Everyone is talking about the third industrial revolution. Progressive digitalisation is conquering one industry after another. Initially, the internet turned the postal and telecommunications industry, the publishing sector and the music business upside down. This was followed by the emergence of innovative business models in the taxi and hotel industries like Uber or Airbnb. Economist Joseph Schumpeter referred to these transformation processes as “innovation through creative destruction”. The internet is changing the way we act and think at horrific speed. And at virtually zero marginal costs.
Although contributions to digitalisation debates often address imminent risks, I would actually like to focus on the opportunities. It is notably the renewable energies which stand to profit from these opportunities — which I refer to as financial real asset investments. Just like the “Internet of Things”, the “Internet of Assets” combines the virtual and real worlds. It is the FinTechs (financial technologies) which are seizing upon the opportunity to disrupt the structures of the financial industry — which have been the status quo since the last industrial revolution of the 19th Century.
But what is the definition of industrial revolution? It is primarily defined by evolutionary leaps that are turning old economic, social, political and cultural paradigms into dust.
The Neolithic revolution
More than 10,000 years ago, before hunter-gatherers started to settle down, small groups of nomads were moving around to wherever the sun would allow them to live. As they settled down, they modeled the solar energy system through mixed farming.
From this model emerged the social organisational principle which we know as feudalism, focussing on collective management of farmland and forests and the protection of the environment against depletion. It seemed opportune at the time to organise this system from the top down, by granting feudal rights in turn for loyalty. In this decentralised system, communication was not faster than horses could gallop, and cities were living off the produce of the county, counting only a few tens of thousands of inhabitants. More than 90% of the population was indentured as peasants while only a small elite lived off the surplus production and was in charge of the political and religious systems, the trades, culture, and the military. Population growth was very modest because people could take no more from the soil — apart from incremental technological advances in the farmland cultivation — than the soil offered in terms of nutritional energy. It was the invention of the letterpress in the middle of the 15th Century which heralded another industrial revolution.
The industrial revolution
The feudal form of society has changed dramatically since the end of the 18th Century. Once again, the transformation of energy use proved to be the decisive factor with the invention of the steam engine enabling mankind to exploit solar energy which had been stored millions of years ago in the form of coal, and later on, oil and gas. This transformation society, which still exists today, is neither sustainable (as the resources we use are finite) nor efficient (as solar energy was stored in primeval times and its conversion into useful energy yields poor efficiency results). But it is nevertheless highly successful if you disregard the consequences for future generations: population numbers have been exploding and urban mega-metropolises are growing rampantly to this day.
Thanks to synthetic fertilizers — another result from the utilisation of fossil resources — and the general industrialisation of agriculture, the production and later the service society emerged as a result of food overproduction by fewer and fewer farmers. Within this system, private property (including land) became the primary social asset worth protecting. Civil and commercial laws were adopted, and the rule of law, national states and the modern banking and monetary system established. These developments culminated in the European revolutionary year of 1848, the year the feudal system came to an end. Horses were replaced by railways and later by automobiles, and with the invention of the telephone and radio, communication technology took a grand step forward. Since then, the principle of private property has barely changed. Social market economies, in conjunction with the democratic governing principle, seem to have struck the balance between property and production.
What’s new: the third industrial revolution
Can the current trend be likened to an industrial revolution at all? Considering that an industrial revolution occurs whenever a new primary energy source starts being used (keyword renewable energies), and that new communication technologies (the internet) emerge and changes in mobility (autonomous driving) are involved: then the answer is yes! Additionally, rapid progress is being made in robotics, artificial intelligence, and the life sciences. Renewable energies and the internet share two characteristics: they are decentralised and they cause virtually no marginal costs.
This rapid technological transformation will always be strongly reflected in politics, society and our culture. We are already in the midst of this change: in the political arena, traditional centre parties in Western democracies and the associated media have been eroding since last year. The internet is making societies increasingly heterogeneous. “Left versus right” may be replaced by a new demarcation line between liberal-global and national-conservative, even within the established parties. Multi-party systems, concordant rather than competitive democracies, subsidiarity and federalism, citizen participation and supranationalism may be the way of the future. The dark side of that trend are extreme pendulum swings back to the supposedly tried and true. Data seem to become the new gold — and data privacy seems to inherit the social status of private property. The labor market is changing rapidly and with unpredictable consequences. The productive surplus may give rise to a new leisure society, similar to the transformation from the peasant to the service society. Against this background, the unconditional basic income will be just as vital as was the introduction of social security back in the days.
The Internet of Assets and the financing of a new startup era
Industrial revolutions are times of tremendous opportunities for founders of new businesses. The last period of years of rapid industrial expansion created the banking and monetary system that funded key infrastructure projects: from electrification, railroads and highways to the expansion of agglomerations, including the businesses which led to the emergence of consumer society. The traditional banking and monetary system, however, has eroded since the last financial crisis, as did all the other traditional industries and the existing capital stock infrastructure. Incidentally, fresh central bank money and increasing public debt cannot stop that trend.
The much debated blockchain could be the missing puzzle piece for financing new businesses from the bottom up. This involves not only the most obvious application, i.e., digital currencies, but the opportunity to digitally list startups, assets and related contracts similar to the stock market, and to trade it on a daily basis with a high level of transparency. Only with regard to this background does sharing economy make sense at all. The associated technologies are called ‘Smart Contracts’ and, in particular, ‘Initial Coin Offerings’ (ICO) relating to the digital account assignment of share certificates. Thanks to these ICOs, everyone will be able to hold and trade such assets. I am particularly excited about scenarios in a renewable energies context. A broad fragmented community could invest directly in decentralised real assets. A liquid digital marketplace, much like a stock market, would ensure that the shares in these long-lived assets could be resold as needed. Electricity supplies (from your own system), collaterals, maintenance documentation, decision processes and much more could also be managed via blockchain. Several dozen startups are already ”plowing this field” in German-language markets. We at greenmatch are proud and dedicated to be right in the hub of this new era of industrial expansion: at the crossroads of renewable energies, the internet, and financing.
Further reading: The energetic approach of environmental history presented here draws on the statements by Prof. Dr. Rolf Peter Sieferle. Cf. the remarks by Jeremy Rifkin in “The third industrial revolution: How lateral power is transforming energy, the economy, and the world”.
As the founder of a leading financial modelling platform for renewables, Matthias Stettler is in charge of greenmatch’s vision, strategy, investors, and partnerships, and advises investors, project developers, and banks on financing renewable energy projects. With Sustainable Finance Team GmbH, he is consulting companies about corporate finance and strategy.
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