The economics of energy, industry, and the Internet

By Francisco Dao , written on May 2, 2013

Published to the News desk.

I recently attended an economics lecture that touched on the direct correlation between economic development and the access to, and effective deployment of energy (coal and oil). In a nutshell, the energy of coal and oil replaced human and animal labor which increased productivity on a massive scale. Fossil fuels also made large scale metal production possible which enabled better engines and construction which then drove the industrial revolution and all manufacturing since.

Obviously, this is not a comprehensive explanation of all the macro-economic drivers of growth, but in the simplest terms, energy provided the power that made industry possible. More than anything, this is what has produced our higher standards of living.

As I thought about the role of the Internet and information technology in relation to productivity growth, it occurred to me that I.T. and the Internet mostly serve to make industry more efficient but doesn’t really create anything on its own. Here’s a very simple example. In order to make a car you need steel. In order to make steel, you need energy. You don’t actually need the Internet or an enterprise resource management system to make a car. An ERM makes your automobile factory more efficient but it’s not imperative to the actual production of a car in the same way steel and power are needed.

I realize I’m using very broad strokes, but in short, energy builds while information only streamlines.

Based on the role of the Internet as something that makes other industries more efficient but doesn’t really create much on its own, it occurred to me that the economic benefits of the internet would be very limited in a pre-industrial developing nation.

Essentially, a country has to go through a stage of energy driven growth, AKA industrialization, for the Internet to have a significant economic impact on productivity. If there’s no factory to make more efficient, what do you need the Internet for?

Take Uber for example. If a country has no cars then there’s no reason to make calling for taxis one more efficient. Or even Amazon, if there’s no reliable mail service and people aren’t buying much outside of food, Amazon doesn’t really work.

This isn’t to suggest that the Internet provides zero benefit to early developing nations. Clearly, it opens up a world of knowledge to people who otherwise wouldn’t have it and this allows them to learn new skills that can improve their craft or local business. My point is only that the massive, economy transforming benefits we’ve come to expect from the internet are only possible after a nation has begun industrializing. It is the industrial core that magnifies the efficiency benefits of the internet.

None of this is relevant to the developed world which benefits greatly from information driven efficiency advancements, but I thought it was a point worth considering because Silicon Valley often champions the internet as a great equalizer and the ultimate driver of economic advancement. It seems to me this is wrong and it’s actually energy, and the industrialization that follows it, that is the seminal driver of economic development. Think of it this way. If you’re a farmer in Uruguay and you need to plow a field, it’s an oil driven tractor that makes that possible -- energy and steel. The Internet might help you get a better price for your crops at the market but without that tractor, you wouldn’t have any crops to sell.

As I said at the beginning, this is not meant to be a comprehensive explanation of economics and it is obviously very simplified. But if I’m even half right about the role of energy and industrialization, it raises the additional question of whether or not an information economy based on streamlining and not building is a sustainable source of long term economic growth. After all, someone needs to build those cars, plow those fields, and deliver those packages, and the actual work of doing these things is not done on the Internet. It’s done by physical energy, which today still means oil and coal.

[Illustration by Hallie Bateman]