How the internet will destroy capitalism

Jeremy Rifkin explains how the creation of zero marginal cost is destroying capitalism and replacing it with something… nicer.

Jeremy Rifkin has a big idea.

"I discovered this paradox in capitalism," he says, leaning back in the basement of his publisher's office in London. He holds himself with the easy patience of someone who is used to being listened to.

"What we're seeing now is the emergence of a new economic system. It's the first since capitalism and socialism. I didn't think in my lifetime I would see a new economic system. And it's zero marginal cost which triggered it."

Rifkin deals in big ideas, the type of big ideas which are always unfashionable in Britain. Indeed, he is little known here, outside of a few appearances on cosy Radio 4 programmes. But in China he is considered something close to a guru. His theory of the third industrial industrial revolution is now at the heart of an economy which will, in all likelihood, overtake that of the US before the end of the year. He is also working closely with Angela Merkel in Germany on revolutionising the country's energy infrastructure.

It all comes down to zero marginal cost.

"The first 3D printed car is already out," he says. "It's called the Urbee. It's cute – looks like a VolksWagen. Goes about 40 miles an hour. They put it in a garage, charge it with solar by day, wind at night. In the future you'll be able to transport your 3D-printed product in a 3D-printed car, a driver-less vehicle using GPS guidance, all at zero marginal cost. All free."

If Rifkin seems optimistic, it's because he puts a considerable amount of emphasis on the 'free' part.

It all started with Napster.

In classical economic theory, sellers in a market are always trying to find ways to reduce their marginal cost. That's the bottom line – the invisible hand of the market creating efficiency. Consumers pay for the marginal cost and thats where profits come from. But what happens when a technology comes along, a technology like the internet, which is so powerful marginal cost is reduced to zero?
"No-one expected a technological revolution whose productivity was so extreme," he says.

"It wreaked havoc in the intellectual industries. It hit music first. Then it hit the newspapers and magazine industry with a vengeance. Now the book industry is experiencing it."

In 2001 Lawrence Summers, US secretary to the Treasury under Bill Clinton, was called in for a chat about the future with the Federal Reserve Bank of Kansas City.

"Larry says: 'We've got a problem'," Rifkin recounts. "He realised the internet was powerful enough to drive down marginal cost to zero. But if it gets to zero, we can't guarantee a return for investors. The capitalist system would collapse. There's no profit."

It was, to all intents and purposes, the end of competitiveness as a motivating force in the world economy. Rifkin suspects capitalism will remain for another fifty years or so, albeit in an increasingly diminished role, but that by the second half of the 20th Century it will have faded away.

Ironically, it would not be the enemies of capitalism who buried it, but its own operating system. Karl Marx guessed rightly that capitalism contained the source of its destruction. He just identified the wrong bit.

Consumers are being replaced by prosumers. Wikipedia stands as testament to it – people's desire to give something back, even without any of the selfish gains they might be expected to want according to classical economics. Rifkin calls this the creative commons. It's spreading from the digital world to the world of bricks and mortar, hotels and children's toys.

A generation raised on austerity politics is more accepting of recycling as a way of life than older generations. Rifkin points to internet start ups that have shaken up their respective sectors, whether its car sharing or Airbnb. He discusses a toy sharing scheme where parents, who have finally realised their children only use their toys for a couple of days, send them into a centre where they are sanitised and sent out to other members. The parents who send in a toy get another one back.

Summers' solution was to raise the drawbridge. He gave up on capitalism's claims of efficiency and suggested that market leaders be turned into monopolies so they could artificially maintain a marginal cost.

But according to Rifkin, technology is already overtaking ideas about how to control it. The internet as we know it – a data internet – is being joined by an 'internet of things'.

Big firms had the germ of an idea at once. General Electric started an 'industrial internet', Cisco was making an 'internet of everything', IBM something called 'smarter planet' and Siemens' 'sustainable cities'.

What are they? If Rifkin is right, they are the embryonic start of a global neural network.

Think sensors. Sensors everywhere.

"They'll provide real time information on resource flows, production lines and distribution centres," Rifkin says. "There'll be sensors on the factory floor for production, on energy so we know the price of electricity moment to moment, on vehicles."

The emerging system has the three necessary technological components of an economic paradigm: Communication, energy and logistics. "The super internet is like a brain," he says.

If you find something unsettling about that idea, you're not alone. Whoever is at the centre of that brain would be like a god. They would have more power over resources and information than at any other time in human history. No wonder, I say, the Chinese seem so fond of the idea.

"The internet of things will lead either to the monopolisation of everything or the democratisation of everything," he replies. He's alive to the dangers, but he seems particularly enthused by how quickly even very large firms fall apart when presented with the sudden end of marginal costs. The record companies, who opted for draconian measures to protect their industry, lost the battle quickly and definitively. A similar process seems to be underway with energy firms in Germany.

Energy production had gone lateral. Home owners, renters, small and large business, all started producing their own solar and wind power and feeding it back into the grid. The result has been a sudden decline in the cost of electricity. Generating companies are paying grid managers to take their electricity to encourage cutbacks and prevent the grid from overloading.

E.ON saw a 14% drop in profits in 2013. Germany's second-largest energy company, RWE, reported a loss of 2.8 billion euros – the first loss in its 60 year history. Since 2010 the value of shares of both companies has fallen by over 50%, due to poor results from their subsidiaries producing energy from conventional sources.

"We didn't see it coming. We didn't realise that when we hit the threshold of 20% green electricity it blew power companies out. They can't play. They can't scale it. They're vertically integrated and this is lateral production. Collaboration overwhelms centralised power. The internet of things favours democratisation of economy."

I suggest that his vision sees production democratised, but not logistics. For the super internet to function all the information has to be collected in one spot: information about how full Mrs Smith's bin is, or how far that delivery van is from its depot, or how much more power my kettle needs is all going to one place. The idea that the people in control of that system would be radical democrats is surely as convincing as Marx's insistence that the representatives of the proletariat would manage resources in the interests of all.

Rifkin conceeds the point. He's particularly disappointed by a recent court of appeal ruling in the US which knocked down the principle of net neutrality. That move opens up the potential for internet service providers to prioritise certain customers, or commercial partner websites. Free speech campaigners warn it amounts to privatisation of the world wide web.

"Cable and telecom companies are consolidating quickly," Rifkin says. "They want to control the internet of things. They're saying: 'This network neutrality thing… come on. We need to be able to charge here. We need some proprietorship on data transfer'."

But he shares a view long held sacred by Marxists – that the organisation of production creates political and social consciousness. Having a population create their own energy with the solar panels on their roofs, having them create their own car using a printer – producing for free and consuming for free – will tend strongly toward democratisation.

There are several leaps of logic in what Rifkin is saying, but none of them are unwarranted or particularly unconvincing. It is optimistic, but not naive. Funnily enough, there is something oddly old-fashioned about this vision of a future, a benign vision based on technology and abundance.

It may not happen. Certainly he seems to underestimate the strength of corporate and state interests. But it is a logical and considerate assessment. Perhaps it's time for Britain to join the rest of the world and start paying attention to him.

The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism is available now.