W. Brian Arthur

 

 

Here is a popular 1996 article by Arthur in the Harvard Business Review: "Increasing Returns and the New World of Business"

 

And here is a piece by Fast Company commemorating the 20th anniversary of the HBR article: "A Short History of the Most Important Theory in Tech"

 

A recent discussion on increasing returns: "Rerun the Tape of History and QWERTY always Wins—a Comment"

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increasing Returns

In standard economic theory, markets show diminishing returns. There are only so many good hydroelectric sites in Norway and after these are exploited hydro energy runs into diminishing returns—it becomes more costly. So hydro and petrolium energy share the market.

But some economic markets show increasing returns. If one company or product or technology gets advantage it gains further advantage—there are increasing returns or positive feedbacks. So when several such companies compete, one that by chance or clever strategy gets ahead may gain further advantage and can go on to dominate or lock in the market. (Think of Facebook versus Myspace, or Google versus Yahoo and AltaVista.) But the one that wins need not be the best—it may have come to dominate partially by chance.

Economics had long known about increasing returns but didn't know how to deal with them. Alfred Marshall speculated in 1890 that if N firms competed and each had increasing returns, the market would go to “whatever firm first gets a good start.” But there was an indeterminacy: in principle any of the N firms could win. In the 1980s Arthur realized that such indeterminacies could be resolved by viewing the market’s buildup as a dynamic process subject to random events. Sometimes these small random events would steer the outcome into the dominance of firm X, other times into the dominance of firm Z. The appropriate framework for increasing returns problems was random and dynamic.

Arthur's original 1983 paper on this was turned down by 4 top journals over a period of 6 years. Increasing returns seemed rare and esoteric—not quite "economics." Finally the paper was published in the Economic Journal. (Currently its citations are over 12,000.) The theory wasn't much noticed at first, but became prominent when it was realized that high-tech markets operated under increasing returns: If a technology has a network of users and gets ahead, this enlarges its network and increases its advantage, so it can go on to lock much of the market. By the 1990s Silicon Valley had embraced increasing returns, and since then the theory has been standard for tech markets. "We launched Java based on Arthur's ideas," says Eric Schmidt, then CTO of Sun Microsystems.

In 1990 Arthur was awarded the international Schumpeter Prize in economics for this work.


Book: Increasing Returns and Path Dependence in the Economy

by W. Brian Arthur, Univ. of Michigan Press, 1994. Foreword by Kenneth J. Arrow.


 

© 2022 W. Brian Arthur