top of page
  • Writer's pictureGlobal Green Shift

From green transition to green industrial revolution: Increasing returns and economic progress

By John A. Mathews

“.. division of labour depends upon the extent of the market, but the extent of the market also depends upon the division of labour. In this circumstance lies the possibility of economic progress which comes as the result of the new knowledge which men [humankind] are able to gain ..” Allyn Young 1928

In the leadup to the 26th Conference of the Parties (COP 26) under the UN Framework Convention on Climate Change (UNFCCC) being held in Glasgow in November 2021, all attention is focused on individual country commitments to carbon reductions, in the hope that in aggregate this will lead to substantial global reductions. But this will not happen and will never happen for as long as commitments continue to be made within the worn out conventions of the Kyoto Agreement (1997 to 2016) and its successor the Paris Agreement (2015 to 2021 and beyond). These agreements are framed solely in terms of low-carbon outcomes and commitments to reach such outcomes by individual countries, and never in terms of how the world can actually reach such outcomes through the greening of industrial processes. There are no commitments in the Kyoto Protocol to promote solar or wind power industries, nor green hydrogen, nor any means to favour these industries in world trading agreements. It is long overdue that such a shift in perspective should inform international agreements on mitigation of climate change.

To focus solely on outcomes is consistent with conventional economics reasoning in terms of comparative static shifts from one product or process to another, driven by changes in price secured through the tax system. In this comparative static framework we have carbon taxes (and their international extension in terms of border carbon tariffs) levied on economic processes to “restore” an equilibrium between carbon-intensive processes (using incumbent fossil fuels both as energy sources and as petrochemical inputs) and new “carbon-light” processes that substitute renewables for fossil fuels.

The whole debate over carbon taxes has proceeded over the past couple of decades without the benefit of empirical evidence as to whether carbon taxes actually work. They are advocated on the basis of typical “a priori” reasoning that afflicts all of conventional neoclassical economics. This reasoning has carried over to debates over what to do about global warming, held under the aegis of the UNFCCC – with the Glasgow COP 26 as the latest instalment in this process. It is surely self-evident that the green transition -- involving such substitutions as wind and solar power for coal-fired power, BEVs and FCEVs for internal combustion engines, green hydrogen for NG -- must depend not just on these individual substitutions but on systemic transformations involving emergence of a new “green” industrial system from the womb of the incumbent fossil fuel system.

The last occasions on which such systemic (technoindustrial) transitions took place were in the early 20th century when mass production took over from prior craft-based manufacturing (and we note that the etymology of manufacture is “production by hand”), and subsequent transformations within mass production such as “just-in-time production” as invented in Japan and “total quality management” again invented in Japan. Nobody has ever argued (to my knowledge) that mass production of Ford automobiles in the US was stimulated by a tax on horse and buggies, or that mass production of typewriters was stimulated by a tax on quill pens. Of course not. These were systemic transformations that were driven by their own principles sui generis, which turned on the capacity of entrepreneurs to envisage large-scale markets and invest in the large-scale production systems needed to create mass produced standardized product for these new markets. The standardized product and process innovations involved were what gave mass production its capacity to reap huge economies of scale and thereby undercut the craft-based production system on cost grounds, where the lower costs emerged as a result of successive rounds of market expansion and cost reduction linked to manufacturing learning curves. Traditional comparative static economic analysis based on static concepts of supply and demand, linked to static concepts like oligopoly and monopoly compared with “perfect competition” (where all producers are the same), was quite unable to shed any light on the rise of this new system of standardised manufacture and on the new principles of its operation.

It was left to the US maverick economist Allyn Young to demonstrate the key principles of the new system in terms of how the new mass producers were able to capture increasing returns (as opposed to the diminishing returns that rule in agriculture and extractive industries) and through this to drive economic progress. His 1928 presidential address to the British Association for Advancement of Science (BAAS), “Increasing returns and economic progress,” carried subsequently in the Economic Journal, remains the single best outline of how mass production works and how it differs from the craft-based production that preceded it. Of course it goes without saying that Young was comprehensively ignored by his economics peers, and he remains today as a marginal figure, a heterodox exponent of a heterodox economics.

