The Energy Revolution Will Transform How We Live and Work

Revolutions in commerce used to be few and far between. James Watt’s steam engine, developed in 1781, set the stage for the first industrial revolution.  But it wasn’t until a century later that the widespread adoption of electricity and the internal combustion engine brought about the second industrial revolution.

The information age didn’t really get going until the 1970’s and that’s led to what to what many are now calling the new industrial revolution, which incorporates computer aided design and advanced fabrication techniques like 3D printing.  However, the next revolution, in energy, is already underway.

While the drop in price for fossil fuels has grabbed most of the headlines lately, Citibank predicts that the shale boom will merely serve as a bridge to get us to a new era of renewable energy.  This revolution, if anything, will be more far reaching than the others.  While the earlier revolutions empowered large enterprises, this one might very well undo them.

When The Sun Never Set On The British Empire

Great Britain was an unlikely empire.  A relatively diminutive island, with a small population and few natural resources, it somehow came to rule over one fifth of the world’s population and a quarter of its land area.  As it used to said, “the sun never sets over the British empire”

And Britain wasn’t alone.  Colonization at the time was seriously profitable.  Wages were a pittance compared to the bounty to be had by conquering new lands.  Cotton and tobacco from America.  Tea and spices from Asia.  Virtually every major nation in Europe ventured out to stake their claim for resources that were unavailable back home.

The industrial revolution only accelerated this trend.  As Max Boot explains in War Made New, steamships and railroads shortened travel times exponentially, making it possible to both conquer more voraciously and administer more effectively.  He writes, “In 1876 Europeans ruled over 10 percent of Africa; by 1914 they had more than 90 percent.”

These changes not only affected the people in the colonies, however.  They also transformed life in the industrialized European countries.

The Rise of Bureaucracy

In the early 20th century, the great sociologist Max Weber noted that the rise of mechanization would lead to a change in organization.  As cottage industries were replaced by large enterprises, leadership would be less traditional and charismatic and more bureaucratic and rational.

Some time after, a young economist named Ronald Coase published his groundbreaking paper, The Nature of the Firm, in which he argued that the function of the enterprise was to reduce transaction costs, especially information costs.  His analysis implied that firms would grow until increased organizational costs nullified the decrease in transaction costs.

The last century was in large part driven by scale advantages.  The bigger you were, the more efficient you would become.  Those efficiencies would enable enterprises to own and control more resources, which would increase bargaining power and enhance the dominance of the firm.

Initially, information technology bolstered these trends.  Only large organizations were able to afford computer systems that could help them administer resources by tracking accounting, maintenance and human resources.  However, with the rise of personal computing and the Internet, that began to change.

The New Age Of Platforms

While the first two industrial revolutions led to greater centralization, the information revolution has brought about massive decentralization.  As computer systems became cheap and plentiful, even small firms could afford them.  The Internet and mobile devices furthered this shift, driving down transaction costs for everyone, not just the big guys.

The impact of this change is hard to overstate.  Today, anyone can wake up in the morning with an idea, design it on CAD software, create a prototype with a 3D printer, acquire financing through crowdfunding and market it on Google and Facebook.  We’ve entered a new age of platforms, where what you own isn’t as important as what you can access.

And that’s created a profound change in how we need to compete.  As former Citibank Chairman Walter Wriston explained in Bits, Bytes, and Balance Sheets, “The competition for the best information has replaced the competition for the best farmland and coal fields.”

Clearly, the end of the scale economy has had a profound impact on every aspect of life.  In contrast to colonial times, wars today are more likely to be fought over ideology than territory and they are increasingly between states and non-state actors, rather than between rival nations.

The Last Domino

The transformation, however, is incomplete.  There is still one resource that remains supremely important: energy.  We still rely on digging fossil fuels out of the ground and competition for those resources remains contentious.  To fuel the distributed information economy, we still depend on electricity from centralized power companies.

Yet that too is beginning to change, because technology is transforming energy as well.  A recent report by McKinsey shows that, in many places, solar energy is already outperforming more traditional sources.  Moreover, as we increasingly derive energy from algorithms rather than from fossil fuels, accelerating returns will continue to decrease costs exponentially.

We’re now seeing a shift from the distribution of centralized capabilities and resources to distributed capabilities and resources that are produced and accessed locally.  The impact will be especially great in developing (and formerly colonized) countries like India where patchy electricity networks have been a serious impediment to investment and modernization.

In effect, energy is the last domino of the information age.  While it’s hard to predict exactly what the energy revolution will bring, one thing is already abundantly clear:  Over the next generation, power and influence will decouple from the ownership of resources (and associated rent seeking activity) and increasingly be tied to information and imagination.

– Greg