Thermo-Dynamic Efficiencies of the Third Industrial Revolution
"Conventional economists fail to recognize that the laws of thermodynamics govern all economic activity. The first and second laws of thermodynamics state that “the total energy content of the universe is constant and the total entropy is continually increasing.”
The first law, the conservation law, posits that energy can neither be created nor destroyed—that the amount of energy in the universe has remained the same since the beginning of time and will be until the end of time. While the energy remains fixed, it is continually changing form, but only in one direction, from available to unavailable. This is where the second law of thermodynamics comes into play.
According to the second law, energy always flows from hot to cold, concentrated to dispersed, and ordered to disordered. For example, if a chunk of coal is burned, the sum total of the energy remains constant, but is dispersed into the atmosphere in the form of carbon dioxide, sulfur dioxide, and other gases. While no energy is lost, the dispersed energy is no longer capable of performing useful work. Physicists refer to the no-longer-useable energy as entropy.
All economic activity comes from harnessing available energy in nature—in material, liquid, or gaseous form—and converting it into goods and services. At every step in the extraction, production, storage, and distribution process, energy is used to transform nature’s resources into finished goods and services. Whatever energy is embedded in the product or service is at the expense of energy used and lost—the entropic bill—in moving the economic activity along the value chain. Eventually, the goods we produce are consumed, discarded, and recycled back into nature, again, with an increase in entropy. Engineers and chemists point out that in regard to economic activity there is never a net energy gain but always a loss in available energy in the process of converting nature’s resources into economic value. The only question is: when does the bill come due?
The entropic bill for the First and Second Industrial Revolutions has arrived. The accumulation in carbon dioxide emissions in the atmosphere from burning massive amounts of carbon energy has given rise to climate change and the wholesale destruction of the Earth’s biosphere, throwing the existing economic model into question. The field of economics, by and large, has yet to confront the fact that economic activity is conditioned by the laws of thermodynamics.
Until very recently, economists were content to measure productivity by two factors: machine capital and labor performance. But when Robert Solow — who won the Nobel Prize in economics in 1987 for his growth theory — tracked the Industrial Age, he found that machine capital and labor performance only accounted for approximately 12.5 percent of all of the economic growth, raising the question of what was responsible for the other 87.5 percent. This mystery led economist Moses Abramovitz, former president of the American Economic Association, to admit what other economists were afraid to acknowledge—that the other 87 percent is a “measure of our ignorance.”
Over the past 25 years, a number of analysts, including physicist Reiner Kümmel of the University of Würzburg, Germany, and economist Robert Ayres at INSEAD business school in Fontainebleau, France, have gone back and retraced the economic growth of the industrial period using a three-factor analysis of machine capital, labor performance, and thermodynamic efficiency of energy use. They found that it is “the increasing thermodynamic efficiency with which energy and raw materials are converted into useful work” that accounts for most of the rest of the gains in productivity and growth in industrial economies. In other words, “energy” is the missing factor.
A deeper look into the First and Second Industrial Revolutions reveals that the leaps in productivity and growth were made possible by the communication/energy/transportation matrix and accompanying infrastructure that comprised the general-purpose technology platform that firms connected to. For example, Henry Ford could not have enjoyed the dramatic advances in efficiency and productivity brought on by electrical power tools on the factory floor without an electricity grid. Nor could businesses reap the efficiencies and productivity gains of large, vertically integrated operations without the telegraph and, later, the telephone providing them with instant communication, both upstream to suppliers and downstream to distributors, as well as instant access to chains of command in their internal and external operations. Nor could businesses significantly reduce their logistics costs without a fully built-out road system across national markets. Likewise, the electricity grid, telecommunications networks, and cars and trucks running on a national road system were all powered by fossil fuel energy, which required a vertically integrated energy infrastructure to move the resource from the well-head to the end users.
The general-purpose technology infrastructure of the Second Industrial Revolution provided the productive potential for a dramatic increase in growth in the twentieth century.
Between 1900 and 1929, the United States built out an incipient Second Industrial Revolution infrastructure—the electricity grid, telecommunications network, road system, oil and gas pipelines, water and sewer systems, and public school systems. The Depression and World War II slowed the effort, but after the war the laying down of the interstate highway system and the completion of a nationwide electricity grid and telecommunications network provided a mature, fully integrated infrastructure. The Second Industrial Revolution infrastructure advanced productivity across every industry, from automobile production to suburban commercial and residential building developments along the interstate highway exits.
During the period from 1900 to 1980 in the United States, aggregate energy efficiency— the ratio of potential to useful physical work that can be extracted from materials—steadily rose along with the development of the nation’s infrastructure, from 2.48 percent to 12.3 percent. The aggregate energy efficiency leveled off in the 1990s at around 13 percent with the completion of the Second Industrial Revolution infrastructure. Despite a significant increase in efficiency, which gave the United States extraordinary productivity and growth, nearly 87 percent of the energy we used in the Second Industrial Revolution was wasted during transmission.
Even if we were to upgrade the Second Industrial Revolution infrastructure, it’s unlikely to have any measurable effect on efficiency, productivity, and growth. Fossil fuel energies have matured. And the technologies designed and engineered to run on these energies, like the internal-combustion engine and the centralized electricity grid, have exhausted their productivity, with little potential left to exploit.
Needless to say, 100 percent thermodynamic efficiency is impossible. New studies, however, including one conducted by my global consulting group, show that with the shift to a Third Industrial Revolution infrastructure, it is conceivable to increase aggregate energy efficiency to 40 percent or more over the next 40 years, amounting to a dramatic increase in productivity beyond what the economy experienced in the twentieth century.
Cisco systems forecasts that by 2022, the Internet of Things will generate $14.4 trillion in cost savings and revenue. A General Electric study published in November 2012 concludes that the efficiency gains and productivity advances induced by a smart industrial Internet could resound across virtually every economic sector by 2025, impacting “approximately one half of the global economy.”
The build out and scale up of the Third Industrial Revolution Internet of Things platform will enable businesses in Luxembourg to dramatically increase aggregate efficiencies across their value chains, increase productivity, and reduce ecological footprint, making the nation a leader in the shift to the new economic paradigm." (from a report on the Third Industrial Revolution