Following that lead, I have assembled these rules of thumb by asking these questions: How do our tools shape our destiny? What kind of an economy is our new technology suggesting?
Any network has two ingredients: nodes and connections. In the grand network we are now assembling, the size of the nodes is collapsing while the quantity and quality of the connections are exploding. These two physical realms, the collapsing microcosm of silicon and the exploding telecosm of connections, form the matrix through which the new economy of ideas flows.
There are 10 trillion objects manufactured in the world each year and the day will come when each one of them will carry a flake of silicon
The surest way to advance massive connectionism is to exploit decentralized forces to link the distributed bottom. How do you build a better bridge? Let the parts talk to one another. How do you improve lettuce farming? Let the soil speak to the farmer s tractors. How do you make aircraft safe? Let the airplanes communicate among themselves and pick their own flight paths. This decentralized approach, known as “free flight,” is a system the FAA is now trying to institute to increase safety and reduce air-traffic bottlenecks at airports
No one is as smart as everyone
We have spent centuries obsessed with the role of top-down governance. Its importance remains. But the great excitement of the new economy is that we have only now begun to explore the power of the bottom, where peers holds sway. It is a vast mother lode waiting to be tapped. With the invention of a few distributed systems, such as the internet, we have merely probed the potential of what minimally centralized networks can do.
As the network age matures, we ll know that chips and glass fibers have succeeded only when we forget them. Since the measure of a technologys success is how invisible it becomes, the best long-term strategy is to develop products and services that can be ignored.
When ubiquity is approached; aim for ubiquity. Every step that promotes cheap, rampant, and universal connection is a step in the right direction.
Examine the speed of knowledge in your system. How can it be brought closer to real time? If this requires the cooperation of subcontractors, distant partners, and far-flung customers, so much the better.
The game in the network economy will be to find the overlooked small and figure out the best way to have them embrace the swarm.
An old saying puts it succinctly: Them that s got shall get. A new way of saying it: Networks encourage the successful to be yet more successful. Economist Brian Arthur calls this effect “increasing returns.” “Increasing returns” he says, “are the tendency for that which is ahead to get further ahead; for that which loses advantage to lose further advantage.” In networks, we find selfreinforcing virtuous circles. Each additional member increases the network’s value, which in turn attracts more members, initiating a spiral of benefits. In the industrial economy success was self-limiting; it obeyed the law of decreasing returns. In the network economy, success is self-reinforcing; it obeys the law of increasing returns. We see the law of increasing returns operating in the way areas such as Silicon Valley grow; each successful new start-up attracts other start-ups, which in turn attract more capital and skills and yet more start-ups. (Silicon Valley and other high-tech industrial regions are themselves tightly coupled networks of talent, resources, and opportunities.) At first glance the law of increasing returns may seem identical to the familiar textbook notion of economies of scale: The more of a product you make, the more efficient the process becomes. Henry Ford leveraged his success in selling automobiles to devise more productive methods of manufacturing cars. This enabled Ford to sell his cars more cheaply, which created larger sales, which fueled more innovation and even better production methods, sending his company to the top. That self-feeding circle is a positive feedback loop. While the law of increasing returns and the economies of scale both rely on positive feedback loops, there are two key differences.
First, industrial economies of scale increase value gradually and linearly. In the industrial economy success was self-limiting; it obeyed the law of decreasing returns. In the network economy, success is self-reinforcing; it obeys the law of increasing returns. We see the law of increasing returns operating in the way areas such as Silicon Valley grow; each successful new start-up attracts other start-ups, which in turn attract more capital and skills and yet more start-ups. (Silicon Valley and other high-tech industrial regions are themselves tightly coupled networks of talent, resources, and opportunities.) At first glance the law of increasing returns may seem identical to the familiar textbook notion of economies of scale: The more of a product you make, the more efficient the process becomes. Henry Ford leveraged his success in selling automobiles to devise more productive methods of manufacturing cars. This enabled Ford to sell his cars more cheaply, which created larger sales, which fueled more innovation and even better production methods, sending his company to the top. That self-feeding circle is a positive feedback loop. While the law of increasing returns and the economies of scale both rely on positive feedback loops, there are two key differences. F irst, industrial economies of scale increase value gradually and linearly.
The expertise (and advantage) developed by the leading company is its alone. By contrast, networked increasing returns are created and shared by the entire network. Many agents, users, and competitors together create the network s value. Although the gains of increasing returns may be reaped unequally by one organization, the value of the gains resides in the greater web of relationships.
