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MAY 2008 DRAFT Please do not quote or cite without permission.

The New “Emergence Economics” of Innovation and Growth, And What It Means for Communications Policy
May 2008

Richard Whitt and Stephen Schultze

“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.” ~ Charles Darwin, The Origin of Species

The New “Emergence Economics” of Innovation and Growth

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INTRODUCTION......................................................................................... 1 EMERGENT ECONOMY: OVERTHROWING THE OLD REGIME.................4
INTRODUCING EMERGENCE ECONOMICS ........................................................................................................ 4 The Nature of Markets: Complex Cascades........................................................................................... 5 The Nature of Competition: Imperfect Incentives ................................................................................. 7 The Nature of People: Behavioral Beings ............................................................................................... 8 The Nature of Analysis: Mismatched Models ........................................................................................ 9 PRESENTING A ROUGH FORMULA FOR EMERGENCE...................................................................................... 10 Agents..................................................................................................................................................... 11 Networks ................................................................................................................................................14 Evolution ................................................................................................................................................17 Emergence of Networks and Growth.................................................................................................... 22

NETWORKED ECONOMY: THE INTERNET AS THE ULTIMATE EMERGENT PLATFORM ........................................................................... 24
THE NET’S ORIGINS ..................................................................................................................................... 25 Overlooked Components: The Social, Economic, and Legal Backdrop .............................................. 25 An Unlikely Birth .................................................................................................................................. 26 THE NET’S ARCHITECTURE .......................................................................................................................... 28 The Law of Code: Modularity .............................................................................................................. 28 Smart Edges: End-to-End.................................................................................................................... 29 A Network of Networks: Interconnection .............................................................................................31 Agnostic Protocols: IP...........................................................................................................................31 THE END RESULT: A “VIRTUOUS FEEDBACK NETWORK” .............................................................................. 32

GROWTH ECONOMY: THE EMERGENCE OF IDEAS, INNOVATION, AND “NET EFFECTS” ........................................................................................ 33
THE NATURE OF IDEAS AND INNOVATION ..................................................................................................... 34 Ideas ...................................................................................................................................................... 35 Innovation............................................................................................................................................. 36 ECONOMIC GROWTH .................................................................................................................................... 39 The Road to Romer ...............................................................................................................................40 Enter New Growth Theory.....................................................................................................................41 Implications For Technological Change............................................................................................... 43 THE EXTERNAL IS IN: “NET EFFECTS”........................................................................................................... 44

Innovation Spillovers................................................................................................. 45

Richard Whitt and Stephen Schultze

May 2008

The New “Emergence Economics” of Innovation and Growth

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Peer Production .................................................................................................................................... 46 The “Social Layer”................................................................................................................................. 47 A NEW VISION OF WEALTH ............................................................................................................................ 48

POLITICAL ECONOMY: EMERGING IMPLICATIONS FOR U.S. COMMUNICATIONS POLICY .................................................................... 49
THE OVERALL ROLE OF GOVERNMENT ......................................................................................................... 50 The Co-Evolution of Markets and Governments.................................................................................. 50 The Policymaker As Adaptive Economic Agent ................................................................................... 52 A COMMUNICATIONS POLICY APPROACH FOR INNOVATION AND GROWTH .................................................... 53 Why Communications Policy? .............................................................................................................. 53 Defining Our Mission............................................................................................................................ 58 APPLYING THE FRAMEWORK: ENABLING WITHOUT DICTATING ...................................................................... 64 Not Dictating the Evolutionary Process ............................................................................................... 64 Enabling the “Econosphere” ................................................................................................................. 67

CONCLUSION ........................................................................................... 74

Richard Whitt and Stephen Schultze

May 2008

and to begin suggesting some ways those policies should be recast in their light. That is the startling yet inescapable conclusion after one reviews the latest empirical and analytical work in the schools we will refer to collectively as “Emergence Economics. no one would have anticipated the Internet as we know it today. that production is generated only by capital markets or government subsidy. Twenty years ago. . the implications for the public policy world that has rested for so long on those assumptions cannot be overlooked. Schultze served as a policy intern with Google. with perfect knowledge of themselves and the marketplace. Today’s discussions about national communications policy often seem to be rooted to the past. bulletin board systems. that economic actors are perfectly rational. in the form of economic and technology assumptions that more or less ended in the 1960s.The New “Emergence Economics” of Growth and Innovation. And What It Means for Communications Policy May 2008 Richard Whitt and Stephen Schultze ∗ INTRODUCTION Your college economics professor probably lied to you. In the authors’ view. Consumergrade computer modems were still in their infancy. Or fibbed. It turns out that every one of these key assumptions is plain wrong.” The hoary “Old School Economics” still teaches us. Whitt currently is Washington Telecom and Media Counsel at Google Inc. that growth is exogenous. In many ways. and the whole of the economic system is always equal to the sum of its parts. the Internet was a happy accident. now is an appropriate time to articulate the fundamental economic and technology tenets that should inform our nation’s communications and information policies. commercial services – linked together and ∗ Mr. As it turns out. or unwittingly gave you false information. that the market is linear and always seeks equilibrium. or was merely confused. and the few dial-up online communities that existed were a far cry from the globally connected “network of networks” that now pervades so much of what we do. for example. along with new technology platforms culminating in the Internet. While the ramifications for the study and practice of economics cannot be overstated. together directly challenge many of those chief assumptions. the rise of new economic thinking. What started out as isolated islands – universities. Mr.

The interdependent virtuous circles can become part of a complex virtuous feedback network. The virtuous circle appears in the form of technological innovation that facilitates future technological innovation and drives “network effects” where each new user adds benefit to the rest of the system. formed bottom-up by interactions between people in a highly connected marketplace. linear forms of growth. Economists often use the phrase “virtuous circle” to describe systems that contain positive feedback loops in which their outputs cycle back into their inputs. comprising) the system according to diverse motives. Emergent economies combine these dynamics. but instead are the product of economic actors working within (indeed. The underlying software protocols opened up the ability to interact and speak freely across thousands of interconnected networks. were necessary conditions. Rather than moving toward equilibrium. In addition. First. or generating greater efficiency. Fortunately. we live in a growth economy in which the chief currency is ideas. two fundamental observations drawn from Emergence Economics lead us toward a more helpful analytic framework. An economic framework that actually recognizes this dynamic can establish a foundation for even greater growth in the future. While traditional economics tells us that productivity comes simply from adding more capital. but for the most part the system emerges freely and unpredictably. transform the means of production. was beyond even the wildest predictions. these economies are self-reinforcing and have the potential to multiply their effects in unexpected ways – generating both positive and negative feedback. What’s more. we do not fully understand what led to this success. these technologies do not emerge inexplicably from outside the system. in which new ideas emerge and technology constantly is refined. the network economy thrives when there is space for experimental evolution. Richard Whitt and Stephen Schultze May 2008 . Instead.The New “Emergence Economics” of Innovation and Growth Page 2 grew as the result of the actions of millions of unaffiliated people. Advances in computer technology. Even with the benefit of hindsight. many turn understandably to the field of economics. including digitization of information. This networked growth economy differs greatly from some traditional economic models that posit static. and concomitant declines in the cost of computer storage. The advent of new technologies can create better recipes for economic growth. and improvement of ideas. the Internet is what happened while we were busy planning something else. Some basic rules govern these interactions. and the online and offline economy it facilitates. broadly defined. reproduction. Whereas traditional economics more often than not attempts to engineer statically these relationships. To comprehend how the Internet developed into a thriving marketplace of innovation and economic growth. and the structure of the market evolves based on their collective practices. The growth of the Internet. and the mechanism for growth is innovation. dramatic increases in computing power. we live in a network economy. In many ways. Emergence Economics recognizes that such an abstraction fails to represent accurately a far messier reality. growth is not limited by physical goods. but they also could have facilitated a variety of other outcomes. Second. harnessing the discoveries of others in such a way that the system as a whole grows far more efficiently than if it were a disconnected set of actors. Economic actors become nodes. but is enabled by the transmission. Unfortunately. Emergence Economics emphasizes ways in which technologies. traditional economics has little to say about this leading test case.

