Why Private Innovation, Not Regulation, Is the Key to the Circular Economy
Linear supply chains born from steam power and the ignition of intellectual property sparked the First Industrial Revolution that accelerated the world from stagnant GDP growth and subpar living standards to explosive technological and cultural change. Average lifespans increased, living standards skyrocketed, and humanity was set on a more promising course.
However, those linear supply chains have quietly produced some negative effects in the process, materializing subtly in the background. In particular, they have greased the wheels for climate change to hasten its path towards deteriorating global environmental conditions.
Climate change is at the forefront of public discourse across the world, and lucid statistics such as more than 2 billion tons of solid waste produced by humans annually strike at the core of the concerns – linear supply chains have progressively adverse consequences on the climate and overall ecology of the earth.
Fortunately, the topic is not taken lightly, and everywhere you look, conferences, startups, and governments are attempting to tackle the issue of climate change.
But there is a dichotomy in the path of achieving the ultimate goal – a circular economy – where an economic system recycles resources and eliminates waste to improve productivity and augment “regenerative resources.”
Private Innovation vs. Government Regulation
On the one hand, governments and regulators have pushed for curtailing carbon emissions via carbon pricing, emissions trading, and, in more extreme cases, overhauls of entire tax structures. However, these initiatives are lagging behind, and the IMF has renewed calls for more immediate action to stifle climate change.
The problem is that government-imposed initiatives to bring about an abrupt end to climate change are increasingly relying on a notion that Friedrich Hayek described in his prescient essay, “The Use of Knowledge in Society” as dangerously ignorant – the centralized allocation of scarce resources in an economic system.
Governments raising awareness about climate change issues and providing incentives for action are critical to producing outcomes in the broader climate change push towards renewables and green technology, and assuredly well-intentioned. But propositions such as the “Green New Deal” are antithetical to pivotal moments in human history that prove time and again as the boon of technological progress – private innovation.
Within the context of mounting public pressure to provide solutions, regulatory and administrative levers to drive innovation in the desired direction will necessarily entail centralized allocation of resources in the market, which stifles innovation in the process by realizing market inefficiencies formed from a false pretense of perfect knowledge. As described by Hayek in his essay:
“The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.”
Hayek’s idea asserts that nobody in a market has perfect knowledge and that it is the culmination of dispersed imperfect knowledge through individual actors, businesses, and governments that leads to a thriving free market.
And those markets are the medium of technological innovation – where clashes of principals like intellectual property and a new method for producing power (i.e., steam engines) spark industrial revolutions.
The Fourth Industrial Revolution is described as the confluence of emerging technologies like AI, 5G networking, 3D printing, biotechnology, quantum computing, and of course, renewable resources. Within a functioning circular economy, the rise of the next wave of human ingenuity can reduce its outward effects on the environment, with private innovation the key ingredient to its fulfillment.
Private Equity & The Next Industrial Revolution
The goal of a circular economy is intertwined with multiple emerging technologies that rely on energy or are complementary to the emergence of a circular economy. And much of this innovation relies on the invisible hand driving private innovation, not government-directed regulatory hegemonies on where to allocate resources.
Historically, technological advance has been mostly funded by private capital, specifically private equity (PE), the broad term for private investment from the likes of PE firms, venture capital funds, or angel investors.
Indeed, government-funded innovation has worked in the past, but the focus of a circular economy is so broad and abstract that private equity, being much more distributed and encompassing multiple industries, is much better suited to build the infrastructure for regenerative resources, especially in modern America, where startup culture drives technological and social trends.
For example, general social perception in America identifies Silicon Valley as the epicenter of the technological theater in America, and rightfully so. Since January 1st, 2009, the total exit value of startups in the San Francisco Bay Area is close to $1 trillion, roughly 16X more than the next metropolitan area, Boston.
Entrepreneurs gravitate towards Silicon Valley because of the mixture of funding opportunities and the tech-focused scene of young professionals and other entrepreneurs. Their subsequent startups’ attempt to tackle problems of all kinds, from communication applications to advanced cleantech, are the type of fragmented sets of imperfect knowledge that underscore free markets and bolster technological growth.
For example, Pure CE, a PE firm targeting development in the circular economy, funds and evolves conceptual ideas in multiple industries that are part of the larger regenerative resources picture. Their portfolio companies, like Peregrine Analytics, which develops fingerprinting methods for real-time snapshots of oil pipeline chemical constituents, embrace a wider goal by the firm that embodies its maxim:
“People, Planet, Profit.”
Biotech, healthcare, cleantech, and other sectors of advanced technology are all part of Pure CE’s slate of focus. Such wide-ranging funding of technological development is a microcosm of Hayek’s articulation of aggregating sets of imperfect knowledge that achieve a higher goal without needing to earmark an explicit environmental data point (e.g., CO2 emissions) as the target.
Companies like Pure CE are an integral part of private capital, which supports illiquid growth of startups, and in the process, empowers creativity and freedom among entrepreneurs not available with publicly traded firms.
Private capital is the undisputed boon of innovation, and PE bankrolling of the American technology sector since the 1970s is a testament to that notion.
And the earliest forms of PE were, incidentally, the financial funnels that buoyed the steam engine hobbyist tinkerers like James Watt in 18th century England and opened the door for immigrants like Andrew Carnegie to slowly accumulate wealth that would later serve as the foundation for the Carnegie Steel Company.
The Carnegie Steel Company was also, ironically, the first leveraged buyout of a company (by JP Morgan) in 1901.
This time around, however, instead of mass-produced carbon emissions and pollutants as byproducts of industrial manufacturing, the Fourth Industrial Revolution will comprise a circular economy of regenerative resources, preserving the climate and pushing humanity into its next stage of development.
The circular economy is an abstract goal, one that cannot be defined definitively by a single entity with perfect knowledge. Rather, it will be realized by the dispersed actions of entities with imperfect knowledge, coalescing to actualize the vision of a greater goal.
And private innovation will be at its core, not the commandeering of resource allocation by strict government regulatory impositions. The fragmented successes of private innovation have been the key to historical and technological triumph and are poised once again to fulfill the vision of the next great step towards a circular economy.
As Hayek states:
“We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.”
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