But the times today call for such heterodox economic reasoning, because the world is in the grip of another fundamental systemic transformation of the industrial system, from black to green. We are witnessing the evolution of the 20th century industrial system based on fossil fuels to a 21st century industrial system based on circular processes and renewable energy resources. It would be a forlorn hope to imagine that such a systemic transformation could be driven by static tools like carbon taxes or emissions trading schemes targeted at single substitutions. These may play a role, but only as comparative static complements and supplements to fundamental Schumpeterian dynamic strategies aimed at the systemic core of the transformation. This core consists in fresh investments in new “green” processes and their ousting of incumbent fossil fuel based processes, in what Schumpeter (1942) described so memorably as “creative destruction” – the creation of the new green industries based on renewables and the destruction of the incumbent fossil fuel industries, based on the sound economic reasoning that entrepreneurs introducing the new can capture advantages based on lower costs and higher productivity.

Take the green entrepreneurial initiatives of Australian iron ore magnate Andrew “Twiggy” Forrest as exemplar of this new systemic, transformational perspective. Forrest’s new company, Fortescue Future Industries (FFI) spun out of his mining enterprise Fortescue Mining Group (FMG), is in the serious business of aiming to be the single largest company in the world promoting the green industrial transformation. FFI, through Forrest, is on record as viewing green hydrogen as the driver of the green transformation, where the green hydrogen economy might be framed as worth $12 trillion by 2050 – in less than 30 years. At the current costs of producing green hydrogen from electrolysis of water using renewable electric power, amounting to $1.2 million per MW, that would translate into $1.2 billion per GW, or $1.2 trillion per TW, and $12 trillion as producing 10 TW of green electric power – comparable to the current world scale of the entire fossil fuel industry. And as the scale advances, so the costs would be expected to fall, in a competition with incumbent fossil fuel industries that fossil fuels cannot and will not win. So Forrest is thinking big – really big. And his initial investment announcements are not just for solar or wind farms – enormous as these are likely to be – but for critical components of new green hydrogen based value chains, such as electrolysers, pipelines and cables.

FFI under Forrest is embarked on a major investment plunge into a green hydrogen future, announcing a series of investment initiatives in the month of October 2021.

· Creation of the first stage of a green hydrogen hub in Gladstone (QLD), involving manufacture of electrolysers for splitting water into hydrogen and oxygen, as well as manufacture of infrastructure items for green hydrogen like pipelines, cabling and refuelling stations;

· Creation of a hydrogen-containing fuel, methane, for use in production of fertilisers, in outer suburban Brisbane (QLD);

· Creation of a $1.3 billion hybrid gas and hydrogen plant at Port Kembla (NSW)

· Creation of a thin film solar manufacturing plant, again in outer Brisbane, in partnership with Dutch green energy start-up HyET.

These initiatives are all based on manufacturing, and on ramping up the scale of the manufacturing processes and to bring down costs accordingly. Forrest’s vision is that, when scaled up like this, the green hydrogen manufacturing processes will plunge in cost (due to learning curves) and will accordingly grow the scale of the market to challenge the grip of the incumbent fossil fuel industries. This is the global green shift in action.[1]

Forrest’s FFI has colossal targets that guide its present investments. The company is on record as aiming for production of 15 million tonnes of green hydrogen per annum by 2030, and 50 million tonnes per annum by 2050.[2] These amounts call for correspondingly huge wind farms and solar farms to generate the required green electricity at scale in the regions adjacent to the green hydrogen production plants – of the order of an onshore wind farm of capacity 1,683 GW or an offshore wind farm of capacity 1,331 GW.[3] The largest wind and solar farm announced so far for Australia’s northern regions is the 26 GW hybrid solar-wind Asian Renewable Energy Hub.[4] So more than 65 such hubs would be needed to produce FFI’s target for green hydrogen of 15 million tonnes per year by 2030. A daunting target indeed – but one that is not beyond the scale of practicability.