acting through interconnected networks. or surmised. particularly in the communications realm. This particular “dynamic revolution” needs to be televised. and what we call “Net effects. Words and concepts are not the things they describe. This formula is fueled by the latest findings from physics. The tools of government. and understanding of. the reviewing judge – in the face of an innovation-fueled. psychology. and even outright skepticism. but it does not purport to replace the foundational work of many others.” Finally. However. Next. or even guessed at. the regulator. the paper will turn to some key emergent phenomena.The New “Emergence Economics” of Innovation and Growth Page 3 And so what of the proper role of the government policymaker — the legislator. the literature in this field is broad and deep in some places. In addition. In particular. many of the intellectual trends we discuss here slowly but surely are being incorporated into more mainstream schools. that individual agents. scanty and unfinished in others. versus the vices of “tampering” with evolutionary processes and outcomes. but always tempered by optimism. including ideas. carefully. we will look to Joseph Schumpeter and Friedrich Hayek as two towering transitional figures between the disparate phases of Traditional Economics and Emerging Economics. all the coming discussion of “markets” and “systems” and “properties” should not let us lose sight of the common human element.” with “rich indisciplinary hybrids emerging to breathe new life into an old science. economic growth. rightly declares. Ironically. and the conditions that are most likely to foster productive tipping points. cognitive neuroscience.” 1 This paper necessarily presents an overview of what so far is known. network-connected. The Internet then will be discussed as a notable and perhaps unique product of market and non-market forces. As a result. many policymakers still cling to the basic assumptions that underpin older forms of economic theory. engage in the evolutionary market processes of differentiating. biology. can successfully facilitate a more optimal environment for new ideas. in all its breadth and depth. which in turn generates a host of positive emergent economic phenomena. emergent economy? There is little doubt that the policy environment needs to catch up to newer economic thinking. technology. this bottom-up regulatory approach requires an appreciation for. Nor do we seek to discredit the world of modern economic thinking. while Traditional Economics may be adjusting itself to new ways of thinking. the lessons here are many. innovation. and amplifying certain business plans and technologies. topics like network-based dynamics. This paper will introduce the rough formula for “Emergence Economics” – namely. and plain common sense. as Michael Shermer. and deliberately. Nonetheless. and in the right context. as a modular infrastructure. we will bring these economic and technological elements to bear in the world of communications policy. The chief concern is that. they merely serve as organizing principles to try to make sense of a seemingly disorganized world. our objective here is comparatively humble. The Mind of the Market (2007). when employed sparingly. about becoming a more active force in the market. economics is undergoing “the most dynamic revolution since Adam Smith. We have a few important caveats to relay at the outset. economic growth. First. and law – 1 Michael Shermer. selecting. and human freedom. yet practical: to condense what currently comprises this sprawling body of new work in a way that can aid policymakers and others in analyzing policy issues. where a proposed new framework separates out the virtues of “tinkering” with market gaps and inputs. economics. they point to caution. Richard Whitt and Stephen Schultze May 2008 . and as a platform for broad-based innovation. Whatever happens in any agent-constructed space such as economics should be taken to reflect humanity. indeed. As we shall see. at bottom. at xviii.

often are perceived as sterile. In the case of communications-based technology sectors. peripherally relevant. EMERGENT ECONOMY: OVERTHROWING THE OLD REGIME INTRODUCING EMERGENCE ECONOMICS So what exactly is this new economics? The term Complexity Economics adopted by analyst Eric Beinhocker describes a variety of different analytic and empirical approaches to the economy. and Ormerod’s “Iron Law of Failure. As mere abstractions of reality. we can only hope that more of us are able to join in the evolving conversations. with the binding principle of attempting faithfulness to the real world.” 3 2 Richard Whitt and Stephen Schultze May 2008 . we thought it best to avoid confusion by using a broader umbrella phrase. “Emergence Economics. “Net effects” like spillovers and social production. new growth theory. Moreover. and we think inevitably. Finally. Perhaps some will dismiss what follows solely for that reason. at least (yet) by trade.” to denote this more wide-ranging set of emerging viewpoints. indeed the forces at work in network industries in the 1990s are Supposedly found in “Bentley’s Second Law of Economics. and even tedious fields. the world of economic theory should not only be available to. While the concepts explored here should not be confused with exacting correlates to the real world. Phenomena thought to be minimally important. or outside the scope of proper economic thinking altogether are being brought to the forefront. after all. In this paper we will be combining Beinhocker’s impressive synthesis with emerging work in other areas. it must be stressed that all economic models inherently are wrong. competition theory. they inevitably miss at least some of the nuance and sinew of the world that each of us inhabits. they do provide an important corrective to what has gone before. this “new” economics draws from several long existent but submerged themes in mainstream economics. nonetheless. the only thing more dangerous than an economist is an amateur economist. and behavioral economics. [T]hese forces are not "new".” As a result. and articulated by. we should never forget the people behind it all. Other useful contributions include the origins of innovation. we must point out that neither author of this paper is an economist. to one degree or another. most notably network science. a cloistered few. We would argue instead that they should be seen as the fleshand-blood instantiation of ordinary humans participating in the world. makes way to new forms of economic thinking. In reality. the saying goes. artificial. economist Hal Varian has noted that: there are some forces that are particularly important in high-tech….The New “Emergence Economics” of Innovation and Growth Page 4 together which form the three-way intersection for this paper -. Amidst the vernacular.” We also take heart from Hayek’s statement that “an economist who is only an economist cannot be a good economist. 3 As Traditional Economics gradually. 2 Still.

Farrell. a central tenet of Emergence Economics is that the economy is a “complex adaptive system” (CAS). and predictable movement between boom and recession.The New “Emergence Economics” of Innovation and Growth Page 5 very similar to those that confronted the telephone and wireless industries in the 1890s. and still the intellectual grounding for much of today’s economic theory. at ix. Under this view. which is a subcategory of open systems. by occasional shocks originating from outside the system itself. public policy tends to hew closely to the dictates of traditional economic theory. until recently. at 79-80. this paper seeks to offer a much-needed corrective to that situation. resources are put to their most efficient use. where supply equals demand. 5 Unfortunately.. at 5. and the welfare of society is optimal. a lack of sophisticated analytic tools. J.” Mark Taylor. Why Most Things Fail. a natural resting point is reached. Perhaps the best way to understand Emergence Economics is to compare it to the more traditional economics handed down to us by the neoclassical theorists. 8 By contrast. Robert Nelson. (2004). and moving from equilibrium point to point as it seeks balance. at 239-40. as Michael Shermer puts it. Cambridge University Press. One author goes so far as to claim that traditional economist theories employ an explicitly religious defense of the marketplace. The Nature of Markets: Complex Cascades Neoclassical theory states that the economy is a static equilibrium system. Confidence Games. In a free market economy. the thinking goes. Why Most Things Fail. Any indeterminacy typically is assumed away by econometric models. Another author notes that some supporters of traditional economics want so badly to believe in their models that. Economics as Religion (2001). The business cycle is just that: a regular. “The Economy As an Evolving Complex System” (1997). as we shall see. 6 Mark Taylor.. 7 Ormerod. et al. periodic. competition. Brian Arthur. negative feedback that keeps things contained. Confidence Games (2004). 4 Varian undoubtedly is correct—many of the various elements at play in today’s economy have been there for many decades. Richard Whitt and Stephen Schultze May 2008 . One gating question first must be addressed. 5 Paul Ormerod. Below we will look briefly at four aspects of traditional economic thought -. 6 Neoclassical theory also sees an “invisible hand” at work in competitive markets. financial markets 4 Varian. 9 W. why have these ideas taken so long to be absorbed into the social and political mainstream? Economist Paul Ormerod cites as likely reasons sheer intellectual inertia and. these economic formulas and models were symptoms of the very desires and emotions they were designed to eliminate. existing at rest. New York. 9 In a CAS. In a small way. 8 Ormerod. Or. at 191. however: if Emergence Economics actually present a more truthful version of the economic landscape.markets. The Mind of the Market. and analysis – and contrast them with the different perspectives brought by Emergence Economics. 3. 7 The business cycle is determined exogenously. the economy literally is a closed equilibrium system.” Shermer. micro-level interactions lead to the emergence of macro-level patterns of behavior. at 276. economies are complex systems “that emerge out of the simple activities of people just trying to make a living and provide for their children. Such a market is deemed optimally efficient. Economic processes are dominated by dampening. Why Most Things Fail. “paradoxically. at p. The Economics of Information Technology: An Introduction. people. H. As one example. Cambridge. R.

whose behavior is fixed.” so that “the more carefully one ponders the market. at __.. so there is no “long run” in the real world. of which the economy is a subset. at 225-252. 1985 (Jul. agrees that the efficient market hypothesis and related theories “were wrong on virtually every count. human society. and controllable. The (Mis)behavior of Markets (2004). deceptive. Critical Mass. the more suspect the whole notion of efficiency becomes. Harnessing Complexity. at 50-51. Time is an important element of economic phenomena. 18 By contrast. Why Most Things Fail. linear way. Papers and Proceedings of the Forty-Fourth Annual Meeting of the America Finance Association. Butterfly Economics. Harnessing Complexity. the neoclassical economists failed to include in their thinking the Second Law of Thermodynamics. 17 This perspective emphasizes rules executed by top-down hierarchies of relatively expert and impartial officials who prize efficiency and consistency.” 15 Traditional Economics is riddled with these basic flaws for a good reason. the economy is not an equilibrium system at all. for such a state would equal death. Ormerod points out that there are numerous empirical and theoretical bases to criticize the concept of general equilibrium. Crucially. there are always new sources of positive feedback. CONSTRUCTIVIST AND ECOLOGICAL RATIONALITY IN ECONOMICS. 16 See Ormerod. Why Most Things Fail. 18 Axelrod and Cohen. while large disturbances ultimately may have no lasting impact. at __. is more like a living organism. 11 To quote 2002 Nobel Prize winning economist Vernon Smith. Confidence Games. at 189. Philip Ball. with metaphors better suited to the Information Revolution. Confidence Games. 17 See generally Ormerod. No less an authority than Lawrence Summers has been quoted as saying that “the efficient market hypothesis is the most remarkable error in the history of economic theory. at 273. 13 Ormerod. It is widely understood that neoclassical economic theory views the economy through the prism of the physical sciences of the late 19th Century. and will never reach a resting place. A key aspect of any CAS is the inherent lack of predictability in its future operations. “Does the Stock Market Rationally Reflect Fundamental Values?.The New “Emergence Economics” of Innovation and Growth Page 6 are far more turbulent. 3. predictable. Butterfly Economics (1998). at 269. at 204-06. Axelrod and Cohen. 41. Emergence Economics views the economy through the prism of modern day physics and biology. a complex system characterized by constant change. which describes entropy and the notion of an open system. Vol. Dips and peaks in the economy refuse to recur in a predictable manner. 13 The real world also exhibits positive feedback. at 28-31. 2002. 15 Mark Taylor. and risky than previously thought. and disequilibrium that percolate from the bottom up.” 14 Mark Taylor. Ball. December 28-30. The idea that the market is optimally efficient also runs headlong into reality. 273. 12 Vernon Smith. 19 Benoit Mandelbroit. because they do not add up in a simple. evolution. “We do not understand why markets work as they do.” 12 Further. at 17-35. stable. 1986). particularly atomistic statistical mechanics. New York.” The Journal of Finance. December 8. 19 Ormerod. 16 The metaphor appropriated from the Industrial Revolution is the economy as a human-made machine (like a steam engine). Critical Mass (2002). a noted expert on complexity theory. one missing in general equilibrium theory. small. Summers. at 28-31. 11 10 Richard Whitt and Stephen Schultze May 2008 . 10 Oftentimes. with prices leaping up and down in a more or less concentrated fashion. innocuous events can set off avalanches of change that are inexplicable in Traditional Economics. or increasing returns. Mark Taylor. New York. No. 14 Lawrence H. Under that perspective. Nobel Prize Lecture.

