The Third Industrial Revolution

I have to say that I was impressed when I read about Jeremy Rifkin and his theory about the Third Industrial Revolution and Zero Marginal Cost society. I would warmly recommend you all to get familiar with the theory and see what you think about it.


But meanwhile this blog is all about ideas that this wonderful theory has awaken in me. Indeed we are living in a time where the third industrial revolution is just around the corner. Internet of Things, renewable energy sources and sharing economy are no longer just theories: Several companies like Nokia, Tesla and Daimler are already making these ideas reality.




Rifkin described three causes for an industrial revolution: New forms of communication, new ways of transport and a new source of energy. In the first revolution those were the telegraph, the steam engine train and coal. Second revolution presented the telephone, the automobile and oil. We have been in that stage a hundred years so perhaps soon it would be the time for the next revolution.


And that is exactly what is happening. We are going to have the Internet of Things (we already have the smartphones and the social networks), soon-to-be driverless electrified cars and renewable energy sources like solar power.




Let's start with the Internet of Things. IoT is basically connecting everything to everything. Connecting devices and data between each other to gather and share more information and data everywhere, for everyone. For example Kemppi, a Finnish manufacture of welding equipment has employed IoT in its welding equipment by connecting the devices into a cloud service where data from welding is sent and later analyzed for business development. This is going to be the new norm in every industry. Finnish network giant Nokia has for instance started heavy investments for IoT and 5G-technologies that are currently tested in the Pyeongchang Winter Olympics.

IoT is going to be closely linked to the transportation as well. For instance, Daimler has already developed a Highway Pilot for its long-haul trucks. The truck has an autopilot which gathers huge amount of data with hundreds of censors from the road (road conditions, weather, traffic) and from this data is able to drive autonomously and set this data through a cloud service for the uses of Daimler. Similarly Tesla has also developed similar systems for its vehicles.




A good example from the revolution in transportation is also the fact that less Millennials (you and me) are considering to actually buy a car for themselves. Why? Because car isn't anymore a product, it is a service. Not only car sharing, but according to the statistics also leases of vehicles have become more common in the past few years in the Nordic countries. People are paying more about the service and not for the car. We got Uber, Osuuspankki in Finland already introduced it's car sharing division and the car sharing idea is also on Elon Musk's Masterplan part deux.

Renewable energy, despite Donald Trump's efforts, is booming in Europe. Each year millions and millions of euros are invested into researching to make renewable energy more available and more efficient. For instance in Germany over a third of all electricity consumption comes from solar power, wind power, hydro and biomass. Governments are realizing the effects of using non-renewable resources and want to see alternatives for the 100-year old use of oil and coal.




But I have to ask, what is the reason behind this technological advancement? Making things easier for us?




No. It's about the money. Yees the stuff that they all want.




When devices themselves gather, send and analyze the data, you don't have to pay your analysts.




When trucks drive themselves, you don't have to pay your drivers.




When you can gather energy from the sun, your energy production has zero marginal cost.






The industrial revolutions have been about increasing wealth and efficiency in production of goods and services. The next industrial revolution will do the same; increase efficiency by reducing costs and create more wealth (but to who).

This introduces the idea of zero marginal cost society. According to the theory of firm, a firm with perfect competition produces where the marginal cost equals the marginal revenue. When energy can be produced by just with the fixed costs, like buying a solar panel, the energy production has zero marginal cost. When firms, households and corporations demand more energy, the marginal costs of their production don't rise from this. This would also suggest that the services and goods available would become more cheaper, thus more available for people all around the world. This is what technology is all about.




It is absolutely such a lovely idea that I almost want to cry. But those tears of joy will turn into tears of bitterness when I realized a problem: The market economy.




The market economy works in a following way: You need apples to eat and you have more than enough apples for yourself. Your neighbour comes to ask you if he could get 5 apples from you. Now you start to think about your utility: Do you get the same utility from 10 apples than from 5? Probably not since more is always preferred than less and thus you would need something in return, for example pears.




Same in energy production. If you produce solar power for yourself and a corporation wants to take some of that energy for their use, you wouldn't give it for free since you need the energy for your heater and phone charger. You would demand payment from which you can buy or produce the same amount of energy that you sold from elsewhere. This is how the world works.

So as long as everyone don't have the option to become energy independent, the production doesn't have zero marginal cost. But maybe in some point of the future... at least Tesla is introducing solar panel rooftops and Powerwall for your home and car to become energy independent.




Don't get me wrong, I don't want to be pessimistic about this. It is certain that the third industrial revolution is in its way but I'm not yet sure about the consequences. It will increase aggregate efficiency and increase wealth, but will it create our society a zero marginal cost society? I'm not that sure. A sure thing is that several professions and industries will disappear sooner than we think.




By the way, you might have noticed that I mentioned Tesla and Elon Musk in this blog for a couple of times. I don't think it is a coincidence that Musk the supervillain studied at the Wharton Business School where Jeremy Rifkin taught for 15 years.


Text:SW
Pictures don't belong to me

The European Federation

My time here in Luxembourg has raised awareness of the scale of tax evasion that is going on here. I've never considered it before, but according to the Financial Secrecy Index (FCI) developed by the Tax Justice Newtowk in 2013, Luxembourg is the second most used place for tax evasion, just behind Swizerland. Luxembourg is also the most common place of Finnish tax evasion which surprised me. Over 200 million euros of Finnish household savings are located here, not to mention different subsidiaries from well-known Finnish companies like Huhtamaki and SRV who were revealed as tax evaders in 2014 (LuxLeak).


