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Re: On Increasing Returns

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Re: On Increasing Returns

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<P class=MsoNormal style="MARGIN: 0in 0in 0pt">Hello!</P>
<P class=MsoNormal style="MARGIN: 0in 0in 0pt"> </P>
<P class=MsoNormal style="MARGIN: 0in 0in 0pt">Consider this rather long note a preface to a NYT article that I am about to send to the FRIAM list.</P>
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<P class=MsoNormal style="MARGIN: 0in 0in 0pt">You might be unaware that the concept of increasing returns in economics comes in two flavors. In one use of the notion mostly associated with the work of Brian Arthur increasing returns is a feature of certain types of technologies (mainly information technologies), and is, in effect, an instance of a network externality. This use of increasing returns provided the theoretical underpinnings for the widely disseminated idea of the new economy. The other notion of increasing returns associated with the work of Paul Romer and Robert Lucas treats increasing returns as a consequence of knowledge spillovers (themselves another type of externalities). In both cases, increasing returns is an attempt to solve the conundrum of where sustained growth comes from in the face of diminishing returns to factors of production.</P>
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<P class=MsoNormal style="MARGIN: 0in 0in 0pt">But even while the notions of (technological) increasing returns and the new economy gained popularity, there was a ferocious debate within the economics profession as to whether or not there was statistical evidence for a significant productivity effect of investments in information technology. At the very least, the evidence was ambiguous. Some economists notably the late Zvi Griliches as well as researchers at the U.S. Census Bureau argued that the computer was not, from an economics standpoint, that different from previous technological innovations (the steam engine, the railroad, electricity generators, etc.).</P>
<P class=MsoNormal style="MARGIN: 0in 0in 0pt"> <o:p></o:p></P>
<P class=MsoNormal style="MARGIN: 0in 0in 0pt">McKinsey published a study in October 2001 that examined the factors underlying the productivity gains in the U.S. economy during the 90s and in particular tried to identify the productivity effects of IT investments. (The study team was led by the Nobel Prize winner economist Robert Solow.) A quote from the study:</P>
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<P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="COLOR: black; mso-bidi-font-size: 8.5pt">Contrary to popular belief, our research shows that IT was only one of many factors causing the post-1995 productivity growth jump in the last five years. Product, service, and process innovations, competition, and to a lesser extent cyclical demand factors, were the most important causes. IT investments had a tremendous impact on productivity in some select industries, but virtually no effect in others.<o:p></o:p></SPAN></P>
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<P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="COLOR: black; mso-bidi-font-size: 8.5pt">You can download the study at <A href="http://www.mckinsey.com/knowledge/mgi/productivity/index.asp">http://www.mckinsey.com/knowledge/mgi/productivity/index.asp</A><o:p></o:p></SPAN></P>
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<P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="COLOR: black; mso-bidi-font-size: 8.5pt">Having read all of this, you might find the article from the NYT that I am about to post interesting.<o:p></o:p></SPAN></P>
<P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="COLOR: black; mso-bidi-font-size: 8.5pt"> <o:p></o:p></SPAN></P>
<P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="COLOR: black; mso-bidi-font-size: 8.5pt">Regards,<o:p></o:p></SPAN></P>
<P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="COLOR: black; mso-bidi-font-size: 8.5pt"> <o:p></o:p></SPAN></P>
<P class=MsoNormal style="MARGIN: 0in 0in 0pt"><SPAN style="COLOR: black; mso-bidi-font-size: 8.5pt">Jose</SPAN></P></DIV>
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<DIV>*************************</DIV>
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<DIV>José Lobo</DIV>
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<DIV>Visiting Researcher</DIV>
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<DIV>Santa Fe Institute</DIV>
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<DIV></DIV>>From: "Robert Holmes" <[hidden email]>
<DIV></DIV>>Reply-To: [hidden email]
<DIV></DIV>>To: <[hidden email]>
<DIV></DIV>>Subject: [FRIAM] Bonabeau article
<DIV></DIV>>Date: Sat, 3 May 2003 20:02:14 -0600
<DIV></DIV>>
<DIV></DIV>>The May 2003 Harvard Business Review has an article by Eric Bonabeau "Don't
<DIV></DIV>>Trust your Gut". It describes how the latest decision-support tools
<DIV></DIV>>(agent-based model, genetic programs, the usual suspects) are best used to
<DIV></DIV>>complement (rather than replace) executives' intuitions.
<DIV></DIV>>
<DIV></DIV>>I've got a PDF version of this article so if anyone wants a copy, email me.
<DIV></DIV>>
<DIV></DIV>>Robert
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