23 Uncertainty and lack of information shroud the future in doubt. and that anything that interferes with the price system’s ability to do so is a detriment to social well-being. 23 Ormerod. 29 Ball. Demand and cost curves are extremely difficult to know with any clarity. at 257. stock prices accurately reflect all available information at all times. 22 Robert Nelson calls these theories “an economic tautology. 30 James Case. And the “free market” rarely. 24 Ormerod observes that the phrase “perfect competition” is “yet another example of the terrifying ability of economists to brand their central concepts so effectively. and with no market failures. 25 James Case. and unfair and deceptive advertising claims. Ball. and so should follow a “random walk.” Ormerod. there is no waste. Critical Mass. 28 Further. however. 20 Relatedly. 27 James Case. 27 Now. at 160-63. Competition. Supply and demand supposedly balance out precisely. at 23-35. Critical Mass. Critical Mass. price-fixing. free markets will squeeze as many useful goods and services as possible out of the available resources (maximal output at minimal prices). Empirically. Competition. Why Most Things Fail. operates under conditions of perfect competition.” Nelson. at 83-84.” 25 Free markets are presumed to be both efficient and fair. at 244-46. at 58-69. 30 [cites] Mark Taylor. at __. 21 Emergence Economics challenges each of these assumptions. Ball. Why Most Things Fail. but also seek to attain other primary objectives such as attracting and retaining productive workers.The New “Emergence Economics” of Innovation and Growth Page 7 One illustrative example of the different approaches is the prices for goods and services. the price should always be set equal to marginal cost (or where additional revenues will exceed additional costs). 28 Ball. careful analysis shows that most firms are not pure maximizers of profit or utility. at __. 26 The concept that the supply of every traded good or service is precisely equal to the demand for it at prevailing prices led to the related concept that the economy rests in perfect equilibrium. and goods are distributed in a “Pareto optimum” way. at 191. 29 Common diversions to raising prices include predatory pricing. 26 James Case. Competition.24 The watch phrase is “consumer sovereignty. The efficiency principle says that under perfect competition. we often see a wide divergence in the prices of individual goods and services. 268-69. at 255. Traditionally one of the central tensions in economics is between producers (supply) and consumers (demand). which makes setting prices that much more difficult.” with no patterns and no clues for future prices. Critical Mass. attempts to monopolize. Economics as Religion. discriminatory pricing. In addition. Competition (2007). at 254-55. the study of competition slowly is turning from a theoretical to an experimental science. at 183-84. if ever. the demonstrated phenomenon of “sticky prices” leads to higher than necessary prices that refuse to descend to their theoretically sanctioned levels. 22 Supply rarely equals demand. The Nature of Competition: Imperfect Incentives The traditional view of economic competition is that “perfect competition” compels free markets to allocate scarce resources in a manner so efficient that all our conflicting wants and needs are resolved in the most satisfactory manner possible. Further. Confidence Games. 21 20 Richard Whitt and Stephen Schultze May 2008 .

34 The Nature of People: Behavioral Beings Under Traditional Economics. because supernormal profits are the temporary fruits of innovation. 36 Ball. Firms compete via prices in existing goods. Competition. but firms seeking to capture market share through new products. The physical world is characterized by diminishing returns. presupposing perfect foresight. and falling costs per unit (such as producing a software CD). at 206. 31 Richard Whitt and Stephen Schultze May 2008 . Persistent competition from innovations creates a threat that “disciplines before it attacks.” both logical and consistent in their behaviors. increasing returns comes from both the “shoulders-of-giants” process (new ideas build on existing ideas. Critical Mass. at 84. Information is costly. at 293. a towering figure in 20th Century economics. and such markets tend to evolve into tight oligopolies over time. Some modern-day students of “imperfect competition” do not necessarily agree with this point. and have perfect knowledge of all probabilities. The classical world view is founded on scarce material objects and their efficient allocation – or as Paul Romer puts it. Joel Kurtzman. at 209-11. as some oligopolies may cling to pricing power indefinitely. 36 In the real world.strategybusiness. Competition.” 35 Unlike the academic equations and assumptions that undergird traditional economics. Critical Mass.” so that as soon as innovators cease to innovate. Indeed. at 213-14.com/press/16635507/9472. Indeed. found at: http://www. Socialism. the pursuit of self-interest is a rational activity of individuals. assumed that people are “representative agents. James Case. He saw claims about “perfect competition” as relatively unimportant. barriers to decision making almost always exist. the process of discovering them does not suffer from diminishing returns. however. what counts is “competition from the new commodity. the new technology. the new source of supply. Capitalism and Democracy. but instead chose a profit-maximizing price of $89. 32 Id. In the Information Age.” 31 Value comes from rearranging that matter into a more valuable form. and then beget more new ideas). and laws were built around establishing property rights and ensuring no monopoly control. which could have sold its Windows OS for $49. based on utility (a measure of pleasure and pain). Traditional economics also includes assumptions about homo economicus possessing “rational and errorless choice. behavioral economics is based on the actual discernible rules by which humans make everyday decisions. and increasing cost per additional unit produced. An Interview with Paul Romer. these same economists observe that free markets long have tolerated all manner of supernormal profits. the new type of organization… competition which… strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. “a finite quantity of things with which to work – basically. pricing power will desert them. Paul Samuelson. Joseph Schumpeter was an original prophet in this area. 33 Schumpeter. instead. Id. 34 Id.” 33 Schumpeter also argued that some degree of monopoly is preferable to perfect competition. 32 Because ideas are not scarce. Ball.The New “Emergence Economics” of Innovation and Growth Page 8 Traditional Economics also has failed to convey the reality of modern-day competition in another fundamental way. Strategy+Business. the matter in the earth’s crust. One salient example mentioned in the literature is Microsoft. we rely increasingly on ideas as the recipes we use to rearrange matter to create more value and wealth.” and “foreknowledge free from uncertainty. Competition is facilitated not by firms trying to drive prices. 35 James Case.

Why Most Things Fail. “to be of any value. theories must be confronted with reality. 38 Ormerod. Models in Traditional Economics often use simplifying and highly restrictive assumptions. competing. Hayek showed us that desirable outcomes are the joint product of both individual actions and the institutional framework in which individuals operate. and rapidly changing. Indeed. 44 There also is an uncomfortable feeling that economic models oftentimes simply lose the human element in their too-neat equations. at 181. engaging in strong reciprocal behavior. Critical Mass. all mathematical statements are conditional in nature. 44 Ball. and must not affect the answers the model provides for that purpose. we not only address a specific problem. at 450. Famously. creates an emergent phenomenon that we call society – a phenomenon as real as the emergent pattern of a whirlpool. Why Most Things Fail.” 38 We will discuss this critical point in further detail in Part II. 40 Malcolm Gladwell.” 41 The Nature of Analysis: Mismatched Models Traditional economic theory has proven inadequate in terms of the two standard criteria for a scientific theory: prediction and explanation. 39 Social change is both volatile and often inexplicable. “in the new economics. there is no such thing as self-interested individuals acting in isolation. Milton Friedman insisted that unrealistic assumptions in economic theory do not matter so long as the theories make correct predictions. at 125. at 224. Paul Ormerod believes that. At best. Why Most Things Fail. In econometrics. in Beinhocker’s words.” 43 Philip Ball explains further that: Economic models have been augmented. garlanded. 42 [cite] 43 Ormerod. The Origin of Wealth.” by making decisions in the face of obvious external and internal constraints. making decisions. refined. cooperating. 39 Ormerod. We want to believe that economic theory does not regard us as “automata” and “preprogrammed. at 211-12. Yet they still lack their ‘Newtonian’ first principles: basic laws on which everyone agrees. or problematic. as agents engage in “clustering” and “herding” behavior. Indeed. 37 Richard Whitt and Stephen Schultze May 2008 . omniscient computers” in order to make their mathematical Ball. acting out their cultural norms. 41 Beinhocker. at xiii. statistical correlations do not provide a causal explanation of the phenomena. Further. Assumptions must be appropriate for the purpose of the model. The Tipping Point (2000). 40 Ample evidence shows that. and data often is not readily available. Critical Mass. Some of these models now rival those constructed by physicists in their mathematical sophistication.The New “Emergence Economics” of Innovation and Growth Page 9 incomplete. 42 Such optimism would seem misplaced. and decorated with baroque accoutrements. and going about their daily lives. at __. we employ “bounded rationality. we try to start from the outset with rules of behavior which have empirical support rather than with rules that we believe a priori a rational agent ought to follow. “the interactions of millions of people. 37 Ormerod observes that every individual decision involves massive complexity and defies the orderly application of the rational calculations of economic theory.

