Blockchain, Institutional Evolution, and the Path to Sustainability — Part II
This is the second section of a three part series highlighting how cryptoasset technology can incentivize renewable energy adoption and lead to the development of a decarbonized techno-economic paradigm.
Implications and Theoretical Solutions
The many implications of the biophysical worldview create a set of assumptions and conditions to which any theoretical solution to the climate problem must adhere.
· First, the industrial era, characterized by exponential increase in fossil fuel consumption, is reaching a terminal phase that will lead to a qualitative structural transition.
· Second, because all institutions since the industrial era have been organized to maximize economic growth, also known as the throughput of terrestrial stocks of matter and energy, the new era will have to include institutional evolution to accommodate renewable sources of energy.
· Third, given the distributed nature of renewable sources, in addition to their limitations in quantity and rate, the institutions of this new techno-economic paradigm must be decentralized and incentivize maximum efficiency in energy-matter consumption.
· Finally, given the lack of political will within Western nation-states, the new techno-economic paradigm must provide qualitatively better systems that stimulate rational, voluntary adoption by individuals.
Structural Change in Complex Adaptive Systems
In recent years, biophysical economics and complexity theory have converged on the same conclusion that human civilization, as a complex system reliant on energy flows, has reached a theoretical limit and now faces structural transition. Society is reliant on processes that are fundamentally out of sync with the earth’s thermodynamic equilibrium. There are two reasons our species has been able to temporarily surpass the natural physical constraints established by evolution. First, social innovations like paper money and debt have led to complex institutions designed to organize the energy surplus on a level previously unimaginable. Second, the burning of fossil fuels has acted as the socioeconomic equivalent of the Big Bang, leading to a positive scaling relationship in energy use, population, food production, and material consumption.[1] However, this Promethean Innovation inadvertently closed the thermodynamic system by shifting humanity’s primary source of energy from renewable solar flows to terrestrial stocks. Technology built on top of this carbon-based infrastructure has become increasingly complex in order to obtain harder to reach fossil fuels and rare earth minerals. In total factor productivity metrics, there have been declining returns to each successive wave of innovations within this techno-economic paradigm. These declining marginal returns of innovations lead not to standard economic recessions, but either result in total system collapse or the reorganization of the system according to new rules.[2] The deteriorating returns on energy invested emphasize how the solution requires integrating these deviating trends back in line with biological earth systems reliant on renewable flow rates. The Crisis of Civilizations framework, as Rafeez Ahmed calls his analysis, uses the complex adaptive systems model to “return to a scientific framework defined by the thermodynamics of the fossil fuel system, and the evolution and adaptation of the species” while “bringing in critical insights from the physical and natural sciences that can inform the development of robust historical and sociological theories.”[3] His framework suggests that the EROIE feedback mechanism describes a global system on the brink of a fundamental phase-shift to a new structural configuration.
Given the physical constraints of the earth, industrial society as we know it cannot function with a purely renewable energy throughput. Any structural change that returns human and earth systems to equilibrium requires the level of energy consumption to decrease, which will be difficult because our entire social and economic paradigm is designed to continue the process of open-ended growth in energy throughput.[4] Returning to a paradigm that integrates economics and thermodynamics requires the harnessing of dispersed renewable energy flows and reducing energy consumption to maximum efficiency, as a biological organism would, which in turn requires all social and economic institutions to reorganize around renewable sources. Rifkin refers to this coming structural change as a shift from a colonizing to a climatic framework, which progresses from centralized, complex institutions to decentralized, emergent ones in harmony with renewable generation patterns.[5] Throughout history, humans have consistently reorganized society around Promethean innovations. Agriculture and the Industrial Revolution led to technology, innovation, and centralization; the next phase shift seeks a return to a distributed system of processing energy that reduces environmental impact while still enjoying the benefits of modern life. In order to go smoothly, it will require a progression of organized degrowth that will restore the economy to a scale in sync as a natural subsystem of the ecosystem.[6]
Institutional Inertia
The United States, as the established global superpower and most powerful economy the world has ever seen, has struggled to adopt sustainable energy policy or a concerted movement to address the challenges of anthropogenic climate change. At the center of this obstinate economy is a fossil fuel-based industrial complex that forms the backbone of all American commercial activity and has a tight grip on corporate and political institutions, as well as an ideological grip on U.S. consumer culture. It is the key barrier to decarbonizing the U.S. energy system and exemplifies what Vogler calls “institutional inertia.”[7]
Society’s relentless pursuit of growth since the Industrial Revolution has led to the proliferation of consumer culture in the U.S. and an ideological barrier to sustainability. It has also created a political dynamic that intertwines the core industries responsible for this remarkable growth since the industrial revolution — finance and fossil fuels — with government. And most importantly, the way firms and governments are designed to maximize production and consumption appears incompatible with the systemic change needed to address climate change.