We see this in the way network effects govern the growth of Silicon Valley. Silicon Valley s success is external to any particular company s success, and so loyalty is external, too. As AnnaLee Saxenian, author of Regional Advantage, notes, Silicon Valley has in effect become one large, distributed company. People job-hop so frequently that folks “joke that you can change jobs without changing car pools. Some say they wake up thinking they work for Silicon Valley. Their loyalty is more to advancing technology or to the region than it is to any individual firm.
We are headed into an era when both workers and consumers will feel more loyalty to a network than to any ordinary firm. The great innovation of Silicon Valley is not the wowie-zowie hardware and software it has invented. Silicon Valley s greatest “product” is the social organization of its companies and, most important, the networked architecture of the region itself the tangled web of former jobs, intimate colleagues, information leakage from one firm to the next, rapid company life cycles, and agile email culture. This social web, suffused into the warm hardware of jelly bean chips and copper neurons, creates a true network economy.
To imagine the future of an enterprise or innovation one needed only to extrapolate the current trends in a straight line. There was a comfortable assumption largely true that the world proceeded linearly. Entirely new phenomenona did not ordinarily appear out of nowhere and change everything within months.
One of the hallmarks of the industrial age was its reasonable expectations. Success was in proportion to effort. Small effort, small gains. Large effort, large gains. This linear ratio is typical of capital investments and resource allotments.
Consider the first modern fax machine that rolled off the conveyor belt around 1965. Despite millions of dollars spent on its R&D, it was worth nothing. Zero. The second fax machine to be made immediately made the first one worth something. There was someone to fax to. Because fax machines are linked into a network, each additional fax machine that is shipped increases the value of all the fax machines operating before it. This is called the fax effect.
So strong is this power of plentitude that anyone purchasing a fax machine becomes an evangelist for the fax network. “Do you have a fax?” fax owners ask you. “You should get one.” Why? Because your purchase increases the worth of their machine. And once you join the network, you ll begin to ask others, “Do you have a fax (or email, or Acrobat software, etc.)?”
In the network economy, the more plentiful things become, the more valuable they become. This notion directly contradicts two of the most fundamental axioms we inherited from the industrial age. First hoary axiom: Value comes from scarcity. Take the icons of wealth in the industrial age diamonds, gold, oil, and college degrees. These were deemed precious because they were scarce. Second hoary axiom: When things are made plentiful, they become devalued. For instance, carpets. They were once rare handmade items found only in houses of the rich. They ceased to be status symbols when they could be woven by the thousands on machines. The traditional law was fulfilled: commonness reduces value. The logic of the network flips this industrial lesson upside down. In a network economy, value is derived from plentitude, just as a fax machine s value increases as fax machines become ubiquitous. Power comes from abundance. Copies are cheap. Let them proliferate. Ever since Gutenberg made the first commodity cheaply duplicated words we have realized that intangible things can easily be copied. This lowers the value per copy. What becomes valuable is the relationships sparked by the copies that tangle up in the network itself. The relationships rocket upward in value as the parts increase in number even slightly.
Proprietary, or “closed,” systems were once rare because industrial systems were relatively uncomplicated. Proprietary systems rose in popularity as advancing technology made it difficult to replicate a system without assistance or encroaching on patents. The creators of a closed system made a nice living. When the information economy was first launched several decades ago, the dream was to own and operate a proprietary system one that no one else could copy and then let the money roll in. To a degree that can still be done, at least for short period, if the system is significantly superior. Bloomberg terminals in Wall Street traders offices is one current example. But the network economy rewards the plentitude of open systems more than the scarcity of closed systems. It is a bit of a cliche now to blame Apple s misfortunes on its insistence that its operating systems be treated as a scarce resource but it s true. Apple had more than one opportunity to license its particularly wonderful interface the now familiar desktop and windows design but backed off each time, thereby guaranteeing its eventual eclipse by the relatively more open DOS and Windows systems.
There is a place for isolation in the infancy of system, but openness is needed for growth because it taps into a larger wealth. Citibank pioneered the use of 24-hour instant cash at ATMs in the 1970s. They blanketed New York City with their proprietary machines, and at first this strategy was highly successful. Smaller competing banks started their own tiny and proprietary ATM networks, but they couldn t compete against the high penetration of Citibank machines. Then, led by Chemical Bank, these smaller banks banded together to form an open ATM network called Plus. The power of n2 kicked in. Suddenly any ATM was your ATM. Citibank was invited to join the open Plus network but declined. Following the principle of increasing returns, the handy Plus system attracted more and more customers, and soon overwhelmed the once dominant Citibank. Eventually the open factor forced Citibank to forgo their proprietary ways and join in.
Every time a closed system opens, it begins to interact more directly with other existing systems, and therefore acquires all the value of those systems