Chapter 6: Towards the Service Economy

3. Combatting Diminishing Returns

It should not be thought that the notion of diminishing returns is exclusively an economics-based one. It is at the heart of our lives, materially, physically and also psychologically.
Let us think first of going on foot and of racing. If we are champions, the fastest we can go is about 100 metres in 10 seconds. To run 200 meters takes more than twice 10 seconds. And so it goes on up till the moment at which, after some tens of kilometres on foot, we will no longer have the strength to move. It is possible to go even further, but increasingly less efficiently in terms of speed.
This phenomenon of diminishing returns can be overcome by getting a bicycle. This is very efficient for covering the first few kilometres, though increasingly less so, especially after 50 or 100 kilometres. And so we can take advantage of using a car and following the same logic we can try, in exceptional circumstances, to go to a place as far as China. For this distance however, a plane is preferable. And to go to the moon there is currently no option but space rockets.
Here then we have a first opening into the mechanism of diminishing returns and into the possibility of opposing them with new technologies and inventions. It is necessary, however, to draw attention to the fact that every new technology, every new invention, is increasingly more specialised. Going on foot allows me to jump over a small wall, to enter the water and learn to swim. Though having a car it is better to opt for a ship on water, or for a submarine for underwater. On the other hand, to go quickly to the bakery a kilometre away it is hardly appropriate to use the speed of an aeroplane. There is, therefore a fine balance between the most efficient use of the various means, from our body to aeroplanes, and the effects of diminishing returns. The analysis of productivity in economics (how to get more with less) depends on a thorough study of these phenomena, and it is not enough to know how many cars are produced in an hour in a factory.
This problem of returns occurs at the psychological level too: We might enjoy a film, but if we see it for the tenth time, we’ll enjoy it less than the first. Let us think of love, at the beginning declared to be forever but extinguished over time, unless there is an appropriate change in register and the aims of the couple. There is a difficult word to define all of this, entropy. This indicates the tendency of every system, including the starry universe, to be exhausted and to lose its vitality. Georgescu Roegen, an iconoclast economist, with an education in physics, wrote a book on this subject, compared to which even the ideas of the Club of Rome on the limits to economic growth seem very modest and inadequate. Entropy (or diminishing returns) occurs faster if we insist on sustaining an accelerated growth. In order to protect the Earth, said Georgescu Roegen, it is necessary to proceed slowly to avoid arriving at the final stage too soon.
Although Georgescu Roegen’s book contains many important elements worthy of consideration, and although he once wrote to me to compliment me on my ideas on the subject, I’ve always thought, and I still think, that if on the one hand entropy exists, just as dimin­ishing returns exist, there is also a positive side of the coin. This is negantropy: it is real scientific discovery, it is the capacity at the individual level, to get back into action so as to seek new ways. Every extrapolation of what exists, including the human species, leads and can lead to the end of everything. What emerges every time, however, is the discovery of new worlds, of matter and of the capacity of society to organise itself. Uncertainty of the future fortunately destroys every idea of extrapolation of a finite world.
A finite world is one whose future we would know. Instead we seek it. We invent it. Of course there will be crises: one day there will be no more petroleum for cars, like there is today, and perhaps there will be ten billion and more people on the earth, and maybe there will be a nuclear incident caused by a war or by something else. Today, however, the infant mortality rate continues to fall almost all over the world; the majority of people have enough to eat and for the first time in history we can think of reducing hunger and injustice to a minimum. The first danger to be faced, much more than entropy, is that of the growth of vulnerability, of risks that man’s power is capable of producing catastrophes of planetary dimensions. The political, social, technological, cultural and scientific challenge lies before us. Let us rid ourselves of the deterministic and pseudo-scientific extrapolations of the 20th century. They have done enough harm. Let us also get rid of the deceptive certainties, let us use the margins and the possibilities offered by uncertainty, by risks, by life as it is. Let us leave to society the capacity for rebirth despite everything.

