The Supply-Side Miracle

Let’s be clear. Supply-side economics, also known as voodoo economics or trickle-down, does not work. As the Harvard Business Review put it: “When we compare Europe with the U.S., or China with India, it is clear that countries that experienced a higher rise in inequality were not better at lifting the incomes of their poorest citizens. Indeed, the U.S. is the extreme counterargument to the myth of trickle down. While incomes grew by more than 600 percent for the top 0.001 percent of Americans since 1980, the bottom half of the population was actually shut off from economic growth, with a close to zero rise in their yearly income.” The traditional supply-side argument—that if you increase production, primarily by reducing taxes on the rich, you can get the economy going—is now busted.

Trickle-down depends on hope—the hope that the owners of production will spread their wealth around on their own or invest it. In reality, those that inherit wealth tend to hoard it rather than spend it, so the idea that they will immediately start using it to pay wages doesn’t hold up. As The Simpsons’ Mr. Burns said when asked what he was going to do with an unexpected million-dollar windfall, “Oh, I don’t know; throw it on the pile, I suppose.” In the more precise words of professor Eric Beinhocker of Oxford University’s Institute for New Economic Thinking:

“‘Trickle-down economics’… has created the myth that helping powerful plutocrats is somehow the same as encouraging the free market. Orwell would have admired the doublespeak. But the true history of American capitalism has not been trickle down,’ it has been ‘middle out.’…Trickle-down economics may work in textbook economic theory with ivory-tower assumptions about perfectly rational people and perfectly efficient markets. But in the real world of politics and interests, it simply provides a cover story for rentier economics. It dresses up anti-market behavior in free-market rhetoric.”

Often, supply-side ideology is philosophically countered with a Keynesian demand-side argument that if people have good-paying jobs, demand for products and services goes up, and the economy grows. That’s a good argument. But what if the supply side does have something to offer? What if economic productivity worldwide soon became so great that inputs from the supply side could make a difference to everyday people? Not in the debunked way Larry Kudlow has in mind, but in a Next Economy way.

Today, productivity is becoming so great that many products and services now have or are approaching a zero marginal cost of production and distribution. In other words, the cost required to produce each additional unit of an item is essentially zero (when excluding fixed costs), ultimately bringing down the price for the consumer.

How is zero marginal cost possible? The rapid evolution of technology. I borrowed the term “supply-side miracle” from Klaus Schwab, the founder and executive chairman of the World Economic Forum, who offers a list of emerging technologies that are enabling previously unimaginable efficiencies. He includes: “artificial intelligence, robotics, the internet of things, autonomous vehicles, 3D printing, nanotechnology, biotechnology, materials science, energy storage and quantum computing,” to which I would add renewable energies and big data analytics. Author Jeremy Rifkin writes that these developments mean that “anyone will be able to access the internet of things and use big data and analytics to develop predictive algorithms that can speed efficiency, dramatically increase productivity and lower the marginal cost of producing and distributing physical things, including energy, products and services, to near zero, just as we now do with information goods.”

“We can run the world without consuming the earth.”

—Ulrich Spiesshofer

As a result of this high degree of interconnection, the global economy is evolving to be so efficient that ultimately, it will produce sufficient economic output to provide good standards of living, while significantly reducing the impact on our delicate yet mandatory planetary systems. As ABB CEO Ulrich Spiesshofer put it,“We can run the world without consuming the earth.”

As people, businesses and information become increasingly connected, we see these efficiency upticks and price drops almost everywhere.

For a case study in how manufacturing is both benefiting from and contributing to the unfolding zero marginal cost economy, we’re well served to look at Tesla’s Gigafactory, the lithium-ion battery production facility outside of Reno, Nev. The facility—which has the largest building footprint in the world—has a roof that is covered by a 70-megawatt solar system. This is important because, as Gregor Macdonald explains in his piece “Sunshine Economics,” “The high, western desert of Nevada in the Reno region receives over 3,500 hours of sunshine during the year…While solar still ‘works’ in dimmer locations in Northern Europe and the Pacific Northwest, Musk’s Tesla will be manufacturing at high volume using energy that will fall in cost towards zero, shielded from the future volatility in fossil fuel prices.” (italics added)

What you have at Tesla’s Gigafactory is advanced, automated, connected manufacturing that is up to 70 percent more efficient in time and money than traditional manufacturing, powered by energy that is falling in cost towards zero—a huge advantage over traditional manufacturing. The efficiency of the process and energy inputs means the cost of a lithium-ion battery can be cheaper than ever. Can it get to zero? Not any time soon, because there will remain certain fixed costs, although even those aren’t as fixed over the long run as we imagine. And when fixed costs are distributed among innumerable iterations of a product, they can become vanishingly low.