In the United States, an entrenched consumer culture has led to a misinterpretation or complete disregard for what an energy transition actually implies. For example, some optimists mistakenly point to the recent decoupling of energy consumption and economic growth in the U.S. as a sign of progress. There are two main reasons to be skeptical of this optimism. First, the dip in energy use after 2008 was a direct consequence of economic crisis and represents recession, of which we are still probably feeling the effects, not a decoupling of energy and GDP. Second, the leveling off of energy use yet return of nominal GDP growth may point to decreased energy use in the U.S., but does not take into account that this uptick still raises total energy consumption elsewhere in the world. It is more likely that this recent dynamic reflects the new nature of the global economy in the 21st century as more energy-intensive industries, like manufacturing, shift overseas. In fact, as Americans become richer and consume more goods, it raises the quantity of fossil fuels used because production of these cheap consumer products takes place in countries with inefficient energy systems, cheap fuel, and long transportation routes to market. Given the American appetite for cheap goods, it will be more difficult to reduce total energy consumption than simply embracing a services economy; the global nature of the problem compels that we look past one-dimensional statistics like total U.S. energy consumption.
On a political economy level, the cozy relationship between government agencies and the corporate institutions responsible for organizing the vast fossil-fuel industrial complex provides another arena where public perception of the free market’s role in energy is grossly misunderstood. The majority of energy subsidies in the U.S. go towards supporting fossil fuels, yet the political sphere routinely chastises the ideological impurity of pro-renewables legislation.
Fossil Fuels Get More Subsidies than Renewables
This political distortion favors incumbent dirty energy companies and raises barriers to entry, serving to promote innovation away from cleantech. Furthermore, the energy industrial complex has so many different agencies, laws, and regulations governing the sector that it has become incredibly opaque and subject to influence from lobbying and special interests. Those who would benefit from sustainable energy policy, namely individuals distributed around the country, inherently do not have the ability to organize as effectively, creating a collective action problem favoring the incumbent professional lobbyists. These public and private institutions remain incentivized to maintain the status quo given the overarching structure of the system.
At its most fundamental level, economic growth is contingent on increased consumption of energy and natural resources, which is a problem because economic growth has formed the basis of institutional legitimacy since the industrial revolution. Economic growth, reflected through the GDP metric, was created to measure the drastically increasing production and consumption of goods and services within nation-states. All institutions formed throughout this period in the nineteenth and twentieth centuries are geared towards this goal because GDP per capita is the predominant measure of living standards. Even in theocracies like Iran, there is a strong relationship between wealth per capita and the consent of the governed. In China, the Communist Party’s entire legitimacy rests its ability to provide a growing economy for its people and greatly fears the slowdown climate change implies. If the economy suffers in the U.S., the party in power is likely to be voted out of office; Clinton capitalized on a recession to oust Bush out of office on the mantra “it’s the economy, stupid.” Today’s international institutions like the World Bank and IMF, vestiges of the neoliberal world order, were designed to produce economic growth around the world and instill legitimacy into the U.S., with its dominant ideology of democratic capitalism, as the global standard.
The private sector is also reliant on economic growth for legitimacy. Firms and management are bound to shareholders through a form of consent based on profit. Finance, an ancillary industry closely related to the energy industry, relies completely on growth for its ability to function because of the nature of credit; the massive amount of debt outstanding today only functions because people believe the economy of the future will be larger than the economy today. In order to avoid financial collapse, it is in institutions’ economic, political, and cultural interest to do everything possible to consume more and grow the economy.
