracts) to those individuals who are developing the innovation commons. Typically the most robust innovations are propelled by a core of passionate individuals working collaboratively in a specific knowledge commons. These individuals are often propelled by motivations related to the creation of a public good – or common wealth. It therefore makes good sense, both in business and in policy terms, to create new forms of support for the work of individual pioneers. Just as 18th Century science was supported by a network of patrons, leading to an upsurge of scientific research, so governments today should use their procurement and advocacy obligations to promote the processes of open knowledge and collaborative design.

Finally, social innovation should not be seen in isolation but as part of a growing and interconnected set of trends towards ‘peer-to-peer’ methods and infrastructures. Next to the well-known Internet-based infrastructure of digital communications, there are other significant networked infrastructures whose fortification will help local economies survive periods of globalized crisis. 

President Obama’s ‘green stimulus’ proposal, for example, illustrates a genuine understanding of the value peer-to-peer grids bring to the overall energy infrastructure as well as offering an integrated strategy to deal with Peak Oil and climate change. Moving beyond a dependency on depletable fossil fuels, peer-to-peer energy grids encourage citizens to invest in home and neighborhood-centered energy production (based on renewable energy sources like wind and solar) and to share or sell that energy with others on the grid. In this way peer-to-peer energy grids strengthen local communities and open the door to a thriving new kind of energy sector.

Among other uses peer-to-peer principles can be used to improve the efficiency of economic production by enabling ‘complementary monetary systems’. The proliferation of regional currencies in the Germanic-language countries of Europe together with the success of the WIR system in Switzerland and Thailand’s Santi Suk complementary currency, show how communities can retain a greater part of the local value it produces, rather than letting this be transferred (exported) to other parts of the nation or the world. Peer-to-peer monetary systems help insulate local economies from the volatility of national currencies (these days invariably entangled with the global economy) providing localities with much-needed respite and resilience.

As these examples suggest, a ‘social innovation’ stimulus plan can provide incalculable benefits to all citizens in times of financial crisis. Despite capital scarcity, social innovation allows the process of value creation to continue unabated. It can deepen and enhance human capital while building a resilient ecology of open-source businesses that cooperate within social innovation communities.

Through active public support of this new productive sector we can build much stronger and resilient economies able to withstand the storms of globalization. Instead of locking up most know-how and creativity in intellectual property rights (whose circulation is now limited by bankruptcies and the depressed economy) social production and open licensing can unleash creativity into the knowledge commons.

If we have the courage to cultivate our precious ‘common wealth’ we can expect local and global markets to revive and prosper - reinventing themselves on a far stronger, more resilient foundation than was previously thought possible. 

This posting was contributed by Michel Bauwens (a researcher for the Asian Foresight Institute at Dhurakij Pundit University in Bangkok and founder of the Peer-to-Peer Foundation) in collaboration with David Bollier (an independent policy strategist, journalist, activist and consultant whose work focuses on reclaiming the commons).

Serious Play

Innovation has become the new ‘in’ thing. Some suggest it may be the sole source of future competitive advantage and consequently an imperative no organization can afford to ignore. I tend to agree. Furthermore I believe it applies equally to the public sector and to civic society as a whole.

There is little doubt that in certain fields the ability to innovate, thereby generating a continuous stream of new value-adding products, can be the difference between prosperity and irrelevance. Think computer software, fashion and pharmaceuticals, for example. Then again the human condition also obliges us to find alternative solutions to many of the problems our inventive minds continue to construct. And quickly too. Consider global warming, water, food, poverty, terrorism….

But do we have the solution for you! Innovations-R-Us. Touted around university campuses, research laboratories, hospitals, farms, city halls, schools, corporations and even government departments, innovation is the cock's crow at dawn from which only the deaf escape.

In reality the contemporary emphasis on innovation has been spawned by tensions between the commoditisation of desire (post-industrial society’s fixation on and craving for anything new) and the concurrent need to curb such rampant materialism (because of the critical impact of the afore-mentioned issues on our civilization).

This tension is intensified and made even more complicated by the fact that the burgeoning middle class in the world’s emerging economies are now beginning to demand (and can afford) a quality of life most citizens in post-industrial nations have enjoyed for some considerable time. In all conscience it is difficult to deny them their right to this. Meanwhile sheer demographic momentum will increase the world's urban population by 3 billion people over the next 40 years (90 per cent of these in poor cities) and absolutely no one has a clue how a planet of slums, with growing food and energy crises, will accommodate their biological survival, much less their inevitable aspirations to basic happiness and dignity.

