Positive Linking: How Networks can Revolutionise the World, Paul Ormerod, Faber and Faber Limited, Pp 308, £ 12.99
In the early 21st century, just as it did in the late 19th, economies in general assumed that individuals operate autonomously, isolated from the direct influences of others. The industrial chose from the alternatives available according to his or her own preference. This theory is no longer sustainable. The choices people make, their attitudes, their opinions are influenced directly by other people. The medium through which this influence spreads is the social network. Often, social networks are through of as purely a web-based phenomenon – sites such as Facebook.
Our social and economic worlds have been revolutionised. The internet has transformed communications and for the first time in human history, more and more people have come to live in cities. These can indeed influence behaviour, but it is real-life social networks – family, friends, colleagues – that are even more important in helping us shape our preferences and beliefs, what we like and what we don’t.
Network effects the fact that a person can and often does decide to change his or her preferences simply on the basis of what others do, pervade the modern world. Throughout history, human behaviour shows the propensity to copy or imitate the behaviour, choices and opinions of others. Today, we can see it in the behaviour of traders on financial markets, where the tendency to follow the herd can lead to the booms and crashes we have lately experienced.
In September 2008, Lehman Brothers went bankrupt, precipitating a crisis which almost led to a total collapse of the world economy and a repeat of the Great Depression of the 1930s. It was precisely because Lehman was connected via a network to other banks that made the situation so serious. Lehman’s failure could easily have led to a cascade of bankruptcies, first in those institutions to which Lehman owed money, but strangely neither the system of financial regulations nor the mainstream economics thought of such a possibility.
In this book the author explores the implications of the network effects. He says incentives are still a driver of human behaviour but network effects can be far more powerful as the author shows through examples in which network effects have completely swamped the impact of incentives, leading to outcomes completely different from those intended by policy makers.
Network effects require policy makers, whether in the public or corporate spheres to change radically their view of how the world operates.
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