Towards a Closed Loop Economy

Innovation is Serious Business. It's the key to prosperity, national security, health, jobs, you name it, innovation will solve it. But for all the talk that gets thrown around about innovation, and innovation policy (at least in the circles I run in), one question which is largely unaddressed is: Can we innovate in any direction we want, or are there historical patterns that describe how technological change produces the social, political, and economic outcomes were aiming for?

The study of economic history is called cliometrics, and one of the seminal works in the field is Chris Freeman and Francisco Louca's As Time Goes By: From the Industrial Revolutions to the Information Revolution. Freeman and Louca develop a theory of innovation centered around Kondratiev Waves, decades long cycles of economic development driven by a “carrier branch technology.” They identify five Kondratiev Waves: water powered machinery, the steam engine, electrification, motorization, and computerization. Kondratiev waves display common characteristics, the carrier branch technology allows vastly more efficient use of resources, while creating new demands for raw materials, new technological innovations, and new forms of social organization. However, each wave's upswing is followed by a downswing, a structural adjustment as the limits of the technology are reached, and the quest for further profits and efficiencies instead leads to the elimination of jobs, and associated social and political unrest. I'll use the steam engine as the canonical example.

Steam engines were initially developed to pump water out of coal mines, and were relatively bulky and immobile. Improved metallurgy and machine tools allowed the creation of lighter, more efficient steam engines capable of driving locomotives on railroads around 1820. Railroads created a new market for coal, which was become cheaper thanks to better mining techniques, but more importantly, made it much easier to bring coal to market. Factories, which previously had to be located by fast flowing rivers, could now be moved closer to population centers and raw materials. Travel became a mass commodity, and millions of people could travel between cities cheaply and easily on a network of new railroads and steamships. Entrepreneurs became extremely wealthy, while many investors went broke in speculative bubbles. The sheer scale of railroad enterprises (thousands of employees as opposed to hundreds, and geographic dispersion) required new techniques of rational management, for example, the Harvard Business School was founded to train railroad executives, while timezones were imposed so that a nationwide train schedule could be coordinated. By 1870, market pressures had forced the creation of massive conglomerates, run by Gilded Age robber barons. Recession and labor unrest reverberated around the world, and wealth production did not begin in earnest until the start of the next Kondratiev wave in the 1890s, when electrification provided a host of new opportunities. Similar stories can be told about each of the other Kondratiev waves.

So what's the take away, the relevance to modern life? Kondratiev waves last about 50 years, in total. The start of the computer age can reasonably be traced back to the invention of the integrated circuit in 1959, or more realistically, the IBM S/360 in 1964, which was the first widely available general purpose computer. The exact date isn't important, what matters is that now, fifty years later, we've reached a point of saturation in terms of computers. Micro-controllers are in literally every possible device. 4.6 billion people have cell phones. Computer chip manufacturing is a cut-throat business conducted on the thinnest of margins. These facts are clear signs of a mature technology, and the downslope of a Kondratiev wave. The economic and political side matches as well. We're seeing persistent unemployment and social unrest the world over, from the United States, to Greece, to Egypt. While the proximate cause of the most recent recession was financial mismanagement (made possible in large part by the computerization of the financial sector, I might note), it seems more plausible that in fact we're experiencing a structural adjustment. Computerization is tapped out as a primary driver of economic growth. Incremental innovation in computers and related technologies will not restore prosperity. What is needed now is a new carrier branch technology.

Carrier branch technologies are big, they fundamentally alter every aspect of production and social organization. What in the pipeline might fit the bill? Nanotechnology is a perennial favorite, but molecular assembly is fifteen years away, and has been since 1986. Human enhancement and biotech is important, but I'm not sure how much it drives at the "means of production." Clean energy might work, but replacing coal plants with solar plants, and gasoline with batteries, doesn't seem big enough for a Kondratiev wave.

This comic [backup link] provides a hint. It tells the Malthusian story of reindeer on St. Matthew Island, where the population expanded exponentially until they hit their resource limit, and collapsed. While the only thing more predictable than a Malthusian prediction is that it will be overturned, the central tenet that in the long run, Earth is a finite system, is a physical fact. So let me speculate, what if the outputs of the economy were identical to the inputs? What if the human economy was a closed loop, taking in only sunlight, and producing the absolute minimum of waste? Stop burning fossile fuels, stop mining metals, stop depleting fisheries and upsetting nutrient cycles, and focus on minimizing

This would require the re-engineering of almost material artifact, every large scale technological system. The amount of human effort would be staggering, millions if not billions of jobs would be created. The potential benefits are large, not only would we be saving the planet, but we'd be growing the economy, because turning trash into wealth is the very definition of alchemy. Moving to a closed loop economy is not just ecologically sound, it's also cost efficient. As Neal Stephenson recently pointed out, sucking resources out of the ground and lighting them on fire as a way to create energy is a method that appears, from the point of view of hypothetical alien anthropologists, to be insane.

The actual policies involved in transitioning to a closed loop economy are far from easy. There are entrenched interests opposing any such shift. Not only is it cheaper to extract resources from the ground, and use the atmosphere as a carbon dump, but humans intrinsically enjoy being part of the larger world. As I've been thinking about this, the image of domed cities and hydroponic farms came to mind, a classic sci-fi dystopia. But as a start, we need to begin collecting information about the total life-cycles of products, and encouraging greater amounts of recycling. We need to identify what technological changes can be done easily, and what will be hard. There will be normative and cultural shifts; consumerism is not compatible with a closed loop economy However, in terms of the grand challenges of the future, the big economic picture, the creation of public policy and the role of individuals, there are steps that can be taken. This is the innovation we need, not only for prosperity, but for survival.