Purely on this basis it is logical to suppose that these tensions will continue to worsen at least until global population numbers level out, some time after 2060 if you believe the latest and most sophisticated demographic modelling: the world’s population will have reached seven billion people by the end of 2012. So we can safely assume that across-the-board innovation will be essential to peaceful global prosperity and societal advancement for at least the next 50 years.

But what is really meant by the term innovation? Typically defined as a process of discovery linking the re-assembly of knowledge (or the creation of novel ideas) with the capturing of their social and/or commercial value, innovation can range from continuous improvement (of products, processes and services) to the invention of entirely new models, markets, systems, philosophies, ways of seeing and even states of being. Think virtual reality and online avatars!

The latter type, popularly known as strategic or radical innovation, often rejects conventional notions (of competition or established hierarchies, for example) in order to redefine conceptual models. New truths, possibilities, spaces and roles arise from this process. As a consequence strategic innovation can be disruptive: overturning sacrosanct rules, long established habits and reshaping contextual conditions previously thought to be constant.

Radical innovation is immensely attractive to that breed of multinational corporation intent on dominating a particular market, as well as larger equity firms and venture capitalists of course. Why? Smart game-changer strategies and keystone plays can render competition entirely irrelevant. Which CEO or Board Chairman would not want this wish granted?

Naturally, financial risks are correspondingly higher than those implied by continuous improvement efforts. But then the ROI for strategic innovation (by which I mean return on imagination of course) can be a quantum greater, assuming one has the courage to purposefully disturb the status quo. Just look at Richard Branson’s Virgin brand fashioned out of sheer British eccentricity, audacity and a determination to craft a unique customer experience.

Then there is the potential accompanying such limelight: strategic innovation often elevates individuals and even entire corporations to positions of universal prominence. Public accolades linking business success with social advancement can not be so easily dismissed in today’s brand-resonant, media-savvy, celebrity-saturated world. Witness Madonna, Bono, Steve Jobs, Anita Roddick or Linus Toorvald, for example.

All of which sounds so easy. Just go out there and innovate. Be creative. Use your imagination guys! Well? What are you waiting for?

Naturally the textbooks are stuffed full of well-meaning advice, though most concentrate on tools and processes while ignoring other critical intangibles. As a result we are well schooled in the knowledge that trust emboldens collaborative practice - but are unsure how to nurture this. We recognize the role played by uninhibited imagination - but lack the confidence to put forward novel ideas. We appreciate the incredible power of globally distributed networks but still keep information to ourselves. We accept the notion that rules and regulations stifle creativity – but still insist on adherence to archaic management protocols. And we ‘get’ the power of teamwork – but still insist on rewarding only individual performance.

What then are the secrets of investing in innovation? What does it take for creativity to become routine? What are the innovation drivers that make companies as diverse as Threadless, Cirque du Soleil, Apple, Virgin, Semtec, Cabbages & Condoms, Toyota, Agricultural Bank of China, Infosys, GE, Procter & Gamble, eBay and Google so successful? And how is it that the People’s Party in Brazil can engage the community in bold experiments of participative democracy at a time when post-industrial nations, formerly recognized for their egalitarian systems, seem hell bent on eroding citizen’s hard-won rights and installing repressive regimes?

Clearly the real world is not nearly so neat and ordered as academics and consultants would have us believe. In spite of all the attention (one need only look at the avalanche of web sites, conferences, wikis, blogs, books, articles and academic papers devoted to the subject) innovation as an embedded capability remains as elusive as the proverbial pot of gold at the end of the rainbow. Furthermore most innovation is still targeted at improving existing products, processes and services, which rarely delivers exceptional value.

From our experience, recently affirmed by the Boston Consulting Group’s analysis of the world’s most seriously innovative corporations, there are four underlying causes for this state of affairs. They are (a) contextual conditions, (b) state of mind, (c) business praxis and (d) organizational design.

Contextual conditions:
Contemporary business was long ago ambushed by its own success. It now finds itself cocooned within a condition brought about by the rapidly converging processes of technology-enabled globalisation.

This condition, which I call globalism, is without precedent. It has catapulted us into a vibrant world of transactions and interactions where geography matters little - a world characterized by the need to manage relationships rather than things. Indeed the things that matter today are diffuse networks, co-design, open source learning, collaboration, the exponential speed at which new knowledge is created (and old knowledge is made obsolete), democratisation of standard business practices and society’s seemingly unquenchable thirst for the new...

