Technology, networks and increasing returns

W. Brian Arthur (image from Wikimedia)

One of the people whose thinking has had the greatest impact on me is W. Brian Arthur, the complexity theorist and economist who did much of the original work on the economics of networks. Brian was very involved in the Santa Fe Institute in New Mexico which for a while held a kind of mythical place in my mind — I read as much as I possibly could that came out of there as I realised that the work they had done was exactly what I was interested in. That led me to really try and understand the maths and techniques of network theory which has been an important part of lots of things I’ve worked on.

There’s a great podcast in the A16Z series at the moment of a conversation between Brian Arthur and Sonal Chokshi and Marc Andreessen from A16Z about what those papers he wrote in the 80s and 90s can teach us about the way that technology has developed and what it means for investment. Arthur argues that investing in technology companies is different from investing in other companies because of the interaction they have with network effects and the law of increasing returns (as opposed to diminishing returns in most markets). There are all kinds of reasons why particular tech firms end up dominating markets (Arthur’s shorthand for the combination of these is ‘luck’), but he argues that the overall phenomenon is inevitable and inescapable. Markets either become effective monopolies or they become commoditised — there’s very little middle ground in the medium to long term. Coincidentally this is why I think technology is so vital to impact investing. If impact investing were only to focus on markets that become commoditised, it would struggle to have a positive impact at scale and miss all the opportunities that new technologies present.

The podcast is well worth a listen and confirms my view of Brian Arthur as one of the most pertinent thinkers for the world we live in.

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