Tuesday, April 26, 2016

Uncertain networks

Recent research from MIT, Chicago and Harvard (1) contends that smaller shocks in the economy could be magnified significantly by network effects. If true, it may provide guidance on policy that is trying to "jump start" large economic systems by targeted investments. If the transmission of such shocks across the economy is predictable, then, it could impact macro-economic decisions favorably. However, looking back with a deterministic view of network evolution, may have some downside.

Economic growth is driven by the conscious harvesting of uncertainty and not by strategic investments by bureaucrats or even corporations. Further, networks are in a constant state of evolution. Measuring GDP impact, a backward looking measure has less meaning in an economy driven by information, innovation and intellectual property. Firms, locked into the status-quo, with a rigid view of demand and supply, indeed fall prey to shocks amplified by static networks, But those, keenly aware of unpredictable uncertainty and the value of flexibility, could certainly surpass such external noise. The question is not how the present network amplifies shocks but rather how the networks are built. If they are built by organizations with a static view of the future, then they will be brittle and consumed by minor shocks. The measurement of intellectual property by patents is symptomatic of the adherence to known metrics and a lack of awareness of where value is originating from.

Empirical analyses in the context of accepted theories have less value for the future - policy or not. The field of economics has to evolve with the modern economy. Lack of innovation will always have a negative effect on the economy - no further analysis is needed.

(1) http://esciencenews.com/articles/2016/04/06/how.network.effects.hurt.economies