Critical Mass. Emergence Economics is our suggested umbrella phrase for a rapidly developing field that incorporates a broad set of tools in order to understand this type of activity.” 45 PRESENTING A ROUGH FORMULA FOR EMERGENCE Economic activity fundamentally is about order creation. By isolating. We will explore more fully in later sections the role of the Internet. 47 We have assembled these and other elements into a rough formula that captures the essence of the economic activity: AGENTS + NETWORKS + EVOLUTION = EMERGENCE Agents in this case consist of the full spectrum of economic actors—large and small businesses. but instead takes seriously “the thousand and one parts of our daily lives that cannot be reduced to numbers but that makes our lives worth living. then. Innovation and technology are key elements. The Origin of Wealth. is what results from the complex interplay of agents. specializing. 47 Eric Beinhocker. universities that generate foundational research. because they propagate through the network as components of new recipes for economic growth. The Net also is the physical infrastructure that supports such growth across many sectors of our economy. 48 This is not meant to suggest a straightforward linear equation. the system develops an emergent structure. we can create even more order than we otherwise could on our own. and in turn do not lend themselves to simplistic policymaking. what we exchange in this system are not just finished goods and services – per traditional economic theory -. at __. and nonlinear system. economic Ball. we both illustrate. generating spontaneous and nonlinear growth. This kind of market operates as an open. and information into the goods and services we want. many times over. Each element is its own complex adaptive system. By cooperating. 46 The complex interactions that make up our networked innovation economy are not simple to model. The Origin of Wealth (2006). at 208. Emergence. and distort. Instead of straightforward emergence (if there is such a thing). and trading. Eric Beinhocker outlines some of the principles of this approach in his recent book. Beinhocker. and others. we have emergence layered on top of emergence. The “rough formula” thus is an over-simplified approximation intended to illuminate these properties. The Origin of Wealth. 46 45 Richard Whitt and Stephen Schultze May 2008 .The New “Emergence Economics” of Innovation and Growth Page 10 models work. individuals with varying motivations. These agents form ad hoc relationships that change over time and interconnect into larger social networks. and evolutionary forces. individual agents build on others’ innovations. see Martin Nowak. Through this process. 455. Evolutionary Dynamics (2006). and the roles of ideas and innovation. dynamic. and the system overall evolves toward greater productivity. matter. government officials. noncommercial organizations. 48 For a far more in-depth treatment of the mathematical equations of evolutionary dynamics. When these dynamics arise. Importantly. ordinary consumers.but raw ideas and applied technologies. networks. We organize our world by transforming energy. which greatly expands the scale and scope of the resulting emergent behavior. and new means of productivity. and should not be misconstrued as a faithful representation of reality.

The New “Emergence Economics” of Innovation and Growth Page 11 growth and “Net effects. Behavioral economics seeks to right some of the false assumptions that lie at the heart of Traditional Economics. Chapter 3 (pp. we will sketch out the elements of a “rough formula for emergence. In this paper. though. The Origin of Wealth. at 143. William Easterly. have helped further the concept of bounded rationality in economics.” Agents Any theory of economics must begin with a sound theory of human nature. 50 49 Richard Whitt and Stephen Schultze May 2008 . by pursuing our economic self-interest in carefully calculated ways. 52 Economic actors only interact through market prices. each of us displays perfect rationality. face no transaction costs. These assumptions include: agents are modeled collectively. but still can help keep the system open to productive dynamism.” We will also show how policymakers generally should not attempt to engineer or intrude into these market-based relationships. Why Most Things Fail. "Towards a Not-Too-Rational Macroeconomics". CEOs or government officials. all of us play this central role in the economy. 54 Herbert Simon first introduced this concept in the 1950s. agents do not possess perfect rationality. “economics are ultimately made up of people. Critical Mass. 51 Under the standard model of human behavior. The term is preferred to either consumer or user. at 211-12. After all. Whether acting as consumers or investors. at 63. 50 Beyond that observation. Ormerod. 51 Beinhocker. Ball. at best they live with bounded rationality. 53 Axel Leijonhufvud. Ormerod. 54 Imperfect and asymmetric information is the rule. make no errors and have no biases and – being perfect – have no need for learning or adaptation.” 49 With that overarching premise in mind. both of which tend to reduce humans to a one-way relationship of purchasing access to goods. we will briefly examine how Traditional Economics is built on the flimsy and ultimately unsupportable premise that human beings are perfect economic agents. The central insight of economics is that agents respond to incentives. and individual nodes in a network. Modeling Bounded Rationality (2002). traditional economic theory assumes that agents have definite characteristics. In fact. Much well grounded thinking about agents and what they do comes from the latest teachings of behavioral psychology and neuroscience. providing catalytic change. To be an agent is to have several different meanings and connotations: as a selfpossessed entity. Joseph Stiglitz and George Akerlof. Critical Mass. account for all relevant factors. have perfect freedom to act. 53 Each of these assumptions is misplaced. Ariel Rubinstein. at 97. see also Shermer. 2001 Nobel Prize winners. or other resources. at 64. Agents are economic actors. at 115. For example. at 3. The Elusive Quest for Growth (2001). Why Most Things Fail. at 204-25. at 190. Mind of the Market. The Origin of Wealth. Beyond Microfoundations: Post Walrasian Macroeconomics. as acting on behalf of others. use complex deductive calculations to make decisions. have complete information available for free to gather and process. For now. the usual economic model of human behavior posits incredibly smart people in unbelievably simple worlds. 39-55) in David Colander (ed. rather Beinhocker. we will use the word “agent” generically to describe humans acting in their environment. a new form of economics has emerged—behavioral economics—with the actual human being at its core. Ball. and in the chemical sense. instead. 52 Beinhocker at 51. services. but only recently has it begun to influence everyday economic thought. As Leijonhufvud has put it. 115-139.).

Mark Blumberg. the world itself exhibits irregular. Thomas Kida. Philosophy in the Flesh (1999). Confidence Games. we utilize linear processing. The Robot’s Rebellion (2005). and biases. Linden. social. because “we are limited to the tools nature has given us. and linear processes. where Tom Cruise (as The Brain) asserts “I want the truth.g. A Mind of Its Own (2005). Walking the Tightrope of Reason (2003). 57 To put it more colloquially.The New “Emergence Economics” of Innovation and Growth Page 12 than the exception. at 243. functional. educational. we have difficulty accurately calculating risk and probabilities. Strangers to Ourselves (2002): Cordelia Fine. intentions. Marc Houser.g. 56 These aspects of our behavior stem from the fact that our senses. Stanovich notes that while our problem-solving strategies lead us to select regular. The Seven Sins of Memory (2001). 56 55 Richard Whitt and Stephen Schultze May 2008 . Making Up The Mind (2007). Moral Minds (2006). The Accidental Mind (2007). 58 In particular. Fooled by Randomness (2004). Daniel Schacter. we misperceive aspects of our world (senses can be deceived). one can apply neuroscience metaphorically to the 1992 motion picture A Few Good Men. Read Montague. at __. 59 Keith Stanovich. thoughts. 61 See. we crave causality (underestimating the role of chance and coincidence in life).” and Jack Nicholson (as The World) responds. 57 In summary. Basic Instinct: The Genesis of Behavior (2005). Survival and procreation. David J.” but creatures with different interests. profit-seeking entities can seek actively to Case. and intuitions. we seek to confirm (remembering the hits and forget the misses). Your Brain Is (Almost) Perfect: How We Make Decisions (2007). 60 Dan Ariely. Why We Believe What We Believe (2006). we can be confused and even paralyzed by having too many options. and cultural). Humberto Maturana and Francisco Varela. not “truth. Taleb. and we have individually varying skills. Melvin Conner. “You can’t handle the truth. Paul Bloom. Predictably Irrational (2008). then. we hold beliefs based on many external influences (parental. and the natural ways in which we make decisions is limited by the quality and accuracy of these tools. The Tangled Wing (2003). Gilles Fauconnier and Mark Turner. e. 55 Nor are we “homogenous billiard balls or gas molecules. we have framing biases. and independent processes. Barry Schwartz. Competition. of recent research in the area: • • • • • • • • • • • • • • we prefer stories to statistics (relying on anecdotal evidence). Mark Taylor. George Lakoff and Mark Johnson. Timothy Wilson. at __.” are the governing realities that have shaped us.. The Robot’s Rebellion. Robert Fogelin. Dan Ariely. sibling. we have faulty memories (memory is constructive). 59 We fall for the “decision illusions” our minds show us. Keith Stanovich. Paul W.. all of which inevitably color whether and how we make economic decisions. Andrew Newberg. Fooled by Randomness (humans tend to overestimate causality and underestimate luck). and how we make decisions in the marketplace. at 273.” 58 The literature literally teems with excellent treatments of all these well-grounded scientific findings. Predictably Irrational. Chris Frith. why. Don’t Believe Everything You Think (2006). The Tree of Knowledge (1998). indeterminate. we compartmentalize our economic behavior. Descartes’ Baby (2005). indication-dependent.” 60 These varying aspects of our behavior obviously directly affect whether. 61 As just one example. in most high-stakes competition. we oversimplify (avoiding analysis paralysis). deterministic. The Paradox of Choice (20004). The Way We Think (2002). e. we rely only on available evidence. and memory are attuned to the embodied. Tor Norretranders. evolved environment of an early homo sapiens. The User Illusion (1991). See. peer. perspectives. Nassim Nicholas Taleb.

