Smart Technology and Sustainable Nanoeconomics

By Paul Huggins

Back in 1944 the Nobel Prize winner, Friedrich Hayek, discussed the important role of economics in society, explaining how it can help us to use knowledge to decide how to efficiently allocate resources, meeting society’s needs in the most effective way. But it would have been difficult for him to predict at the time quite how much knowledge we would have at our fingertips today.

At the time Hayek was writing, products were mechanical and business processes were manual.  In the 1960s and the 1970s, advances in information technology enabled a rapid expansion in the use of automation and standardization in production, driving economic growth. Progress in communications technology – particularly the rise of the Internet – created another economic boom in the 1980s and 1990s, by allowing unprecedented levels of coordination, integration and market growth around the world.

We are now entering what is being described as the third wave of IT transformation – where smart technology becomes a key part of products, so that they can communicate with us and interact with other products without human intervention. This is providing leading businesses and forward-thinking governments with the opportunity to pioneer new approaches to creating a more sustainable world.

Big businesses such as Microsoft, GE, ABB, Siemens, Oracle, Cisco and Amazon are focusing their efforts into harnessing the opportunities in a smarter world. This involves finding ways for products and services to be provided more efficiently, for example by using less energy or reducing the use of resources. This often results in significant cost savings and better environmental sustainability performance.

A smarter perspective on the world

When you look at the world through a different lens it can open your eyes to greater levels of detail, revealing fresh insights and new possibilities. For more than 400 years, advances in telescope and microscope technology have helped visionaries to break new frontiers in science.

In a similar way, smart technology and big data are today giving us a much more detailed perspective on how our economy and society work in practice, allowing us to see transactions and interactions at a granular level. The knowledge obtained from learning to understand an ever-growing mountain of data is making it possible to move from microeconomics to nanoeconomics – looking at actual individual transactions, rather than making general assumptions about the behavior of individuals.

The collection of information continues to increase at a staggering pace, with quintillions of bytes of data created every day. Technology research firm, Gartner, predicts that 4.9 billion connected objects will be in use in 2015, a 30 percent increase on 2014. Growth is expected to be phenomenal, with 25 billion connected objects expected to be in use by 2020. This includes an expectation of more than 250 million connected vehicles, opening up possibilities for better traffic management and self-driving cars.

Perhaps the most conspicuous impact to date from these smarter products has been the digital transformation of services for consumers, which are helping to dematerialize sectors such as entertainment, retail, and banking – taking them from the high street into cyberspace. But behind the scenes a lot of innovation is also happening in areas such as manufacturing, logistics, and building automation. And on the horizon there are some very exciting prospects for the application of smart technology in new areas, including healthcare, home automation and agricultural management.

In essence smart technology is about making products and services more efficient – as efficient as they can be – and with just a few exceptions, this means that they will be better and more sustainable. Process inefficiencies will be reduced and greater value will be delivered from a smaller amount of resources.

When we understand the individual performance characteristics of millions of buildings and vehicles, or the behavior of millions of people, then we can design better buildings, produce safer cars and keep people healthier.  And if we know immediately when an individual boiler needs maintenance, or when a room in the home is being overheated, then we can take immediate action to address this.

A smarter future

We are acquiring unimaginable quantities of real-time, real-world data. But the challenge with all this information is knowing what to do with it. So, what does the future hold for smart technology?

Technologies such as 3-D printing could allow for individual production runs of one, reducing waste and providing products that are precisely the right size for the job, avoiding the waste that comes from over-specification.

We know that businesses will change. Existing markets will be opened up to new entrants and displace incumbents; new markets and economic models will emerge, and some markets will disappear.

Lower transaction costs from greater efficiency could be a double-edged sword for large businesses. Some enterprises could benefit from their ability to effectively manage the knowledge they receive and become more productive. Other firms could be undermined because individuals or small businesses may become more able to do things themselves, with lower barriers to market entry.

There may even be a time when humans take the back seat in business. IBM’s CEO, Ginni Rometty, argues that we are now at the stage where so much data exists that it is now impossible for humans to write algorithms to analyze it all.

She believes we are moving into the world of cognitive computing, where computer systems will have their own analytical abilities to sift through vast mountains of data and then distil it to create new knowledge which has not been influenced by human thought. Gartner has predicted that by 2017 a company will be created that was conceived by computer algorithm.

An economic enlightenment

In the near future, businesses and governments will be able to use unimaginable volumes of rich knowledge -- generated by the use of smart technology -- to maximally optimize their business processes to meet each customer's specific needs. This would take us a long way toward achieving more sustainable consumption practices.

As Hayek suggested, economists could use this same nanoeconomics knowledge to comprehend, in much great detail, the complexities of human decision making. Real behavior, rather than questionable assumptions, can be used to develop the theories and models which better predict how economies function. In turn, these economic models will enable policymakers to create real-world economic systems that more effectively meets society’s needs in an optimal way. Smart technology could really be the key to unlocking the door to a sustainable future.

Images via iStock photo

Paul Huggins is an Associate Director at the Carbon Trust, where he leads on technology programmes. In this role he helps governments and industry understand and shape current generation low carbon technology markets to improve building and industrial processes energy performance. He sits on numerous government and industry boards and councils. Paul has extensive experience in the energy sector, with 12 years in upstream roles with BP, Shell and BHP Billiton. He has an MBA from Cranfield School of Management.