Given the explicit link between GDP and energy consumption, in an ideal world institutions could decouple energy consumption and GDP growth, or stop growth altogether. The problem is that the industrial nation state has designed its legitimacy around a process that undermines the strategies needed to address climate change. In the ultimate goal of reducing emissions, increasing renewable energy capacity and improving energy efficiency are effectively the same thing — yet only one of these activities contributes to GDP. Institutional inertia will always seek to maximize output first and consider environmental consequences second, which is why Vogler points out that international institutions for addressing climate change are fragmented and those with cohesion are geared towards security of supply to promote growth rather than sustainability.
Necessity is the mother of invention, but institutions have protected us from feeling the market necessity to shift away from the current paradigm. Subsidies for oil and gas, as well as indirect subsidies like defense expenditures, are masking a steady decline in EROEI. Financialization has also papered over the genuine health of the economy. As Ahmed explains, the “extreme deregulation, debt-money expansionism and harsh national austerity” of the neoliberal era is “a direct product of the changing dynamics of the global energy system” and the transition to a world with low-quality fossil fuels.[8] Biophysical economists point to an astronomical money supply as the marker of true health; Rifkin called inflation nothing more than the measure of the entropy state of the environment.[9] Misleading GDP growth driven by the high amounts of inflation and debt currently circulating in Western economies could be responsible for the calamity of political economy problems faced by these developed nation-states today.
As currently constructed, the institutional complex designed to facilitate the flow of energy through the economy has become a parasite and sucks up too much of the remaining energy source.[10] Rapid change within this paradigm, perhaps highlighted by China’s attempt to centrally design an economy to wean itself off fossil fuels, is doomed to fail because the flaws of industrial society, given the constraints of thermodynamics, run much deeper than proposed solutions. As currently constructed, political and corporate institutions are incapable of pursuing an organized process of degrowth but instead will continue to pursue economic growth at all costs.[11] In the past it has been energy innovation that leads to the institutional shifts, but with no Promethean innovation on the horizon, civilization will need institutional evolution to incentivize a renewable energy transition.
Decentralizing the Means of Production
Marx predicted the end of capitalism because he believed the system perpetuated the unequal distribution of labor and capital. He focused his analysis on technology and exosomatic evolution, arguing that tools, as the primary means of production, naturally centralized in the hands of elites and allowed this capitalist class to perpetually control the rest of society. Georgescu-Roegen also used an exosomatic critique by highlighting how the centralized nature of fossil fuels inherently led to centralized institutions for controlling resources. Those who owned and operated the tools for organizing the throughput of the energy system naturally solidified elite socioeconomic status. The energy industry, producing the fuel integral to the physical economy, has become increasingly centralized, as have ancillary industries like finance, agriculture, and manufacturing. All institutional innovations have followed this paradigm because neoclassical markets dictate that firms constantly seek expansion and returns to scale in pursuit of economic growth. Biophysical economics and complexity theory predict that this centralized institutional model is due for change.
The climatic framework Rifkin outlines in his book Entropy minimizes energy flow-through and slows the entropy process by designing small, decentralized institutions that maintain a steady low-growth state.[12] This design can be applied to all institutions that will need to be disrupted in order to implement true sustainability. The innovations required for an entirely renewable energy dependent economy can be broken down into two categories. The first constitutes improvements in total factor productivity. These would include technological advancements in renewable energy generation, transport, and storage, all of which will play an essential role in the transition. The other type are institutional innovations, which are not scientific improvements leading directly to increased output but rather changes in incentive structures and cultural behavior that have a disruptive and reorganizing impact on incumbent systems.
21st century information technologies have created institutional innovations and cultural shifts that are already acting as decentralizing forces in several industries. The first generation of the Internet has distributed communications power and led to previously unfathomable peer-to-peer connectivity. Incumbents reliant on competitive advantages in information networks, like the media, have struggled to adjust; disruption occurs because the Internet broke the monopoly that large centralized institutions, namely corporations and state media outlets, had on information, just as the capacity to mass-produce books with a printing press disrupted medieval and religious institutions.[13] The transition to distributed sources of energy will require not just distribution in the access to information, but in entire financial and legal systems.