After that I soon started to find information on why. Why here? The corporate tax rate here is 30 % and income taxes are not that low compared to other Middle-European countries. Again returning to my second blog-post about tax evasion, I started to think again that how tax evasion could be reduced? Despite several attempts, the OECD hasn't managed to end tax evasion for good in 10 years. Also tax-havens like Liechtenstein and Monaco have just simply refused to collaborate with the OECD to deal the problem.


As long as there exist differentiation in the taxation between countries in the Euro-are, there always (repeat: ALWAYS) exists some form of tax evasion from wealthy individuals and corporations. Would a solution be to remove this differentiation and for simplicity have common fiscal policy and common tax regulation in Europe. I would say yes.

In the map above you can see the general opinion towards the issue country by country. The European Federation has been an idea that politicians have been developing since the 15th Century. It was not long ago when Martin Schulz, the leader of the Social Democratic Party of Germany has been demanding that the European Federation would be established by the year 2025. This would even more tighten the European collaboration and increase stability in Europe.


When you look at it through economics, everything seems good on paper. But it would be a political nightmare.


A common tax system would increase transparency and presumably decrease tax evasion. This would bean more government revenue for government spending and transfer payments. At least in theory this should also increase the equality in the distribution of European income. Also criminal activities such as money laundering and other hidden economic activity would be easier to monitor and prevent.


The Federation would also introduce common guidelines for international trade. Everyone would play with the same rules and trade within the Eurozone could become even more transparent. On the other hand common guidelines for trade would in theory increase the willingness of the Federation into protectionism in trade to keep the large domestic industry going. This is what is already going on: The EU is currently fighting against China in the World Trade Organization for anti-dumping regulation.

The process could be started by first soothing out the VAT's and corporate tax rates in the EU. After that the price level and PPP would probably need some time to adjust before quick changes into income tax-scheme could be introduced. In the same time a common social security system should be developed.


You are probably seeing that arranging this would be a political nightmare in Brussels. 28 member states with 28 different cultures when it comes to decision-making, freedom, independence, equality, culture etc. It would just not going to work. Already we can see that things are going exactly to the opposite direction: Populism and anti-EU politics are on the rise. Just take a look at Brexit and Catalonia.


The European Federation would be the solution where the welfare and the stability of the European Union could improve for sure. But if we just want to ban tax evasion and increase welfare, other options exist as well. If we want to increase the European Cooperation and transparency between states, I would see that this is the only way. To answer the question on whether the European Federation would be a good idea, the politicians would need first to ask themselves that what do they want to achieve with the whole idea in the first place.


Text SW

When I'm Sixty-Four

Now I warmly beg you to imagine a scenario: Scenario where you increase your personal monthly net income. The cost? Your retirement.


Let me open this enigma a bit more. The retirement system in Finland is a pay-as-you-go type of social security, which means that each month the government takes a slice from your monthly wage. This slice is transferred to retirement funds like Ilmarinen, Varma or Elo and these funds invest your and others' future retirement savings to the financial markets. In addition to that, you might want to save for example 100€ per month to stocks or funds, since the monthly money provided by the government at the time of your retirement is relatively small if you want to live wealthy in your retirement days.


This has proven to be a well-functioning system. However, now the retirement system seems more like a ticking time-bomb. As you can see from the figure below, the demographic structure in Finland is shaped in not so good of a way. The population pyramid is shrinking. Soon more people are retiring than there are people in the workforce. This means that less slices are available for the government to transfer them to the people who are starting their retirement.

One macabre but clear solution for this would be to, erhm, "get rid" of the excess people. But, since I'm an amateur-economist and a human, I would suggest a different solution: Let's abandon the pay-as-you-go system and move to a system where each one would save 100 % of their retirement savings themselves and as the way they wish. People can decide whether to start saving for their retirement through ETF's or Bitcoin or Habbo Coin and we don't have to worry on how the future generations would be able to provide money for the growing population in retirement.


If people would be given the opportunity to start investing their retirement funds themselves, of course then the role of investment advisory from banks and other institutions would became even more important. People would have more options from where to choose and they can clearly see where their money is going for. The investment would become more transparent and easier to follow. It would be also easier to make changes as in any investments (which might not be recommended, however).


Also, if you are a true professional and know what to do, you can also try to gain even a higher return for your retirement savings than the retirement fund would provide (I propably wouldn't ). On the other hand if you don't know what to do and don't know where to look for, then you are facing a lot trouble when you're 64.

Now a clear question is that should the government provide some sort of an insurance to cover the lost savings for the individuals who don't know what to do and lose their retirement savings? I would say no. This would clearly raise the existence of moral hazard and more people would be more betting in the markets without risk. Everything should go without government intervention.


There's only one problem on which I haven't figured out an answer. How to do it? How to change the system? If it would happen tomorrow, it would be a disaster. It wouldn't be pareto-optimal. The youngest and the oldest generation would gain since they already have their savings or haven't started yet and the people who would suffer the most are the people who have been in the workforce 10 years or more. They would be returned their current savings of course but their time period to save would be just too short to gain from the reform.


Early steps could be taken by giving tax-exemptions for the population who will suffer the most. Thus they would have more disposable income that they could (and SHOULD) use for saving. But is this kind of a scenario realistic? I don't know. I'm just writing here.


Nevertheless I think it would be a way to be now and in the future. Let's see what is the situation in the economy when I'm sixty-four.