Arthur: Myths and Realities of the High-Tech Economy

Arthur, WB. 2000. “Myths and Realities of the High-Tech Economy.” Talk given at Credit Suisse First Boston Though Leader Forum, Santa Fe Institute.

Author presents 4 myths of the “high tech economy”.

The author first points out a general trend: a digital economy of networks has emerged that is distinct from the earlier economy of input-output production. This new economy is overlaid upon the old economy. Additionally, the author believes that, “of networks, there will be few” because increasing returns to scale will be impossible to overcome with differentiation (1).

Myth 1: All Networks are Subject to Network effects:

“Network effects”, a synonym for Metcalfe’s Law, states that the “value” of networks increases quadratically. Therefore, any network that people are involved within will be beneficial for those people. While this relationship may be true of some technologies (the author points to a telephone), the nature of digital networks provides different kinds of increasing returns with increased membership in a network. Combinatorial networks, like eBay, show some sort of increasing returns to scale, while “hub and spoke” networks do not: users are just connected to the same server and not to one another.

Myth 2: The Coming of the Internet implies a New Economy:

Myth 3: Either that technology must evolve in a specific place, or that technology can come from anywhere: the answer is somewhere in the middle.

Myth 4: Current political structures will last forever

Briscoe, et. al.: Metcalfe's Law is Wrong

Briscoe, B., Odlyzko, A. & Tilly, B., 2006. Metcalfe's law is wrong-communications networks increase in value as they add members-but by how much? Spectrum, IEEE, 43(7), 34-39.

This article discusses why its authors believe that Metcalfe’s Law is over stated and mathematically incorrect. They put forth a log-based account of the law instead of a quadratic account. “Simply put, it [Metcalfe’s Law] says that the value of a communications network is proportional to the square of the number of its users” (35).

The authors attribute the dot-com bubble to people making decisions based upon Metcalfe’s Law instead of a logged version of network analysis.

Sarnoff’s Law was named after an RCA television executive and it dealt with the number of viewers of broadcast networks. It grows linearly.

Their “valuation” can not be proven, oversimplifies the phenomena, and doesn’t make explicit any of the nuanced interactions (both positive and negative).

Their basic objection to Metcalfe’s law is that it values all connections equally when, in reality, many connections are not taken advantage of and are thus not valuable.

There is anecdotal evidence that the logged law is widely applicable.

There is a grand conflation of “value”.