An Essay on the Future — Regulation, the Economy and the Environment
“The greatest wealth is to live content with little.” Plato
I recently came across an article I wrote in 2012, “How to Survive the End of the Industrial Age”. I was surprised at how good a forecast of the future I made. It made me start to think and I realized that I spend a lot of time thinking about the future. Whether it is a student lecture, work commercializing faculty research or leading a badge as I did last week, my thinking has involved the same theme for the last ten years. I am trying to prepare people for a future where I do not yet think they realize the scope or scale of change.
The future always comes down to science, technology and transformative innovation, and how those domains affect physical, natural and social systems. You might be surprised that I do not list entrepreneurship or social entrepreneurship. But, the more I study the future, the more I become convinced that economics and entrepreneurship are old tools that need to be updated. Much of the work in complexity science at places like Santa Fe Institute and Max Planck Institute lead me to this conclusion. Advances in understanding biomimicry also support this conclusion. Perhaps, instead of economics we should be teaching the most fundamental behavior of all living things — explore and exploit. This simple framework explains scientific and industrial revolutions and the fundamentals of innovation and entrepreneurship, basically the entire spectrum of economic behavior. All animals from slime mold to ants and humans instinctively explore in an iterative approach to manage uncertainty. When a certain confidence level is reached, a convergence of positive factors — what some disciplines call a paradigm — exploitation begins. For example, “Product-Market” fit is the transition point in entrepreneurship from explore to exploit.
This spectrum of economic behavior begins with physical and natural or holistic systems — matter, energy and information — and combines with people, money and government to produce social or manmade systems. It is the balance between natural and manmade systems that has now been overtaxed to the point that Black Swans — the epidemics and financial crises (2007–2008) and snowstorms and 100F+ temperatures — are becoming scarily routine. Many of the Black Swans are leading indicators of the scale of environmental problems to come. As a temporizing measure, we should focus on multidisciplinary approaches to resilience to fortify us for the Black Swans coming. For example, we should update procedures at the FDA and CDC so that the speed to develop new vaccines is not lost in the regulatory process. By modernizing our approach to resilience in multiple sectors, we may have the time to tackle the most important problem — the environment. By the way, I think it is touch and go now that we will fix the environment in time.
Another way to slow the march toward the environmental abyss is provided by the noted physicist Arthur Eddington. Eddington believed that scarcity was the default state of humanity. Man functions well, as the indigenous people demonstrate, in a very simple lifestyle that has existed for the last 100,000 years. The current state in much of the world is in fact abundance, any need just a click away. We need to roll this abundance lifestyle back to reduce pressure on the environment and improve the chances for survival. Such a rollback has never been done in human history, although maybe WW II comes close. One particular approach in materials science may be helpful, where we use quantum chemistry, nanomaterial and regenerative material in lieu of traditional approaches to create new eco-friendly materials. Fortunately, the technologies built on artificial intelligence (AI), quantum mechanics and complexity science give us a formidable toolkit, but we need to focus the technology on the right problems. We have arrived at the point in human history where the entire status quo should be considered assumptions to be questioned and revalidated.
Of course, we are not very good at questioning the status quo. We were not programmed by evolution or schooling to purposefully embrace uncertainty. The government rarely plans for the future for fear of being wrong. Universities could take on this role, but the “public intellectual” is now an outdated concept. And, what John Stuart Mill called “economic man” is largely motivated by self-interest. The large corporates have the dollar resources, know-how and networks to tackle the environmental problems, but they are confused by Milton Friedman’s 1970s dictum — “maximize shareholder wealth”. Much research since 1970 at Harvard Business School and other universities has shown that investment in support of other stakeholders — employees, suppliers, government and community — generates comparative increases in return on investment (ROI) and share price. This wider corporate focus motivates the stakeholders to perform better and results in improved ROI. Of course, such an approach requires the corporates to take on the “uncertainty” of a change in the status quo and self-interest argues against such an approach.
Complicating the problems for corporates and government is increasing wealth inequality, as documented by a deteriorating U.S. Gini Coefficient since the 1970s (see chart below). The current “digital transformation”, which UC Berkeley describes as “technology, AI, data, IoT and automation” will only make things worse. A new study out of MIT documents that 70% of job loss has come from automation. Today I think the political will is more in favor of addressing jobs and job loss issues despite Washington’s recent environmental positioning. It is easier to throw trillions of dollars into the economy than to take on the more life-threatening problem of the environment. With the possible exception of Presidents FDR, Eisenhower or JFK, we have not had a recent President who would take on the economy and the environmental problems simultaneously. The simple but effective solution may be a “basic income” program to help with wealth inequality and a thoughtful but urgent Washington commitment to the environment.
However, I do not think a Washington commitment to the environment will succeed without the serious participation of the corporates — the publicly traded multinationals — and private companies with 500 workers (federal SME cutoff) or more. To encourage their participation, I propose two initiatives:
1. Formation of a Federal government agency similar to the National Science Foundation with an annual research budget of $100 billion per year to invest in new research around the five biggest environmental problems — CO2, water, food, energy…
2. Formation of a new reporting agency similar to the SEC where large companies would have to report their performance against federal standards with defined deliverables over time. We would need to create a whole new industry, similar to accounting, to audit and report results according to the standards. The cost and anti-regulatory arguments recently against environmental reporting were the same after the 1929 market crash. The GAAP standards, the formation of the SEC and SEC disclosures that emerged after 1929 have improved ethical behavior, consistency and transparency in financial reporting and contributed markedly to the growth of U.S. financial markets. (Note: I would separate environmental reporting from the current thinking to include it under the SEC. The focus should be on the environment and not be confused with issues of financial reporting integrity.
I was shocked when I came to these two conclusions. I am a lifelong Hayek Republican in favor of limited government. One of Hayek’s themes in The Road to Serfdom was to ask “why do we think the government knows what is better for us than we do”. That question haunts me a bit. I think the difference today compared to when Hayek wrote the book in 1944 is the sheer scale of resources held by corporations. For example, non-financial corporations have over $4 trillion in cash, an increase of $1.3 trillion in just ten years. That resource and the other corporate resources cannot be overlooked in facing the challenges of the environment. For a long time the corporates have underpaid for the natural and public resources they have used. This situation is as much the fault of the government as the multinationals. New government regulation around the environment focused on the large corporations to bring them into the fight for the environment is one important step to correct the situation.
To pay for the increased regulation for the environment, I think we should reduce federal government spending on Education, Health and Human Services, Labor, Transportation …We need these functions but not the bureaucracy. Fund these functions at the state or even city level and let these governments and their communities determine the necessary requirements and regulations. The current network, communications and computing technology all supports a decentralized government that operates in real-time at the city level. We should recognize this opportunity, reduce federal overhead and let local people decide what their schools teach and the level of social services. (We should probably also consolidate several federal departments — Energy, Interior, Agriculture, … — into a consolidated department of the environment focused on research and standards.)
A few years ago I read a great book that explained that photography’s success was because it changed the time to capture a personal remembrance. It made me realize that whenever units of measurement change, it portends a dramatic change. In my youth the government talked in millions of dollars, then billions and now trillions. Computer storage was originally in bytes, then megabytes, terabytes and now petabytes and exabytes. To understand computer processing, we used to talk about CPUs and now we talk about “cores”. Even computing itself is adding a new type, “quantum computing”. All of these measurement units changing direct our focus to the new technology and the opportunities. The opportunity we desperately need to address — save the environment. Last chance!
Note: Fascinating story from the Guardian: Sixty years of climate change warnings: the signs that were missed (and ignored)