John Locke, the father of the market mechanism, first articulated the natural right to property and formed the basis for classical liberal political legitimacy. With the industrial nation-state organization taking shape following the Industrial Revolution, he emphasized private property because it was the most efficient method of generating economic growth. The transition from feudalism to privately owned land marked a key institutional shift that allowed Western Civilization to maximize fossil fuel throughput. The next evolution of the system requires the end of data, energy, food, and financial feudalism in order to create the decentralized networks that most efficiently maintain a low-growth renewable energy throughput. Just as the invention of bonds and equities financed centralized corporations that extracted oil and mass-produced automobiles, decentralized institutional innovations will finance local development and incentivize small-scale, lean, adaptive systems.
Increases in total factor productivity for renewable energy and food generation will merge with the institutional innovations of the next generation of the Internet to create decentralized systems that incentivize energy efficiency and minimize consumption. Cryptography provides individuals and communities with the opportunity to retain ownership of data and leverage it as an asset in marketplaces for goods and services. It has the potential to scale trust-based networks and disintermediate incumbent institutions; the first generation of the Internet democratized access to information and the next generation of the Internet will democratize rights to assets. For example, Bitcoin, although in its early stages, seeks to act as a new global financial standard with a fixed money supply by putting faith in the distributed nature of its cryptographically secured network rather than government-sponsored central banks. Money, as the social invention used to organize the energy surplus, is currently so abstract and dominated by elites that it is being used to constantly generate deceptive GDP growth and maintain legitimacy in incumbent institutions. Money is the ultimate means of production, yet it is the invention most out of tune with biological systems and has not changed since the Industrial Revolution. For all its flaws, Bitcoin moves institutions closer to the new techno-economic paradigm by disincentivizing conspicuous consumption and employing a consensus mechanism rooted in the consumption of the good at the heart of economic activity: energy.
If designed correctly, blockchains could also expedite the adoption curves of distributed energy resources (DERs) by allowing users to leverage local renewable energy generation and data in a manner that maximizes return on investment, which would create a co-evolving system incentivizing further improvements in TFP for generation and storage. Leading scientists agree that any sustainable energy transition must include innovation not just in technology, but business models, finance, and institutions in order to maximize the potential of renewable resources.[14] This combination of TFP and institutional innovation would constitute a new convergence of communication and energy infrastructure that could act as a novel type of Promethean Innovation — one stimulated by a socioeconomic breakthrough rather than a great leap forward in energy.
Localized agriculture, 3-D printing, distributed energy generation and storage, and new financial networks all form a combination of TFP and institutional innovation that can reorganize the economic process back in harmony with earth flows. It will mark a new phase shift away from neoliberal financial capitalism towards a new era dominated by information technologies.[15] Any new technology worthy of a paradigm shift needs to be able to sustain itself and provide enough of a surplus to carry out the ancillary economic activities of modern civilization. Renewable energy, because of its distributed and intermittent nature, is not dense enough nor does it have a high enough EROEI to sustain industrial levels of consumption. We can rely on some increase in total factor productivity of renewable inputs and storage systems, but the fundamental structural innovation must be led by institutional innovations that incentivize individuals to live more energy efficiently. The key to addressing anthropogenic climate change, set in motion by economically efficient yet energy wasteful processes, is to leverage information technology to decentralize the means of production and the institutions that organize them.
The Process of Creative Destruction
The new techno-economic paradigm must be voluntarily adopted by individuals for two reasons. First, the speed required for a sustainable techno-economic paradigm cannot be met by working within the current institutional framework. Second, in order to uphold liberalism and notions of individual rights, it cannot be compelled by a state or corporation. The biophysical economists are mostly entropic pessimists; their proposed solutions to the present challenges rely on massive, globally-exerted political power and ethical changes that have not (successfully) been exhibited at scale for the entirety of history.