Matt Ridley. Among the key findings: • • • • • • • • • we have a variety of motivations. Others have pointed out the political implications for democratic societies as well. 65 See. “Agents and Complex Systems” (2002). we are altruistic.jot. Mind of the Market. In Benkler’s memorable words. However. including firms and governments.The New “Emergence Economics” of Innovation and Growth Page 13 prey on those constraints as part of the process of selling goods and services. Again. these fundamental characteristics are not reflected in Traditional Economics. and flexible than heretofore has been recognized. Uncertainty and the Brian: The Science of Neuroeconomics (2003). we often know more than the official producers. Recent books have also begun to apply lessons from biology and complexity science to the management of large organizations. 64 Ormerod. as well as deduction (the scientific method). 63 Ormerod. John Henry Clippinger III.fm/issues/issue_2002_07/column3/. so that they are malleable and open to conscious change from new experiences and Glimcher. we are wired to engage in market-exchange calculations. 66 Our brains have been created with built-in plasticity. 66 Shermer. at 259. The Tipping Point. e. Decisions. we can use intelligent action to “tip” the world in certain directions. The Political Brain (2007). The Wealth of Networks. at 221. Michael Shermer.. The Wealth of Networks. The Black Swan (2007). found at: http://www.g. to change – and to grow.62 Of course. The Mind of the Market (2007). “have very limited capacities to acquire knowledge about the true impact of their strategies on others or of others on them. Changing Minds (2004). Why Most Things Fail. Nassim Nicholas Taleb. and often act as if possessed of a single mind. Firms share similar individual characteristics of agents.g. Richard Restak. which only exacerbates the shaky foundations for an agent’s market decisions. human beings have an inherent ability to learn. Richard Ogle.. “it turns out that we are not intellectual lemmings. Harnessing Complexity (2000). We evolved the adaptation of adaptability. including non-economic ones.. Yochai Benkler. Howard Gardner. we utilize not just reason but imagination. and we possess important traits as autonomous entities interacting to carry out particular tasks. 62 Bryan Caplan. Richard Whitt and Stephen Schultze May 2008 .” 64 Agents face massive inherent uncertainty about the effects of their actions. Some see the constraints inherent in our human information processing systems as signs of significant and inherent weakness — the proverbial glass half empty. The Biology of Business (1999) (collection of essays explaining “the Complex Adaptive System of management”). Robert Axelrod and Michael Cohen. Eric Von Hippel. cooperative. Drew Westen. James Odell. e. Democratizing Innovation (2005). The Myth of the Rational Voter (2007). at 190. Malcolm Gladwell. to adapt. at 466. 63 Ormerod states that agents of all types. 65 Most importantly. and sharing creatures. we use induction (pattern recognition). See.” Benkler. we can understand and even transcend our constraints. The Naked Brain (2006). firms are just collectives of individuals. multi-faceted. at 21-35. other research points in the opposite direction: human beings as more capable. and insight as the foundations for creative thinking. The Origins of Virtue (1997). Why Most Things Fail. intuition. Smart World (2007). ed. in particular routinely lacking relevant information and possess inherent uncertainty.

Smart Mobs (2002). 67 We are adaptive agents (or more precisely. Critical Mass.” Adam Smith. standing alone in her perfect wisdom and forethought. which in turn link to others.The New “Emergence Economics” of Innovation and Growth Page 14 new learnings. evolutionary theory. Networks Of course. at solving problems. 74 Ball. and render their happiness necessary to him. reaching decisions. for now the crucial takeaway is that Traditional Economics has little to say about collective intelligence operating in the marketplace. The Robot’s Rebellion. A Mind So Rare (2001). 72 Ogle. though he derives nothing from it. predicting the future. and fostering innovation. The full productive potential of agents comes from their interactions with each other. The Theory of Moral Sentiments (1759). 73 James Surowiecki. there are evidently some principles in his nature. Any particular agent may have a link to several other agents. neuroscience. at 5. yet highly adaptable. agents capable of adaptation) in an ever-evolving landscape. The Mind and the Brain (2002). 74 While we will return to this concept at a later point. and behavioral studies together show that humans are both more limited. constrained yet adaptable agents (normal human beings) do not exist in a vacuum. at __. Smart World. 69 while Donald surmises that we can take advantage of our hybrid brain/cultural mind to break free from our evolutionary heritage. market agreements. 71 Axelrod and Cohen. Harnessing Complexity. Any well-grounded economic theory must take nuanced account of both the half-empty and half-full views of economic agents. agents. 70 As populations of agents. Jeffrey Schwartz and Sharon Begley. Neoclassical economic theories fail this fundamental test. In short. This is physical science’s most important message to social science: do not be tempted too readily into extrapolating from the psychology of the individual the behavior of the group. 70 Merlin Donald. 72 Another point is worth stressing here: the traditional focus on the single individual. 73 Philip Ball puts it well: One of the features of collective behavior arising from local interactions is that it becomes impossible to deduce the global state of a system purely by inspecting the characteristics of its individual components. which facilitate sharing of information and effort. These links consist of lines of communication. Here Comes Everyone (2008). at 95-171. Clay Shirky. 68 Stanovich further insists that we can use our rational self-determination to gain control over our mismatched genetic and cultural programming. 71 We also have recourse to a vast array of culturally and socially embedded “idea-spaces” that populate our extended minds. We are eminently fallible. 69 Stanovich. Howard Rheingold. or the one. than Traditional Economics has assumed. 68 67 Richard Whitt and Stephen Schultze May 2008 . common tasks. share new ideas and innovations. In an often-overlooked work. The Wisdom of Crowds (2004). we can learn from each other. and serve as a fertile environment for growth. or any number of other relationships. except the pleasure of seeing it. at __. at 298-98. Adam Smith declares: “How selfish soever man may be supposed. and more limitless. ignores growing evidence that large groups of people are better than the few agents. which interest him in the fortunes of others. Nor are we the selfish automatons that Traditional Economics presupposes.

the economy as a dynamic. Why Most Things Fail. and collective behaviors will arise in networks composed of very different kinds of elements and linkages.The New “Emergence Economics” of Innovation and Growth Page 15 In Traditional Economics. these interactions. and Open Source. at 18-21. 21:4. 76 75 Richard Whitt and Stephen Schultze May 2008 . there is a growing consensus that “common structures. by links to other agents. biological ecosystems. many of the connections within the economy are downplayed. and often greatly enhanced. Wikis.” 81 Economic and social systems are essentially dynamic. Why Most Things Fail. but when understood they can be extremely powerful. Such complex systems may be understood as energy flow structures organized by thermodynamic principles. nor the system as a whole. at 293. Steven Johnson. firms. at 1. 79 In fact. or even ignored. and attempts to explain why certain dynamics arise in networks that do not appear in more static.” See Mark Cooper.” Thus. and not static. relationships are bound to change over time. 83 In many systems. Law and the Science of Networks. and often discuss the benefits that accrue to others as “spillovers. Six Degrees (2003). 2000. 78 The characteristics of networks can sometimes be counterintuitive. human systems shows themselves to be complex sets of relationships that can be understood fully neither from the perspective of the individual agents. In the language of network science. at 146. agents only interact indirectly. “Myths and Realities of the High-Tech Economy. the interactions of agents (whether individuals. These are open systems of interacting agents that adapt to each other and the environment.” W. It is the structure of the connections between the component parts that gives systems of people their distinctive and characteristic features. the agents are “nodes” and the links are “edges. 77 When viewed as a whole. In particular. Critical Mass. In a dynamic system. He relies instead on the concept of a science of “collective behavior. Ormerod.” talk given at Credit Suisse First Boston Thought Leader Forum. Economies too are a type of complex adaptive system. 141-159. Networks both define. The true value of an agent is affected.” 84 For example. I may invent a new method for scanning bar codes that yields me Beinhocker. physicists and biologists for decades have been studying complex adaptive systems. Thermodynamics. 83 Science writer Philip Ball criticizes the practice of using the term “complexity science” to explain aspects of human behavior. 82 Some have termed it the “econosphere” -. 82 Paul Ormerod. at 133. Emergence (2001). growth patterns. 179-180. Ball. 84 Some prefer to call these externalities “demand side economies of scale. through static and closed market mechanisms. Brian Arthur. 77 Ormerod.” 80 As mentioned previously. 80 Katherine Strandburg et al. and helps create complexity in the overall system. 79 Duncan Watts. 78 “The network is the dominant pattern of the new digital economy. at 5-6. immune systems. and groups of edges between and among nodes. and the Internet. Into the Cool: Energy Flow. linear systems. September 10. evolving system. Examples of CASs include neurons in the brain. 81 Eric Schneider and Dorion Sagan. 75 As a result. 50-51. Berkley Technology Law Journal. 1293. a network of individual agents. Albert-Laszlo Barabasi. 76 Reality is a bit more complex than that. Linked (2002). at 97. Economists call these effects “positive externalities”. and Life (2005). The field of network science explores how networks form. The Origin of Wealth. networks are interactions of nodes. The economy is best conceptualized and analyzed as a connected system.” and sees the market laws emerging from the ordinary (but still unpredictable) push and pull of trade. Wifi. at 173. individual actors end up having indirect positive effect on others. 1301 (2006). or governments) include inherent elements of unpredictability. and are defined by. Why Most Things Fail.

