The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism (32 page)

Coase caught the tenor of the times. Most other economists followed his lead. Henceforth, the conventional economic wisdom was that the market, not the government, is the better arbiter for picking winners over losers in the economic life of the country—although it should be pointed out that the American public was more than willing to make substantial exceptions when it came to the public financing of the interstate highways, college loans for veterans, and government-subsidized Federal Housing Authority (FHA) home mortgages.

But hold on. Few scholars have been interested enough in the history of the period to see whether Hotelling’s contentions and best-case example turned out to be correct. Had they done so, they would have seen that, in his rush to dismiss Hotelling’s thesis and his use of the TVA as an example of the merits of his argument, Coase’s rejoinder utterly flunked the test of time.

Buried in that history is the emergence of a novel new mechanism for Commons management of electricity that would fundamentally alter the course of economic development in America in the twentieth century and provide the essential Commons business model for organizing the Energy Internet in the twenty-first century.

The federal government got into the business of producing electricity in the first place because private utilities were not interested in extending transmission lines into rural areas, arguing that the households were too few, too spread out, and without sufficient purchasing power to afford the service.

By the 1930s, 90 percent of urban dwellings had electricity, compared to only 10 percent of rural dwellings.
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The lack of electrification kept a sizable portion of the American population in dire poverty with little expectation of bettering their lot. The Depression years only deepened the divide.

The TVA was meant to bring a backward rural region into the twentieth century and, by its example, extend the program to other rural regions across the country. The power and utility companies shot back. Although they were not interested in the rural market, they were enraged that the federal government was rushing headlong into the power market and that the TVA was authorized to provide farmers and rural communities “preference” in the sale of electricity at an affordable rate. Despite the companies’ opposition, by 1941 the TVA was the single largest producer of electrical energy in the United States—and the electricity was generated from hydropower, a renewable resource.
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The private-utility industry, backed up by conservative business interests, charged that the TVA was the stalking horse for a wholesale government effort to turn the United States into a socialist society. A
Chicago Tribune
editorial accused the TVA of establishing “a little red Russia in the Tennessee Valley.”
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The utility companies asserted that the Constitution did not allow for the federal government to usurp the authority to produce power, and they took their case all the way to the Supreme Court, where they lost the battle as the court reaffirmed the constitutionality of the law.

In addition to generating power, the TVA had also been authorized to build transmission lines to local communities to advance rural electrification. So, in 1935, Roosevelt signed an executive order establishing the Rural Electric Administration (REA), with the mission of getting transmission wires to every rural household in America. “In 1936 and 1937 the new agency constructed 73,000 miles of electrical lines, reaching more than 300,000 farms.”
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The REA’s achievement was impressive. It became clear, however, that the agency couldn’t possibly muster the in-house technical expertise and workforce to build its own transmission lines across all of rural America. With private power utilities stubbornly refusing to lend a hand, the REA took up the unorthodox and, at the time, radical idea of encouraging farmers to band together in local communities and establish electrical cooperatives. (A few rural electric cooperatives were already operating in the TVA region, Pennsylvania, and the Pacific Northwest, and were proving successful.)

Under the new plan, the REA would provide low-interest federal loans to local farming communities for the construction of the lines and offer technical and legal assistance. The vision was to foster a decentralized approach to electrification that would allow local rural electric cooperatives to install their lines and connect with each other, creating regional
transmission grids. The cooperatives would function as nonprofit, self-managed Commons, with their boards of directors democratically elected from their membership.

The REA lines cost, on average, $750 a mile to construct, 40 percent below the estimates of the private electric utilities.
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Expenses were often kept low by allowing local farmers to devote their time to work on the installation of the transmission lines to pay back money they owed the cooperative. By 1942, 40 percent of all the farms in the country were electrified, and by 1946 half of American farms were electrified.
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Four years later, the other half of American rural households were electrified—a momentous feat, accomplished mostly at the hands of farmers who picked up the necessary skills to both manage their own electric cooperatives and assist in the build-out.

The economic benefit to rural communities from the Tennessee Valley to California was inestimable. Electrification lengthened the productive workday, eased the burden of heavy lifting on the farm, dramatically increased farm productivity, and improved the health and well-being of millions of rural families. In the first five years of the REA program, more than 12,000 rural schools were electrified.
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Having electricity and lighting allowed students to extend their learning day with homework assignments that could be done in the evenings after their daily chores.

Rural electrification had a major impact on the manufacturing and retailing of appliances. The REA convinced General Electric and Westinghouse to manufacture cheaper appliances that would sell at half the usual price to stimulate the equipping of millions of rural households with the latest electrical conveniences.
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The acquisition of new appliances by rural households accounted for an amazing 20 percent increase in appliance sales during the worst years of the Depression, helping to keep a flagging economy afloat.
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Rural electrification also increased property values across rural America and provided the electrical-transmission infrastructure for the mass migration from urban to rural areas in the 1950s to the 1980s, with the build-out of the interstate highway system and the construction of millions of new suburban homes, offices, and shopping malls off of the highway exits. The suburbanization of America also brought new commercial opportunities to rural areas, and with it, millions of new jobs, marking the most prosperous economic period in U.S. history.
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Every argument that Hotelling advanced in his paper in favor of federal government financing of the TVA proved to be astonishingly accurate.
The only wrinkle, and it’s a positive one, is that the electrification of rural America did not require a massive outpouring of tax dollars. Much of the electricity infrastructure was financed by low-interest government loans to rural electricity cooperatives, virtually all of which were paid back.
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What Hotelling missed is that it was not necessary
for government to shoulder the entire burden, but only to facilitate and underwrite the process.