The announced investments by FFI are strategic, in the sense that they set the stage for other investments to follow in their wake in a process best described as circular and cumulative causation. In Gladstone, FFI plans to invest in manufacturing facilities for electrolysers which will be the principal piece of equipment needed for producing green hydrogen by splitting it from water using renewable electric power. With this $1 billion-plus investment announcement FFI both creates the essential means for producing green hydrogen at colossal scale (and at a cost lower than the $1.2 million per MW that currently prevails in Europe) and create the demand for renewable power at a greater scale than previously envisaged, boosting solar and wind power generation in and near the Gladstone Basin which has previously been the coal capital of Queensland.

Forrest makes what appear to be outlandish claims for his initiatives. “There will be no bigger industry” in the future than green hydrogen and ammonia. “It will dwarf the scale of iron ore, it will dwarf the scale of coal.” As noted, Forrest estimates the size of green hydrogen industry to be $12 trillion by 2050 – by far the largest industry on the planet.

As Allyn Young clearly explained, in his address to the BAAS in 1928, what drives investment in new industries is not so much the extent of the market for their produce, as the extent of the potential market, given that costs can be reduced – and thereby prices – because of the increase in the scale of production anticipated for a standardized product utilizing standardized processes. This is what actually drives cost reduction in mass production industries – and so, by a similar argument, what drives cost reduction in new green industries. The cost reduction, and the market expansion associated with it, is what drives the success of green products and processes as they oust products and processes based on fossil fuels. What investments do is tweak the costs and the associated extent of the market, in a circular and cumulative fashion. The flywheel of green investment is an apt metaphor for the process – as utilized by “Twiggy” Forrest and his company Fortescue Future Industries (FFI).[5]

Forrest is capturing in this metaphor of the flywheel the notion that business works through repeated connections and processes of cost reduction (which means generating increasing returns) in a way that mimics the growing momentum of the flywheel as it spins. Another metaphor for the same process is that of the “chain reaction” (Kaldor, 1970) which likewise captures the way that growth of new industries proceeds through making multiple connections that propagate through the economy, like new shoots in a growing biosystem like a grove of bamboo.

Green hydrogen is critical to the emergent green economy because it provides a buffer that enables renewable energy generation to proceed smoothly. The irreducibly varying nature of solar and wind power (known therefore as varying renewable sources) is a major hurdle when compared with the commodity basis of fossil fuels – but it can be corrected with suitable buffers such as batteries (to store energy in chemical form) or green hydrogen, which acts as both a store and source of energy. Forrest and FFI are already thinking of green hydrogen as a replacement for oil and natural gas. Forrest is on the public record as envisaging the scale of the green hydrogen economy reaching $12 trillion by 2050 – making it by far the largest industry on the planet. This is the scale of thinking on the part of an entrepreneur who aims not to substitute one product or process for another but to replace entire industries.

The question of increasing returns is critical to the green revolution, because it is the possibility of securing green growth that is critical to green economic progress. Green growth must be distinguished from the black or brown growth associated with greater levels of dirty resource throughput in the incumbent economy. There is a well known school of thought (associated with Herman Daly and followers) that states that economic growth cannot continue forever in a finite planet. And if by growth is meant growth in GDP, meaning growing output created by growing inputs, then Daly et al are certainly correct. You cannot squeeze extensive growth forever from a finite material base.

But Allyn Young reminds us (1928) that growth can more fundamentally mean intensive growth, viz growth in output from a constant or declining resource base. Intensive growth based on increasing returns, where lower costs and improved productivity drive market expansion which when repeated successively (circular and cumulative causation) generates economic growth in the absence of growth in resource inputs – or “green growth.”[6]

Growth that is measured in increases in GDP is usually extensive growth, associated with increasing flows of materials and energy through the economic system. This is what clearly cannot continue indefinitely – and which indeed must be curbed as a matter of the highest urgency. But intensive growth is a different matter entirely. This refers to a growth in value without change in the flow of resources, through increasing levels of recirculation and greater degrees of inter-firm exchange intensity. Individual firms, and value chains of firms, will doubtless continue to seek out opportunities to generate increasing returns – just as all capitalist firms before them have done. But increasing returns have until recently been ignored in mainstream economic analysis, which to that extent is a clear departure from capitalist reality.