these benefits flow more freely than in disconnected islands. 87 and strategic formation of individual. The Nature of the Firm (1937). In other words. each new node added to the network creates added value for the existing nodes. On the Regulation of Networks as Complex Systems: A Graph Theory Approach. and the multitude of links can reduce transaction costs in more dynamic fashion. [cite.The New “Emergence Economics” of Innovation and Growth Page 16 great profit. comes from and flows to other nodes. these types of “phase transitions”—abrupt jumps from one state of connectedness to another—can also work in the reverse direction. The Centripetal Network. from graph theory (as formulated by Spulber and Yoo). The classic case is the telephone network. in which a globally interconnected system is substantially more valuable to all than a regional or locally delimited system. 89 Werbach. 85 We use the term “Net effects” later in this paper to refer to a diversity of presumed externalities that in fact arise internally from the complex network itself. The more people that owned Ethernet equipment. In complex networks. Here is another instance where a tenet of Traditional Economics – most markets are characterized by declining and eventually negative returns to scale -. Coase. 91 By bringing many entities together under a single umbrella. because these highly interconnected networks represent considerably more value. and the effects of each new node feeds back into the system. an organization can limit the transaction costs required. It also means that the total value created is greater than what each node can create or capture in isolation. edges. at __. An isolated node would have to generate its own value or negotiate with others to obtain what it needed. 87 Daniel Spulber and Christopher Yoo. from game theory (as formulated by Werbach). while also capturing more value than an isolationist approach would yield. Traditionally. 86 There are two broad classes of how networks form: random formation. or clusters see benefit in restricting use of those assets. 90 While such restrictions can appear to make rational sense from the perspective of one agent. The type of externalities referred to as “network effects” arise only in networks. This is true both of literal networks. In complex networks. networks have a tendency to expand slowly and then exhibit explosive growth as individual networks interconnect.does not necessarily comport with reality. 85 Richard Whitt and Stephen Schultze May 2008 . The Centripetal Network. self-interested agents. However. 89 If those who control particularly central nodes. 86 Werbach. but you might adopt or adapt this technology to your own benefit (provided that the law allows). 91 R. 90 Another feature of networks is that they can help reduce “transaction costs” of finding and negotiating interactions with partners. 88 To begin with. like the Internet.] 88 Werbach.H. the presence of these transaction costs has been used to explain why “firms” are created. In this case. these units need not be limited to literal “firms”. another agent with better understanding of the greater dynamics at work likely will find a way to avoid such counter-productive behavior. The Centripetal Network. and the value that is created. A more recent example is the digital network Ethernet standard. at __. at __. The presence of externalities means that a great deal of what happens in a network. they can exponentially dampen the growth of the network as a whole. a network becomes more valuable to its users as it grows. Positive externalities accelerate this activity. and of social or market relationships. Network formation theory looks at networks as endogenous factors that both produce and are produced by a collection of interactions. the more useful the network – which eventually helped catalyze the explosion of consumer Internet use.

and. Emergence Economics uses the universal algorithm of evolution as the basis for much of its analysis. so that additional links are more likely to connect to nodes that are already well connected. at 1305. Law and the Science of Networks. is a consequence 93 92 Richard Whitt and Stephen Schultze May 2008 . these three characteristics provide important insights on how and why complex networks like economies behave the way they do.The New “Emergence Economics” of Innovation and Growth Page 17 Complex real world networks exhibit three other kinds of behavior worth noting here. at 227-241. Uncertainty. 96 Beinhocker. and the Brain. Decisions. 99 Hayek. or an adaptation. economics is a biological science. The Origin of Wealth. evolution becomes the ideal algorithm for creating value within that system. Small Worlds (1999). Evolution Traditional Economics has no explicit mechanisms for explaining endogenous novelty (within the system). This behavior explains the so-called “rich get richer effect. 97 Glimcher. and finally amplification of things that work. It is the study of how humans choose. 96 By contrast. 95 Taken together. at 155. 94 Strandburg et al.” 98 The economy is one such macroscopic system. 95 Ball. 100 Geerat Vermeij. In reality. and now has been identified as operating within economic systems as well. at 43-58. and irregular. 187-217.” where preferential attachment by new users is a real element of networks. an iterative process of experimentation by agents that includes first differentiation. at 41. or sudden growth in complexity. Taleb clarifies that “natural selection does not in fact do anything” – it is not a mechanism or causal agency. 92 This means that a relatively small number of “hops” is necessary to connect any two nodes in the network. 94 Finally. As such.” 99 The Three Stage Process Evolution is the universal algorithm for change in biological systems. Critical Mass. where one of several paths is imminently possible. chaotic motions constitutes the very foundation of macroscopic systems. self-organized criticality and critical points refer to a network’s state of precarious stability. That choice is inescapably a biological process. “the differential selection of a trait. at 336. In other words. “Ultimately. at __. or agents who learn and adapt. a small worlds network is relatively tightly connected. Mind of the Market. Hayek. Small world behavior states that the diameter of a network (the average number of links between any two nodes) tends to grow much more slowly than the number of nodes. Strandburg et al. specifically a complex adaptive system. Law and the Science of Networks. was one of the first to gain the insight that markets involve “the evolutionary formation of such highly complex self-maintaining order. where the laws of nature no longer deal with certitudes but possibilities.” 97 Ilya Prigogine explains that “we live in an evolutionary universe. 93 Scale-free dynamics states that some nodes are vastly more connected than others. another transitional figure in economics. Nexus (2002). 101 In economic systems. 100 Natural selection is simply a description of certain evolutionary processes initiated by agents. The Fatal Conceit: The Errors of Socialism (1988). 98 Ilya Prigogine. then selection. Nature: An Economic History. at 1308-09. Mark Buchanan. as we have seen. at 97. 101 Shermer. one Duncan Watts. The End of Certainty (1996).

William Wallace talks about technology creating disruptions to the economy that trigger the “FROCA” process (Frontier. at 7. As Daniel Dennett puts it. at __. Other analysts employ a somewhat different schema for the evolutionary process. Robert Axelrod and Michael Cohen. Black Swan.’” 106 Chance and accident also play a significant role in evolution. Next. Out of this astonishingly complex series of moves. Geerat Vermeij shows how processes common to all economic systems – competition. at 16. Nature: An Economic History (2004). William Wallace. 105 and technological breakthroughs similarly can come from unexpected directions. The first step of evolution is differentiation. 104 Vermeij. acting as ’The Great Tinkerer. acting as “selectors. at 285. makes eminent sense…. then. and select the most fit solutions. Adaptation). The Origin of Wealth. evolution finds “needles of good design in haystacks of possibility. and continual testing. is to tinker as much as possible. People use this of the functional effects it produces in relation to the survival and reproductive success of an organism in a given environment. others]. Richard Whitt and Stephen Schultze May 2008 . The Origin of Wealth. 107 Stephen Jay Gould. They explain that “harnessing complexity” refers to changing the structure of a complex system in order to increase some measure of performance. cooperation. Evolution discovers design. Release. and eventually converge on one or more “fitness functions. these agents sort through the variation to find what works and what does not. 103 Taleb. selection. Crash. authors Axelrod and Cohen divide up the evolutionary algorithm into Variation (the raw material of adaptation). Id. 108 “The reason free markets work is that they allow people to be lucky. Geerat J. Overexploited. thanks to aggressive trial and error. 288 (“Our own evolution is a joy and a wonder because such a curious chain of events would probably never happen again. and other agents respond accordingly. Vermeej.” 109 The environment is the design space of evolution. an ordered market system evolves. and lack clear ideal paths to a solution. Techno-Cultural Evolution (2006). Evolution allows for experimentation with a variety of solutions to problems. see Beinhocker. Interaction (between agents and populations of agents) and Selection (to promote adaptation). through trial and error. The modern order is largely a product of contingency. adaptation. 108 If we assume a particular design space in which agents experiment. Black Swan. 107 as well as simple luck. 103 So adaptation is the formation. 104 This same evolutionary formula lies at the heart of the market process. Harnessing Complexity. The strategy. but having occurred. Wonderful Life (1989). at 32-151. 105 [See Thomas Kuhn. Agents. means of innovation. and shared experience. the market – the “econosphere” or “marketspace” – is the design space of economics. 102 In other words. they can adapt successful designs by continuing to iterate on what proves useful. and “weeds in” what does. at __. Darwin’s Dangerous Idea (1996). They use the infrastructure of the network as the environment to evolve both their practices and the structure of the network itself. For example. at 213-216. Many problems we encounter are complex. at xxi. 109 Beinhocker. of hypotheses about the environment. Black Swan. not by giving rewards or ‘incentives’ for skills.”). the agents share and iterate on the most successful approaches. at 17.” Taleb. 102 For a more complete overview of the basics of evolution in a networked economy. natural selection both “weeds out” what fails to work.” Taleb. through observation and action. and feedback – in turn also govern evolution. and amplification. in which agents identify and propose various possible approaches. By an interesting reverse analysis. at 55. It is these functional effects that are ultimately responsible for the trans-generational continuities and changes in nature. throwing out the others and amplifying the effects. Finally.” pick and choose which products and services and other transactions they want to engage in. Scientific discovery has long exhibited this hit-or-miss characteristic.The New “Emergence Economics” of Innovation and Growth Page 18 can usefully think of the process of natural selection as comprised of three interrelated stages: differentiation. Nature. 106 Daniel Dennett.