This phenomenon is occurring economy-wide, not only where local factories deploy renewables, thanks to ever growing use of renewables grid-wide, and to the speed those renewables are falling in price. That means global consumers of renewable energy are spending less each year as renewable energy technology rapidly improves and scales.

What other aspects of life are likely to approach zero marginal cost before long?

  • Information, obtained via a smartphone, nearly free of charge
  • 3D printing, allowing consumers to produce anything they want on their own
  • Education, via massive open online courses

It may not be a coincidence that today there are more robots and automation operating in the economy than ever before, while inflation remains relatively tame and unemployment is near historic lows. Is it the case that innovation is deflationary? More outputs from fewer inputs at every level of the economy does create relative abundance, meaning prices do not necessarily have to increase to compensate as and when more and higher paid employment occurs. As many products are distributed for very low or even zero additional marginal cost—the supply-side miracle—standards of living can improve as the opportunity to access products and services widens, inflation can remain contained and economies can shrink their ecological footprints, all at the same time.

Thus, economic growth does not have to mean exponential consumption and crossing through planetary boundaries. Economic “growth”—not in the sense of traditional GDP growth, but in terms of relative purchasing power or other indicators of standards of living and wellbeing—can simply mean doing things better, more efficiently. In this way, we need not equate growth with harm.

Within the social dimension of a zero marginal cost society, purchasing power parity between classes converges toward equilibrium, even if wealth does not. If something costs little-to-nothing, its affordability doesn’t scale with wealth—you can just use it. Take the case study of mobile data subscribers in India. According to Exponential View’s Azeem Azhar, “Monthly data usage per subscriber has hit 1.7Gb, about 20 times higher than three years ago, on a par with users in the UK or France. It’s been driven by the success of operator, Jio, which aggressively sashayed into the market with rock-bottom prices for data. Indian data prices are about 3 percent of what they were four years ago. India is now the second biggest market for app stores.” That’s not zero marginal cost, but it is very low, and India is in one important way more equal as a result.

While the supply-side miracle can reduce our environmental impact and expand access across classes, it cannot stand alone in these efforts.

While the supply-side miracle can reduce our environmental impact and expand access across classes, it cannot stand alone in these efforts. A frequently cited counter argument to the assertion that inequality is reaching toxic levels is the fact that the poorest among us are doing better along several important vectors worldwide (they are in some ways, but not in others). This is not the result of a more just society working intentionally to reduce inequality, but rather the result of the decreasing marginal cost effect (see Sacerdote, for e.g.). This doesn’t mean we can consider inequality solved, because there are other significant factors that contribute to that, including wealth-concentrating ownership structures, institutionalized discrimination and policies that favor the wealthy. It does show that innovation can be a force for reducing some inequality and that more productivity can mean more abundance to go around. As Elon Musk and other experts stated in an open letter calling for efforts to ensure AI is beneficial to society, “The potential benefits are huge, since everything that civilization has to offer is a product of human intelligence; we cannot predict what we might achieve when this intelligence is magnified by the tools AI may provide, but the eradication of disease and poverty are not unfathomable.” (italics added)

Warren Buffett has hit the same themes of the benefits and dangers of radical economic productivity: “This game of economic miracles is in its early innings. Americans will benefit from far more and better ‘stuff’ in the future. The challenge will be to have this bounty deliver a better life to the disrupted as well as to the disrupters.” Buffett also noted that between “1982 and today, the wealth of the [Forbes] 400 increased 29-fold—from $93 billion to $2.7 trillion—while many millions of hardworking citizens remained stuck on an economic treadmill. During this period, the tsunami of wealth didn’t trickle down. It surged upward.”

To fully realize a better world both economically and socially, we would be well served taking a deliberate approach to the structures of ownership of these amazing new means of productivity. While improvements in price purchasing parity mean many will escape extreme poverty, rising inequality means they “may find they don’t have far to rise.” Traditional ideas of supply-side economics are discredited because they never worked as advertised. Yet emerging, zero-marginal-cost economics may promise a true supply-side miracle: abundant enough to provide for everyone, efficient enough to do that within planetary boundaries.

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