Increasing returns were banished from analysis for reasons solely to do with mathematical tractability of the equations governing supply and demand at equilibrium (no convergence to equilibrium can be demonstrated where increasing returns apply); but in capitalist reality, as opposed to its neoclassical fictions, the search for increasing returns governs strategy. In totality it is increasing returns that create the possibilities for intensive growth. The firms earning increasing returns propagate via interfirm connections through the process of circular and cumulative causation as described by Kaldor. These ideas, which have languished at the margins of economics for so long, should come into their own as the debate between intensive and extensive growth becomes sharper.[7]

A perspective on the green industrial revolution informed by the insights of Allyn Young and Nicholas Kaldor enables us to register that what we are witnessing today is a comprehensive transformation of economic value chains with all their inter-linkages. The switch is from value chains based on fossil fuels (as inputs and as energy sources) to alternatives based on renewable and circular resource flows, where entrepreneurs create new value chains based on capturing increasing returns and thereby fashion an economy based on green intensive growth. The strategies that deliver this outcome are those based on Schumpeterian insights, involving fresh investments that drive creative destruction, rather than strategies based on restoration of equilibrium, such as carbon taxes and border carbon adjustments.

Putting green hydrogen at the centre of this transformation makes sense, because green hydrogen acts simultaneously as the new dominant fuel for transport, as the new source for energy storage, and as new chemical input such as in green steel or green cement production. Each of these uses calls for green hydrogen to act as input into some process and calls for fresh infrastructure. The new green hydrogen economy will emerge as new value chains propagate based on hydrogen as common input.

Just like the stones on the GO game board, where the idea is to build interconnected patterns in competition with an opponent, it is cross linkages between new hydrogen-based value chains that propagate through the incumbent fossil fuel economy to create a new renewable-based, green economy. (See Fig. 1 for a typical sequence of moves in GO highlighting the sequential interconnections between stones on the board.) One value chain terminating in production of electrolysers could intersect with a value chain leading to production of green hydrogen while another could intersect with green ammonia produced from green hydrogen and terminating in a production of green fertiliser. Entrepreneurs like Forrest make the strategic investments in these fresh value chains, looking to build competitive advantages as they capture the cost advantages of new green technology – in this case, new green steel forged by introducing green hydrogen in place of carbon for steel, or new green cement produced with green hydrogen as input in place of carbon-based inputs.

Figure 1: Sequence of additions in the game of GO

Source: Mathews (2011)

Green hydrogen is manufactured hydrogen

Green hydrogen is the product of a series of manufacturing processes – from manufacture of electrolysers (to split water), to manufacture of pipelines (for transport of hydrogen to ports and industrial users), manufacture of cabling (for transmission of renewable power) to manufacture of hydrogen recharging points as core of new post-fossil fuel green hydrogen-based infrastructure. It is because it is a product of manufacturing processes that green hydrogen can benefit from cost reduction (via the technological learning curve) and provide economic and energy security – precisely because manufacturing is under management control and is not dependent on the vagaries of extraction and processing of raw materials from the ground with their geopolitical limits to continued operation.

Other sources of hydrogen do not offer these advantages. Blue hydrogen sources hydrogen from the processing of natural gas, a fossil fuel, and its price can be anticipated to fluctuate as the price of natural gas fluctuates (to an alarming degree in recent months). Grey hydrogen combines the uncertainties of starting with the fossil fuel, natural gas, but combines this with the uncertainties of burying carbon wastes underground, in the hypothetical process of carbon capture and storage (CC&S) – a technology that we can confidently predict will never take off.

Concluding remarks

The emergence of new green economy, based on a green industrial system and on green growth for its propagation, cannot be captured in simplistic comparative static economic frameworks such as the imposition of carbon taxes. What is needed is a systemic perspective, focusing on the supersession of one technoeconomic system, based on fossil fuels, by another system, based on renewables and circular flows. This perspective draws on heterodox insights drawn from Young (1928), viewing economic progress in terms of capture of increasing returns generated by manufacturing (with learning curves reducing costs as the market expands, in successive waves of circular and cumulative causation); from Schumpeter (1942) with his magisterial concept of creative destruction, whereby competitive dynamics drive economic progress; and Kaldor (1970) with his fundamental notion of economic progress being characterized as a chain reaction of interactions linking new value chains and eliminating incumbent chains. All these perspectives help to make sense of the systemic green transformation emerging out of the black fossil fuel system, recognizing it as a systemic transformation of core technoeconomic characteristics. In particular, they help to make sense of the investment activities of green entrepreneurs, like “Twiggy” Forrest in his green hydrogen initiatives in Australia, as they invest strategically in the creative destruction and propagation of a new, green industrial system in the womb of the incumbent, black fossil fuel system.