with roughly the same number of new firms added back to the market. 112 Ormerod. and the blind risk takers are often the ones who win in the short term. The same undoubtedly is true for the market. Why Most Things Fail. 116 Ormerod. at 129-130.” 111 110 Richard Whitt and Stephen Schultze May 2008 . at 197.” Id. it helps to encourage a plethora of experimentation with minimal barriers to cross-pollination. there are several challenges to successfully employing it.” in which agents simply do things “as they have always been done. To try each one can prove to be impractically complex. “The fools. which is the distinguishing feature of corporate life. respectively.” 111 Ormerod explains that if we increase the fitness threshold at which agents become extinct. not success. Why Most Things Fail. there are more potential organisms than any ecosystem can support. Harnessing Complexity. at 230. for selection to occur. One problem is the sheer number of possible formulas. at 267. at 12. “We can readily think of this as corresponding to more and less competitive environments.” Taleb insists we should love free markets because “operators in them can be as incompetent as they wish. Taylor. which helps explain Ormerod’s “Iron Law of Failure. we are making it easier. 113 Ormerod. at 17-35. 114 As part of this process. Although the three-stage formulation of the evolutionary process sounds simple. 110 Fitness is the measure of the potential for value creation.” Ormerod’s “Iron Law of Failure” further explains that it is failure. In biology. weaker firms are replaced by firms with higher levels of fitness to the existing environment. while weaker selection pressure provides more variety but sacrifices some agent fitness. the system needs “superfecundity” – more designs than the environment can support – which thus creates competition. Ball agrees that many economic theories of the firm fail to acknowledge that “most firms are ephemeral. Others note that strong selection pressure amplifies the success of the “best” agent while diminishing overall variety in the system. 115 Taleb claims that the concept of evolutionary fitness is overstated. it can be difficult to discern whether an idea will prove fruitful until several iterations are made or until a complementary approach is developed. so do entities in the Shermer. To complicate further the process. and that evolution ultimately is a series of flukes. some bad. Mind of the Market. it is continuous innovation that takes place in parallel and works by building shared knowledge that feeds back into the system. or the partnerships required can introduce insurmountable transaction costs. The Moment of Complexity. Some companies survive simply because they were “the lucky ones. The larger lesson is that. Critical Mass. Why Most Things Fail. On average. In this case.” 112 Because the “solution space” of fitness is complex and often changing. at 181. 114 Ormerod.The New “Emergence Economics” of Innovation and Growth Page 19 design space to purchase. at 180. and if we reduce it. 113 Most firms fail. at 116-17. it is a contingent concept. Finally. 115 Traditional economic theory simply ignores this widespread existence of corporate failure. “Fitness is measured by the capacity to connect and interrelate effectively and creatively. successful evolution can only take place when experimenters overcome the social tendency of “path dependence. Why Most Things Fail.” Taleb. Black Swan. 116 As biological evolution relies on accident – mutation – as the basis for potential change. sell. some good. this is not a linear process. more than 10 percent of all economically active firms in the United States become extinct each year. Instead. we are making it more difficult for them to survive. at 8.” Ball. and barter the goods and services best suited to meet their unique needs and desires. premised on the challenges and opportunities of a particular environment. the Casanovas.

sometimes knocking down the big guy. These technologies have a modular. what Beinhocker refers to as “Physical Technologies” and “Social Technologies. investor risk is spread. Ormerod observes as one example the success of Microsoft’s Windows operating system (OS). “Randomness reshuffles society’s cards. Social Technologies. 122 Marco Iansiti and Ray Levien. Why Most Things Fail. at 44. of components plus architecture. and cultural – that we design and that. in so doing. they consist of specifications. on the other hand. and instill order in the physical realm. at 47. 122 The “keystone” is a pattern of behavior that improves the performance of an ecosystem and. enhance stability. fickle fortune.” Vermeij. in humans by engineering and market forces. transaction costs are reduced. in people. The Keystone Advantage (2004). technology is part of the body.” Paul Romer interview with Ronald Bailey. 121 The long-term power of these successful technologies lies in their capacity to be shared and reused. technology evolves. As with firms. at 221. and provide “platforms” that other firms can leverage to increase productivity. and other ways of transforming materials in order to serve a goal. or fail.. As we have seen. instructions. in organisms it does so largely through natural selection. Nature: An Economic History. biological ecosystems provide a powerful analogy and insights to the functioning of business networks.” rather than technology. see also Ball. at 222. which “was far more the result of a series of accidents than of a far-sighted. 119 In reality. The Company (2003). at 122. 119 John Micklethwait and Adrian Wooldridge. The modern day corporation is seen by some as an enabling technology in its own right. “there are many more dead ends out there than there are useful things to discover. Taleb finds luck to be the grand equalizer in a free market. 117 Richard Whitt and Stephen Schultze May 2008 . 117 Two Types of Technology Evolution operates on two broad types of technologies. Vermeij. and spur innovation. at xxi. 118 Beinhocker. Physical Technologies can enable Social Technologies. Black Swan. Others see the proper unit of selection in the market as occupations. Again. 121 As Romer has remarked.The New “Emergence Economics” of Innovation and Growth Page 20 economic environment often prosper. due to the exigencies of a particular environment – in other words. Id. Each type of technology constitutes an evolution of modular ideas that has the potential to be plugged into other scenarios.” 118 Physical Technologies are means or recipes for producing objects or ideas. December 2001. In both cases. technologies are subject to their own “law of failure” in the market. Reason Online. intellectual. Critical Mass. it is an extension – mechanical. 120 Vermeij observes that “in organisms. Under one approach. and instill order in the social realm.” Taleb. The company has flourished in modern markets because capital can be pooled for investment. at least figuratively speaking. at __. crucial to economic development. the two types of technologies evolve in relation to each other.” Quoted in Taylor. 120 A software company might find that one specific software development toolkit makes its work easier. at __. takes on a life of its own. The Moment of Complexity. companies work to connect a large and distributed network of companies to their customers. or “making a living. and vice-versa.” Ormerod. because almost everyone can benefit from it. The Origin of Wealth. and that small working groups of engineers further improves productivity. shareable practices. This might consist of a particular team structure or collaborative relationship. planned strategy. 123-124. are methods and designs for organizing people in service of a goal. Kurzweil has commented that “technology is the continuation of evolution by other means. and effective management structures are imposed on large organizations. and with concrete business designs (referred to in Beinhocker’s work as “Business Plans”) that incorporate one or both. Nature: An Economic History. at 25054. and it is far more egalitarian than even intelligence. building-block character.

there is only a never-ending race to create new sources of temporary advantage. Agents combine PTs and STs into a Business Plan. according to various strategies.” using effective collaboration to actively shape and regulate the workings of their business ecosystems. Fast Company. The notion of fitness implies that combined Physical Technologies (PTs) and Social Technologies (STs) are used by agents to navigate a market landscape of possible growth trajectories— like a map of mountains. companies such as Wal-Mart. The Origin of Wealth. Our more complex view of the process acknowledges that there are several possible “peaks” of high productivity that operate in different ways. at __. one might say that an equilibrium of sorts has been reached -. This leads to a “punctuated equilibrium” that is disrupted by “keystone” technologies.” Indeed. Iansiti and Levien. An ecosystem tends to beat a product (perhaps even something as innovative as the iPod) because its collective of competitors can explore and innovate and invest in many more ideas than any single company can muster.but only until it is upset by a different approach making use of a different combination. at 113-115. The Keystone Advantage. and see growth as a smooth trajectory of improved efficiency and increased output.The New “Emergence Economics” of Innovation and Growth Page 21 improves individual performance. Beinhocker. differentiation selection amplification BP PT ST Ultimately. 123 Just as “keystone species” in nature play central roles in their ecosystems. Richard Whitt and Stephen Schultze May 2008 . bamboo-based light bulb filament). an entirely different approach might offer a far better fit (such as tungsten-based light bulb filament).” The bottom line is “evolution is cleverer than you are. and that it is possible to arrive at those peaks via different “fitness functions. at __. no one company can hope to out-innovate the market. Microsoft. and Li and Fung deploy “keystone strategies. The Keystone Advantage. at __. Neoclassical economists seek a single optimal balance for a particular market. John Sviokla. As one approach reaches its limit or a peak. just when one peak has reached its maximum utility (say. 124 Losing One’s Balance All of this flies in the face of traditional economic notions of linear progression and natural equilibrium.” 126 123 124 125 126 Marco Iansiti and Ray Levien. 125 Beinhocker observes that “in evolutionary systems competitive advantage does not exist.