For all the damage the Industrial Revolution has done to the biosphere, it was remarkable in that it led to great advances in quality of human life and was adopted, for the most part, quickly and peacefully. The Schumpeterian lens of creative destruction is the best hope for implementing the sustainable, decentralized techno-economic paradigm because it markets technologies so obviously superior to previous iterations that customers rapidly adopt new products. With its emphasis on an evolutionary mechanism of change, it also fits nicely within the biophysical framework outlined in the previous chapter. This branch of economics claims that clusters of disruptive technologies form a complex system where feedback loops incentivize co-evolution between the core innovations of the cluster. A techno-economic paradigm, therefore, represents “the most effective way of applying a particular technological revolution and of using it for modernizing and rejuvenating the whole of the economy.” Once it takes shape, its principles become “the common-sense basis for organizing any activity and for structuring any institution.”[16] The neo-Schumpeterian argue structural laws of the free market system create a predictable cycle with periods of growth, maturation, and reorganization. Indeed, Perez writes that the “sequence of technological revolution — financial bubble — collapse — golden age — political unrest occurs about every half century” and is “based on the causal mechanisms that are in the nature of capitalism.”[17] She identifies five such sequences and wrote at a time where the Internet, software, and microelectronic revolution had reached its golden age. Overall, with its emphasis on structural evolution and technological change, this branch of literature fits in well with the biophysical and complex systems worldview.
In many ways, recent innovations in the digital revolution, with their emphasis on using data to squeeze out productivity from physical assets, are slowly leading towards a sustainable techno-economic paradigm. The invention of the iPhone was disruptive because it put an endless amount of functions onto one intuitive user interface, yet sustainable because it has replaced an endless list of physical items all of which had to be produced, transported, and discarded.[18] It killed the phonebook market but saved lots of trees and shipping costs. Ride-sharing technologies like Lyft and Uber, although debatable about their impact on the environment, at least point to a cultural shift away from physical ownership and towards TaaS, which maximizes the use of each asset. It is clear that in some ways, human nature is already shifting towards sustainable systems with the advent of digital technology by making data an incredibly valuable asset.
The reason that the transition cannot be primarily political is because, as mentioned earlier, institutional legitimacy is predicated on economic growth; lacking ideological consensus in many areas, a compulsory state-driven solution would violate the individual rights enshrined in classical liberalism. Rather than create this transition from a centrally designed, top-down entity, it makes more sense to implement this system in a manner that favors decentralization and emergent order. Relying on those who do not believe in climate change to get on board will take too long; it will be more effective to market new technologies so objectively beneficial that all, whether you believe in climate change or not, feel compelled to adopt them. In this way, the new techno-economic paradigm can be designed to incentivize the adoption of sustainable technologies and institutional systems.
Part III of this series can be found here: https://medium.com/@Kbaranko_391/blockchain-institutional-evolution-and-the-path-to-sustainability-part-iii-56e4acc230c7
Works Cited:
[1] Ahmed, Failing States, Collapsing Systems, 26.
[2] Bonaiuti, Mauro. “Are We Entering the Age of Involuntary Degrowth? Promethean Technologies and Declining Returns of Innovation.” Journal of Cleaner Production, 2017. doi:10.1016/j.jclepro.2017.02.196.
[3] Ahmed, Failing States, Collapsing Systems, 9.
[4] West, Scale, 212.
[5] Rifkin, Entropy, 91.
[6] Daly, Beyond Growth.
[7] John Vogler, Climate Change in World Politics (Basingstoke, Hampshire: Palgrave Macmillan, 2016), 30.
[8] Ahmed, Failing States, Collapsing Systems, 37.
[9] Rifkin, Entropy, 126.
[10] Ibid. 90.
[11] Jonathan Rutherford, “What’s Really Driving the Global Economic Crisis is Net Energy Decline,” Medium, August 02, 2017, https://medium.com/insurge-intelligence/whats-really-driving-the-global-economic-crisis-is-net-energy-decline-82efb9ca45fe.
[12] Rifkin, Entropy, 91.
[13] James Dale Davidson and William Rees-Mogg, The Sovereign Individual (New York, NY: Touchstone, 1999), 11.
[14] Varun Sivaram, Taming the Sun (Cambridge, MA: MIT Press, 2018), 58.
[15] Ahmed, Failing States, Collapsing Systems, 88.
[16] Carlota Perez, Technological Revolutions and Financial Capital (Cheltenham: Edward Elgar, 2014), 15.
[17] Ibid. 5.
[18] Tom Price, “The Last Auto Mechanic,” Medium, July 27, 2017, https://medium.com/ @tomprice_22461/the-last-auto-mechanic-841adec75498.