Jones, E.I. 1988. Growth Recurring: Economic Change in World History. Oxford, UK: Clarendon Press.

Kaldor, N. 1970. The case for regional policies, Scottish Journal of Political Economy, 17: 337-348.

Mathews, J.A. 2011. Naturalizing capitalism: The next Great Transformation, Futures, 43 868-879

Mathews, J.A. 2015. Greening of Capitalism: How Asia is Driving the Next Great Transformation. Stanford, CA: Stanford University Press.

Mathews, J.A. 2017. Global Green Shift: When CERES Meets GAIA. London: Anthem Press.

Mathews, J.A. and Reinert, E.S. 2014. Renewables, manufacturing and green growth: Energy strategies based on capturing increasing returns, Futures (Sep), 61: 13-22.

Schumpeter, J.A. 1942. Capitalism, Socialism and Democracy. New York: Harper & Brothers.

Toner, P. 2001. “History vs equilibrium” and the theory of economic growth, by Mark Sutterfield: A comment, Cambridge Journal of Economics, 25 (1): 97-102.

Young, A. 1928. Increasing returns and economic progress, Economic Journal, 38 (152): 527-542.

[1] See my earlier works Mathews (2015; 2017) for an exposition of this argument. [2] See Forrest’s speech to the Clean Energy Council Summit, 18 August 2021, at: Dr Andrew Forrest AO delivers speech at Clean Energy Council summit | Fortescue Future Industries ( [3] Now 1 kg hydrogen contains 120-142 MJ (megajoules) of energy. Using Platt’s formula, 1 TWh of green electricity is needed to produce 20,000 tonnes of green hydrogen. So 15 million tonnes green hydrogen per year would call for 5,017 to 5,937 TWh of green electricity each year, generated by (say) 1,331 GW (1.3 TW) of offshore wind (CF 43%) or 1,683 GW (1.7 TW) of onshore wind (CF 34%). See “A wake-up call on green hydrogen: The amount of wind and solar needed is immense”, by Leigh Collins, Recharge, 19/20 March 2020, at: A wake-up call on green hydrogen: the amount of wind and solar needed is immense | Recharge ( [4] See the Australian Renewable Energy Hub website at: Asian Renewable Energy Hub ( [5] Twiggy Forrest introduced the “Flywheel of green industry” in his ABC Boyer Lecture (Feb 2021) in these words. “At Fortescue, we call this the flywheel. We nudge the wheel, make sure our systems work, reduce costs, free up capital and create demand. Then we encourage with that momentum to reduce costs even further, creating an even larger, more reliable supply, that again creates more demand. The flywheel begins to spin on its own, faster and faster. Now, we're building, at global scale, the flywheel of green energy.” See “Oil vs Water: Confessions of a carbon emitter), ABC Boyer Lecture, at: 01 | Oil vs Water — Confessions of a carbon emitter - Boyer Lectures - ABC Radio National [6] It all depends, of course, on how one defines “growth”. It is the difference between intensive and extensive growth that is fundamental – a point made by Jones (1988) in his discussion of economic growth, namely: “To make sense of the strands of history, it is vital to distinguish between industrialization, capitalism, modern economic growth, intensive and extensive growth, and economic development.” Eric Jones, Growth Recurring, 1988. [7] See Toner (2001) for a discussion of Circular and Cumulative Causation and why it disappeared from economic analysis. As noted above, the phrase was used by Kaldor (1970) in his Address to the Scottish Economic Society at the University of Aberdeen. Eric Reinert and I borrowed these ideas from heterodox economics and applied them to the case of the green transformation in Mathews and Reinert (2014).

59 views0 comments
bottom of page