4. The Diminishing Returns of Technology
“It’s a matter of applying the idea of diminishing returns, in economic terms, to tech­nology,” Henri Loubergé told me, in 1974, during a discussion in front of a blackboard at the Geneva Association. He was writing his degree thesis that would become a fundamental text of Insurance Economics. He was a collaborator of mine and I felt a little responsible for bringing him to this path. We were completing the first steps of a book written together, inspired by my first experiences, which was to be called Diminishing Returns to Technology.
In February 1975 I took the first decisive step. I wrote an “Information Letter” to the Geneva Association, the series number of which I have never forgotten − 19. I actually wrote those ten pages in a day, with an emotion that I have never again felt. It was inspiration (or psychological self-exaltation, or diseased euphoria, I don’t know which): the outside world came to me in muted sounds and colours. In my heart – in my mind – there was a sense of fulfilment that I had never experienced, except once or twice when in love. And I was perfectly sober. After the text was finished this state of mind lasted an hour or two and then I returned to normal. It was the first time that I had produced a synthesis in ten pages of everything that I had known, read and written till that moment, and that seemed important to me. Thanks to the wave of momentary enthusiasm.
Concerning the content, this idea of diminishing returns of technology seemed absurd to most of those with whom I spoke about it, and especially to economists. To most of them science and technology constituted a kind of magic wand, a simple expression of human capability and intelligence, without nurturing the feeling of needing to know the conditions and limits of discoveries (science) and development (technology). The two were confused (and often still are) with the idea that they are always inevitably interdependent.
The problem is that discovery (which is not that of technological application) is, by definition, uncertain, because at the beginning it is never known if and how something new will be discovered (or not). Basically there is the fact, still widely underrated, that the great annual economic growth of 6% – a unique phenomenon in history – in the industrialised countries, from 1947 till 1973, was the visible and concrete result of the new alliance between science and technology. A unique event in history that took place at the end of the 19th century.
War served as a catalyst for it and from it flowed a tide of extraordinary applications in every sector. When, in 1973, a deep crack was produced in the rhythm of growth, that since then continues for western countries – when everything goes well – at an annual average of 2% an exceptional period came to an end, a period that that had enjoyed the introduction of scientific discoveries in vast fields of technological application. The boom slowed down when diminishing returns intervened, and the production structure changed.
Confusing science with technology, some economists believed that it was enough to increase the budget to have results that were quickly usable. In 1973 and in subsequent years (the reader can check by leafing through the numbers of the Financial Times of the period), with the petrol crisis in mind science was expected to make it possible to extract petrol from the bituminous shale in Canada or shortly to have reliable and waste-free nuclear power plants to continue the production of energy. At the same time, during that period the enormous progress in telecommunications and computer technology were considered secondary.However, it was these that came to prevail: they were based on a mature and sufficiently developed science, while today many questions are still being asked concerning how long petrol reserves will last. What is new is the fact that this question is no longer being asked by the Club of Rome but by the petrol industry.
The book on the diminishing returns of Technology came out in English in 1978. It gave rise to discussions in a significant, but all in all a limited number of circles. In the French and Italian editions, because of my inexperience, the publisher wished to impose his commercial view, maintaining that sales would be better if there were a more showy title on the cover. I tried in vain to object. It was a disaster. As a result of a misunderstanding concern­ing the meaning of “diminishing returns” the book in Italian was published under the title La Delusione Tecnologica (“Technological Disappointment”). In French it was still worse: “Technical Society Adrift”. The use of the original as a subtitle in no way improved the situation, all the more so as one had to be an economist to really understand it, and “normal” economists – with good reason – did not read books with such an unauthorised title as was imposed on me. The ways of the Lord, but also of the devil, are infinite.

5. The New Economic Concepts of Carl Madden

Carl Madden is another personality whose path briefly crossed mine and left profound traces on my mind in its search for an understanding of the world of contemporary economics.
I met him personally only once, during a lunch in Washington in the spring of 1978. I had read his 1976 study, carried out with the Joint Economic Committee for the Congress of the United States.** He inspired my report to the Club of Rome (Dialogue on Wealth and Welfare), published in 1980 (1981 in Italian***). I have never experienced a similar intellectual affinity with an American economist. I record some of his thoughts here.
“The idea on the basis of which growth is related to an increase in production per in­­habitant is too simplistic. Logic and empirical evidence suggests a new concept. Scientific progress has been the great innovation of the last two centuries, yet economists have neglect­­ed the study of science’s effect. In the 20th century science itself underwent a revolution which brought back into discussion yesterday’s fundamental scientific hypotheses concern­ing space-temporal nature, human life and its origins, the nature of organisms, the structure of matter-energy configurations and that of the universe.
Economic evolution is a subject that does not lend itself at all to traditional type discussion. Classical economic science remains dominated by the ideas of the mechanistic type allied to the physics and mathematics of the 18th century. In it economic activity is described in terms of mechanical equilibrium of the forces, of “states of equilibrium”. The content of fundamental economic concepts has to be changed. The concepts of wealth, of profit, cost and productivity must be modified. It is not at all clear that our current concepts relating to fundamental economic contributions – capital, work, land and management – are any more perceptive than the concept the Greeks had of the fundamental elements – earth, air, fire and water”.
Already at that time Madden was stating that the essential in economic development would be increasingly based on the knowhow and will to take action, what today is called “human capital”, and it is a good sign.
I have already mentioned some research proposals for a wider economic analysis on changes and on ongoing progress, such as the distinction between stock and flow in the conception of economic value and the estimate of the uncertainties linked to basic research and on its effects on technology and its economic applications.
In the following paragraphs I will complete my list of research proposals – based on my experiences – which I believe to be reasonable and contemporaneously useful, sometimes even stimulating.

* The publisher mistakenly insisted on the title “The Technonolgical Disappointment” (it was more marketable). On the contrary, understanding diminishing returns is the key to advancing research, both applied and fundamental, in the right direction.
** Madden Carl, U.S. Economic Growth from 1976 to 1986, Volume 8, “Capital formation, an alternative view”, Joint Economic Committee, Congress of the United States, Washington, 1976.
*** Biblioteca della Est Mondadori, Edizioni Scientifiche e Tecniche, Milano, 1979

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