The second deep transition: Johan Schot's theory of radical change

Johan Schot describes himself as a time traveller.

The Dutch academic studies the past to understand the nature of radical change. He then applies this theory to the future, imagining more sustainable living and how to make it happen. That includes the roles investors might play.

While change is never-ending, we’re at a 'watershed moment', according to the professor of global history and sustainability transitions at Utrecht University.

“People sense it in the air,” he tells investment manager Kate Fox.

“The systems we have in place cannot cope: the medical system, the energy system, the mobility system, the communications system with its privacy issues.”

Schot suggests what he terms the Second Deep Transition has begun.

Environmental damage and inequality

The first, he suggests, occurred about 250 years ago, when coal power and mechanical technologies led to the Industrial Revolution. Drawing on the work of the economist Carlota Perez, he says five surges of innovation followed, the current one being driven by information and communications technologies.

However, these have caused environmental damage and social inequality. And Schot believes alternative business models and new patterns of production and consumption are emerging because of a “rupture in industrial modernity”.

Asset managers can play a role by adopting a long-term mindset and investing in companies experimenting with alternative technologies and processes. But many are too focused on minimising risk and backing firms making incremental improvements, he says.

“Investors should get interested in system changes, not just in optimising current behaviours.

“Making them more green is not sufficient. ESG is not sufficient,” he adds, referring to the risk-based scores that rating agencies give to companies based on environmental, social and governance criteria.

“This is not about fixes. It’s about redirecting development… Investors should ask: what is the world you want to live in in 2050? Don’t be bounded by what is now. But develop the discipline of asking ‘how do we get there?’”

More than technology

At the heart of the professor’s theory is the idea that technological innovations are entwined with social contexts.

So we shouldn’t just think of cars, for example, as combustion engine-powered road vehicles. We should also consider their need for:

• Infrastructure – including streets, traffic lights, petrol stations and service centres
• Regulations and policies – for example, registration and insurance
• A market that comes to depend on them – for example, commuting to work
• A culture that embraces them – ie car ownership being a collective aspiration
• An industry that produces them

There are also consequences. Some are positive. For example, easier access to leisure and healthcare.

Some are negative. For example, more greenhouse gas emissions and less money flowing to public transport, which can result in fewer travel options for those who can’t afford a car.

Meta-rules

Schot calls this a ‘socio-technical system’. Such systems take time to build but can seem inevitable once established.

Furthermore, they feed into what he calls ‘meta-rules’ – beliefs, norms or laws that apply to multiple systems.

Just as a person’s genetic code expresses itself in the observable traits of their hair colour, height and inherited personality, Schot says meta-rules can manifest themselves without those involved being aware of the underlying cause.

To illustrate the point, the professor notes that after the second world war, the Dutch and other Western Europeans changed behaviour as they sought to emulate Americans’ lifestyle.

“Having a car was the symbol of becoming American, becoming modern, being free,” he explains.

“And that meant buying a car on credit – something that was unthinkable before, because it was [seen as] not moral to do.

“So, there were programmes set up to teach people how to consume.”

People became less frugal as a result, he says, and more individualistic. These factors now play into our personal behaviours and wider society, even though many Europeans have forgotten the cause.

From niche to the mainstream

Once such changes have occurred, they can seem to be locked in. But remnants from the past can be revived.

“You can think about history as a graveyard of solutions that didn’t make it but may have been sound,” Schot explains.

“I call them hidden alternatives. In 1900 [for instance], there were more electric vehicles than gasoline ones, and it looked like electric vehicles would win.”

At first, the professor says, petrol-based cars were limited to ‘niches’ – spaces for radical innovation that co-exist with the dominant socio-technical order. In the case of automobiles: racing, touring and a chance for owners to show off their mechanical skills (combustion engines were more prone to breakdowns).

Over time these and other niches became part of a cascade.

Electric vehicles (EVs) survived but only within niches of their own, such as forklift trucks.

Another false dawn

Environmental concerns led to renewed interest in the technology in the 1990s, at which point the car industry consulted Schot.

He served as an advisor to an experiment involving about 1,000 EVs spread across several European cities. Many of the volunteer drivers were surprised, he says, to find they could plan around the vehicles’ limited range and appreciated their lack of exhaust fumes.

Soon after, the French auto sector produced about 10,000 EVs. They flopped.

“Many of the dealers told their clients not to buy them because they thought electric vehicles required less maintenance, which would not be good for business,” he explains.

“But more importantly, perhaps, [they missed the point that] in the experiments, people felt special. There was a kind of user club. The buyers of the other vehicles didn’t talk to each other and had an individual experience.”

Beyond electrification

By contrast, EVs’ current resurgence owes a lot to Tesla initially marketing them to wealthy consumers who wanted to exhibit their eco-friendly, tech-savvy credentials and be part of the brand’s vibrant online and offline community.

Tax benefits, free parking and other stimulatory policies have also contributed to EVs gaining the upper hand again.

But Schot says the Second Deep Transition requires a more radical change.

“If you think about the mobility system of the future, it’s not possible everyone will drive their own electric vehicle.

“We need ‘mobility as a service’, [where] the provider can make sure the electric vehicle is used almost 24 hours a day. Currently, cars spend 22 hours in the parking lot. It’s a misuse of capital.”

The professor founded the Deep Transitions Futures project, coordinated by the University of Sussex and Utrecht University and supported by Baillie Gifford, to explore how this and other profound changes might be achieved.

One example is energy systems that are not only reliant on renewables but more decentralised, with consumers doubling up as producers for localised markets.

Another is an agriculture industry that not only cuts greenhouse gas emissions but involves farmers becoming wider custodians of nature.

Shocks and experimentation

So how can this be achieved quickly enough to hit 2050’s net zero targets?

“In the past, shocks were very important,” he adds.

“For example, wars have been crucially important for changing the world. It’s a very uncomfortable message… but they have been game changers.”

One instance he gives is of how the first world war accelerated the UK and other countries’ shift towards the mass production of food. This was because the four years of combat highlighted the risk of relying on food imports and caused a shortage of labour, which led to greater use of tractors and other mechanised devices.

Another example is how the Yom Kippur War of 1973 led the Organization of Arab Petroleum Exporting Countries to impose an oil embargo on countries that had supported Israel. Schot says the resulting price spike encouraged a shift towards smaller, more fuel-efficient vehicles and also led to renewed interest among car makers in developing EVs.

Schot is dubious that efforts to force change via education campaigns or regulation can succeed. Instead, he suggests that giving people the chance to experiment with alternative practices will be more likely to change assumptions and lead to new meta-rules. And this is where far-sighted asset managers can contribute.

The professor says he doesn’t believe investors lead change. But he adds they can still help “radical alternative” technologies go mainstream by funding their innovators and efforts to encourage adoption.

“However, there’s not a lot of coordination,” he adds.

“Maybe it’s possible to create a niche within the investment community of a set of actors that invests differently, learns from each other, coordinates their actions – and experiments.”

Prof Johan Schot spoke to Kate Fox at the Forum for Long-term Thinking, an event held by Baillie Gifford as part of its engagement with academics and other visionaries.

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