The challenge of innovating in this environment, where a maelstrom of globally distributed information, talent and capital constantly changes, engulfing us in overwhelming variety and choice, presents extraordinary challenges for any single enterprise. Especially so as government regulators, in fear of becoming less and less relevant, burden innovators with a barrage of well-meaning legal hurdles and compliance costs, thereby adding to the uncertainty.

We did not anticipate this condition, nor were we prepared for its consequences. It has unsettled traditional patterns of human production and consumption causing intense social and environmental stress. So sudden was its genesis, so colossal its impact, that we are even now trying to take stock; still attempting to learn how best to understand and respond to its constantly shifting complexities.

In this context collaboration, not competition, is of the essence. It is incumbent upon each enterprise to collaborate with others, creating and capturing value wherever it can, exploring opportunities wherever they exist, connecting ideas, technologies and people in order to thrive from change. This is what contemporary innovation is about.

State of mind:
After 250 years, the industrial economic paradigm is worn out. The world wide web, coupled with the convergence of digital and genomic code and enabling tools like biotechnology, molecular engineering and robotics, have diminished its legitimacy. Furthermore it fails the most classic of tests: it is quite simply unable to resolve the critical issues of our time.

Paradoxically, in the world of commerce and governance at least, industrial economism remains the most commonly used and unchallenged framework for explaining events, even when such explanations do not equate favourably with observed reality.

It is almost impossible to liberate strategic innovation within the dominant industrial paradigm – and this at a time when whole-of-system innovation is most needed. Why? Because the language and praxis of industrial economism is set in past experiences rather than in future potential. Innovation contrived within this context invariably tends to focus on discrete projects aimed at growth or increased revenue rather than on revitalising an entire enterprise or industry or conceiving entirely new markets.

Fortunately a parallel universe is emerging in the minds of many entrepreneurs as we make the shift from industrial economism to global ecologism. Wired-in to new knowledge, systemically sensitive and cooperatively inclined, innovators in this space see peer-to-peer connections everywhere they look as well as openings for engaging collaboration on a vast scale.

Business praxis:
Most corporations claim to use innovation as a driver of change. Three elements characterising conventional business practice clearly impede such efforts:

1. Without a doubt creative ideas are the seeds of innovation. Great ideas can surface by accident or by design. But while it is true innovation rarely emerges from barren ground, it requires far more than just having a creative or entrepreneurial organizational culture. While a conducive social ecology is vital for innovation to take root, creativity alone is not sufficient.  On the contrary, innovation is a disciplined practice, a systematic process whereby great ideas are turned into real value. This is one of the most misunderstood factors of innovation. Getting teams of executives to sit around and come up with good ideas is one thing. Extracting value from these ideas is quite another.
2. We still lack a sophisticated language for thinking and talking about strategic innovation. Most business language remains steeped in conventions and thinking habits that refer back to the industrial age. More often than not it is couched in the zero-sum language of competition and profits. Meanwhile the process of innovation has been democratised. Collaborative networks of open design and coordinated interaction are shaping new relationships and alliances between government, business and civic society. In this context using obsolete language from a bygone era is simply confusing.
3. Modest objectives rarely result in breakthrough endeavours. A common problem of many entrepreneurial initiatives (especially start-up ventures) is that aspirations are set too low and possibilities defined too narrowly. More often than not the implicit aim amounts to no more than extracting greater profits from existing product lines or market offers. Strategic foresight is often ignored thereby eliminating many possibilities. The lack of robust strategic intelligence, especially from customers, also limits what can be achieved.

Organizational design:
Ironically we have not yet found a way of designing our organizations to take advantage of the extraordinary opportunities offered by globalism. Most corporations are dinosaurs awaiting extinction. Because of this many businesses remain paralysed, distrustful, responding to shifting realities by mimicking competitors or by resorting to habits that served well in the past but that make little sense today.

Traditionally we designed our organizations for efficiency – not speed and certainly not innovation. In fact focusing on efficiency repeatedly ingrains practices and protocols that actively stifle creativity and hinder innovation.

Unsurprisingly the most innovative organizations recognize this. They constantly refashion boundaries, rethink roles, reinvent systems and revitalise processes, in effect redesigning their organisations for speed and adaptiveness. As a result, corporate research and design laboratories routinely collaborate with customers and suppliers, share software code with programmers and tap into networks of scientists and entrepreneurs for the world’s best ideas.

This kind of cooperative innovation, where the processes of innovation are democratised, is no longer a fringe activity but essential to remaining competitive in a globalised world.