by Charles Hugh Smith, Of Two Minds:
The anti-social carnage unleashed by Corporate America’s “lock-in” / negative network effects has no real limits.
Here’s the U.S.economy in a nutshell: Corporate America is an anti-social Black Plague, gorging on cartel-monopoly profits reaped from negative network effects running amok, enriching the few at the expense of the many and concentrating political power in the hands of the most rapacious, anti-democratic corporate sociopaths.
Let’s start with network effects: the conventional definition is “When a network effect is present, the value of a product or service increases according to the number of others using it.”
So for example, when telephone service was only available to a few users, its value was limited. As more people obtained telephone service, the value of the network increased to both its owners and to users, who could reach more people and conduct commerce more easily as a result of having telephone service.
In the conventional analysis, negative network effects occur from “congestion,” i.e. the network is adding new users so quickly that “more users make a product less valuable.”
But this superficial analysis misses the fatally anti-social consequences of corporate negative network effects, a dynamic described by analyst Simons Chase in this essay. Here is an excerpt:
Even the most imaginative and far-reaching narratives about non-obvious economic fragility and off balance sheet risks are mere rants without constructive ideas about causes and solutions.
Consider network effects, the popular economic construct applied to market concentration and increasing returns for strategies pursued by some leading tech companies. This dynamic economic agent is also known as demand side economies of scale.
W. Brian Arthur, the economist credited with first developing the theory, described the condition of increasing returns as a game of strategic positioning and building up a user base to the point where ‘lock in’ of dominant players occurs. Companies able to tap network effects have been rewarded with huge valuations and highly defensible businesses.
But what about negative network effects? What if the same dynamic applies to the U.S.’s pay-to-play political industry where the government promotes or approves of something through a policy, subsidy or financial guarantee due to private sector influence.
Benefits accrue only to the purchaser of the network effects, and consumers, induced by the false signal of large network size, ultimately suffer from asymmetric risk and experience what I’m calling a loss of intangible net worth for each additional member after the ‘bandwagon’ wares off.