Finally, although rural electric cooperatives continue to receive federal government subsidies, “electric cooperatives receive the smallest federal subsidy per consumer” of all electric utilities—a fact that might surprise taxpayers.
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If Coase was obsessed with the superiority of the capitalist market and Hotelling with the superiority of government management, what unfolded instead was a third approach to optimizing the general welfare. The government threw its support to a distributed, collaborative, laterally scaled economic institution—the cooperative—as the best vehicle for electrifying and transforming rural America. This Commons form of self-management accomplished in just 13 years what private enterprise and government could not have done in twice that time at anywhere near the low cost.

Today, 900 nonprofit rural electric cooperatives serve 42 million customers over 2.5 million miles in 47 states. Rural electric cooperatives account for 42 percent of the nation’s electricity distribution lines. The transmission lines cover 75 percent of the nation’s landmass and deliver 11 percent of the total kilowatts sold in the United States. The combined assets of rural electric cooperatives total more than $140 billion.
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Most important of all, 70,000 employees of the nation’s rural electric cooperatives provide “at cost” electric service to their customers. Being cooperatives, they are not structured to make a profit.
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The Cooperatives’ Renaissance

The first thing to understand about cooperatives is that they are designed to operate as a Commons, while private companies are structured to operate as profit-making ventures. Cooperatives are structured to fulfill a very different set of goals than private companies.

The International Cooperative Alliance (ICA)—an association representing all the world’s cooperatives—defines a cooperative as

an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise.
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Cooperatives are driven by cooperation rather than competition and by broad social commitments rather than narrow economic self-interests. Their field of operations is on the Commons rather than in the market. The ICA explains that

cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. . . . Cooperative members
believe in the ethical values of honesty, openness, social responsibility, and caring for others.
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While cooperative business arrangements extend far back in history, the modern cooperative business structure began in England in 1844 when 28 textile workers formed a cooperative that they called the Rochdale Society of Equitable Pioneers. The weavers pooled their finances, allowing them to buy quality supplies for their trade at cost. Their first cooperative store bought and sold food products, including flour and sugar, to its members.

The Rochdale Society established seven rules for Commons management that became the standard protocol for cooperatives. Those rules, which have been revised and formally ratified as the governance model for cooperatives by the ICA, epitomize the vision and practice of Commons management:

First, any individual is welcome to become a member of a cooperative regardless of race, religion, ethnicity, gender, or social or political affiliation.

Second, cooperatives are democratically run associations in which each member enjoys a single vote. Elected representatives, drawn from the membership, are responsible for management of the association and accountable to the membership.

Third, members contribute equitably and democratically to the capital of their cooperative. Part of that capital becomes the common property of the cooperative. Members jointly decide on how their funds ought to be used in the development and day-to-day operations of the cooperative.

Fourth, cooperatives are autonomous, self-help associations. Although they can and do enter into various business arrangements with other organizations, they do so in a manner that ensures their democratic control of the cooperative and its autonomy.

Fifth, cooperatives provide education and ongoing training for their members, managers, and employees to encourage their full participation in the programs, projects, and initiatives of the association.

Sixth, cooperatives are expected to broaden the networked Commons by providing an ever-expanding and ever-integrating space for collaboration and cooperation across regions and the world.

Seventh, cooperatives are tasked with the mission of promoting sustainable development within the communities they serve through the policies and programs they engage in.
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In a world dominated by the capitalist market and its accompanying utilitarian ethos—which views human behavior as competitive and self-interested—the very idea that human beings might be drawn to a cooperative business model based on collaboration, equity, and sustainability seems hopelessly impractical. Yet much of humanity is already organizing at least some parts of its economic life in cooperative associations operating in Commons. It’s just that we never hear about it. The year 2012 was officially recognized by the United Nations as the International Year of Cooperatives, but a quick Google search shows barely a blip of news about the year-long celebrations. Perhaps it’s because the global media are concentrated in the hands of a few giant for-profit media companies that decide what is news.

The fact is, more than 1 billion people are currently members of
cooperatives—that’s one out of every seven human beings on Earth. More than 100 million people are employed by cooperatives, or 20 percent more employees than in multinational companies. The 300 largest cooperatives would be equivalent in population to the tenth-largest country in the world. In the United States and Germany, one out of every four people is a member of a cooperative. In Canada, four out of every ten people are members of cooperatives. In India and China, 400 million people belong to cooperatives. In Japan, one out of every three families are members of cooperatives and in France, 32 million people participate in cooperatives.
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In June 2011, Paul Hazen, CEO of the National Cooperative Business Association, noted that

in the U.S., there are 29,000 cooperatives, with 120 million members, operating in 73,000 places of business throughout our nation. Overall, U.S. cooperatives account for more than $3 trillion in assets, over $500 billion in annual revenue, $25 billion in wages and benefits, and nearly 2 million jobs.
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