James Odell notes that. radial novelty.” reprinted in The Biology of Business (1999). decay. e.” 127 Emergence is not some mystical force that magically comes into being when agents collaborate. emergent properties take shape based on agent relationships and the conditions in the overall environment. “Emergence vs. say. but a network of neurons brings forth. John Holland. and consist of complex interactions that continuously reshape their internal relationships. “with the stock market. coherence. Brian Arthur. change. emitting pheromones to leave a trail to the food they find. Without any centralized control. Self-Organization in Biological Systems (2001). Analogies drawn from biology include the ant colony. system structures. 129 Tom De Wolf and Tom Holvret. dynamical. 128 Emergent properties are aspects of a system not otherwise exhibited by the component parts. “The End of Certainty in Economics. Paris. Thus.” 131 Much of the development of cities similarly derives from the bottom-up. Thinking in Complexity (4th ed. They are macro-level features of a system that arise from interactions among the system’s micro-level components.129 The brain is an example: the single neuron has no consciousness. The Origin of Wealth. Yet from this independent behavior. where micro interactions of agents lead to macro structures and patterns. Klaus Mainzer.” 133 The many independent actions of agents unify. Steven Johnson describes how early cities evolved around new farming mechanisms. but the end result is additive and interdependent.” The market “emerges from subjectivity and falls back into subjectivity. and New York. Patterns in the Sand (1998). These characteristics appear in many human systems. at 1. an organism-like product called the stock market emerges. Ants follow basic rules for seeking food. 131 James Odell. combining resources and expertise in the form of new technologies.. In other words. interacting parts. and mutually negate. Terry Bossomaier and David Green. 130 Beinhocker. John Holland. they evolve their ways of doing work and discover new techniques. new kinds of cities emerged: the factory towns of Manchester and Leeds. Out of this combined activity. thousands of agents act independently to buy and sell shares of particular stocks and bonds. 2003). bi-directional links between the macro. Emergence (2001). “Agents and Complex Systems” (2003). with urban emergence intensifying as fossil fuel technologies were developed. “more is different. at 116. Roger Lewin. 133 W.g. and the great metropolitan superorganisms of London. bringing forth novel behavior. 127 Richard Whitt and Stephen Schultze May 2008 . arise.” Steven Johnson. Characteristics of emergent systems include micro-macro effects. the smell of a rose. 130 Emergent systems are often described as being “organism-like” in the sense that they are constantly growing and adapting. Mark Buchanan. Brian Arthur notes that our subjective beliefs constitute the very DNA of the market. Hidden Order (1995). and following other ants’ pheromone trails to make their way to food and back to the colony. 128 Steven Johnson. Each agent follows localized rules and motivations. but they do not necessarily work toward one particular structure or equilibrium. Emergence (2001). when agents interact through networks. Ubiquity (2001). and so “coevolve. Complexity (1992). 132 Emergent systems have no single ideal structure. Id. at 113. Similarly. 132 Citizens solve local problems. Self-Organization” (2005).The New “Emergence Economics” of Innovation and Growth Page 22 Emergence of Networks and Growth Decades of research shows that the economic system is a complex adaptive system. decentralized control. “And with that new flow of energy. emergence stems from behavior of agents. at 6. mutually reinforce. and exogenous inputs. Emergence (1998). at 185.and micro-levels. at 3-5. For See. Scott Camazine et al. and robustness and flexibility. a spontaneous structure emerges. They exist in an ever-changing environment.

Ants are not known to innovate their basic rules for foraging or their colony structure. They do not build new tools for finding food. making the problem possibly unlearnable. Because there is in practice a finite number of possible tap positions. 134 But this is a simple case with a single agent.” Various emergent structures may be more or less fit for the environment and the task at hand.html. The system as a whole can take a leap forward when new innovations come out of this process and are replicated throughout the network.com/article/mg19726435. 2643. As we shall see. "Tweaking taps for a constantly warm shower". Emergent phenomena include economic patterns such as oscillations. The Origin of Wealth. 136 In place of Traditional Economics’ conventional wisdom of the market’s “invisible hand. an economist and a physicist sought to understand what happens in youth hostels where many showers share the scarce “market” for hot water. New Scientist. iss. a greater ability of agents to connect and explore new modes of production will facilitate the chance connections that a top-down designer might not foresee. emergent systems can be robust to change. 394. They found that: Tuning one's shower in some hotels may turn into a challenging coordination game with imperfect information. and towards more productive emergence.135 Fortunately we have developed some understanding of what types of conditions lead away from such negative feedback loops. the ant colony analogy falls short. and spillovers. Agents’ actions in turn affect the other agents. The temperature sensitivity increases with the number of agents. oscillating back and forth until finally settling on the right temperature. ideas (instructions) and things (materials). Richard Whitt and Stephen Schultze May 2008 . On the other hand. at 18. setting off both positive and negative feedback loops. people. emergent structures can fall apart when their basic conditions are altered in such a way that they work against the health of the system as a whole. and power laws. and they can be far better at evolving toward efficiency than top-down systems. Beinhocker uses the helpful metaphor of adjusting shower temperatures. Inductive tinkering by a single agent can leads to breakthroughs with widespread payoff. they can no longer cooperatively feed the colony. “Taking a shower in Youth Hostels: risks and delights of heterogeneity” http://arxiv. If corrupt stockbrokers are allowed to manipulate unethically the system. Economic growth comes primarily from new ideas. 136 In this sense. emergence can take several different forms.org/abs/0801. punctuated equilibrium. The line between emergence-fostering actions and emergence-stifling actions sometimes can be difficult to discern.1573v1 (10 Jan 2008). including ideas. An evolutionary approach to 134 135 Beinhocker.” Beinhocker emphasizes a notion of “fitness functions.100-tweaking-taps-for-a-constantly-warm-shower. If cities are saddled with stagnant industries. identical agents are unlikely to reach even approximately their favorite water temperature. Generally speaking. The best chance of finding good fitness functions lies in leaving the emergent system open to subsequent emergence. their growth falters and their economies can crumble. The delay between adjusting the knob and the change in temperature means that one is likely to over-shoot. the complex structure of price signals falls apart. available at: http://www. 20 February 2008. nor do they have diverse motivations and modes of compensation for their work. innovation.newscientist. economic growth. If the ants stop leaving pheromone trails. Better global information sharing and feedback between agents facilitates better local decisions.The New “Emergence Economics” of Innovation and Growth Page 23 example. In a recent study. at 101.

Those values include interconnectivity. openness. NETWORKED ECONOMY: THE INTERNET AS THE ULTIMATE EMERGENT PLATFORM ‘Tis true. logical protocols. The History of the Future at 277-280. and at most shape the fitness function of the marketplace. The structure of the Internet reflects the ethos that produced it. every network of agents operates under a certain set of rules. As an artifact of human ingenuity. For starters. nor will we ever know for sure in the future. the Internet is that ultimate emergent phenomenon. we should be content to preserve a wide space for evolutionary activity.138 Those who struggled to bring forth the Internet did so in the full knowledge that they were imbuing it with specific characteristics that reflected their personal and professional value systems. except for what we build into its architecture.” but how we design and use it reflects a distinctive social and psychological bias. Instead. 140 Depending on your viewpoint. wants. Ball. Generally. computing technologies are products of human design. or 138 137 Richard Whitt and Stephen Schultze May 2008 . The Net is what we make it. at 374. 140 Lawrence Lessig. operates. and the lack of a pervasive centralized authority. so have the staid assumptions of telecommunications technology been cast aside by the rise and success of the Internet. the Internet at any one moment is a technical architecture (physical assets. as opposed to network activities at the network’s “core. or a complex of providers (who owns. and successful. In order to understand better how the Internet can and should play a significant role in shaping our public policy framework. In the case of the present-day Internet. at __. In many ways. that built-in bias is reflected in the key elements of its architecture and infrastructure. and software). the ideal set of market rules. we need to understand what makes the Internet so unique. social.” At the same time. Critical Mass. it is important to understand that the “network of networks” we call the Internet is not some neutral. Code (2006). and fears. there’s magic in the web of it. 139 The Net is also oriented towards user activities at the so-called “edge” of the network. needs. 139 Naughton. and personal connectivity and interaction. at __ (“The culture of the producers shaped the medium”). value-free assemblage of routers and servers and fiber optics. flexibility. the Internet has no fixed. As Lawrence Lessig already has shown us. inherent nature. 137 or rather. While component parts may be used for a variety of purposes – think for example. The Internet Galaxy. See also Manuel Castelli.The New “Emergence Economics” of Innovation and Growth Page 24 economics admits that we do not know now. a platform for all forms of economic. of the assemblage of mechanical systems into either exploratory rocket ships or atomic weapons – the design and assembly and uses of those components inevitably reflects very human impulses. technology expresses deep-seated desires. Code is Law. technology may be viewed from a certain perspective as “neutral. As we have seen. and manages the technical components). – William Shakespeare Just as economic theory has been turned upside-down thanks to innovative new analytical and empirical work on many fronts.

at 2. convey. Critical choices about freedom of expression. secrecy. the “constitutive choices” about the modern media – the press. Because of this rich backdrop. 145 The Internet is no different. John Ziman ed. or transmit whole systems of immaterial ideas and behavioural patterns. 3. ownership of media. U. and intellectual property have made the modern media as much a political as a technological invention. The ecosystem of the Internet is but a part of the larger ecosystem of human life. politics created our media world. at ___. Government in particular can. and extending to today. the social. Susan Crawford helpfully has called it the “code/law background medium. privacy. and our environment. government officials and policymakers potentially have an enormous role in shaping the architecture and uses of the Internet. As we shall see.S. and legal environment within which the Internet operates. and broadcasting in the 20th Century. 144 In particular. one cannot divorce the Net from its social. or a substrate for economic and non-economic activity. The Creation of the Media. Richard Whitt and Stephen Schultze May 2008 . and political forces that affect any other part of the world. the U. cinema. Indeed. 143 Susan P. Some have referred to a technology’s “context of use. Biology and the Broadcast Flag (2004). economic. telecommunications. or a process of human interactions. Starting at least in the 17 Century. 8. with our human capacities. postal and telecommunications networks. Evolutionary models for technological change. economic. 142 John Ziman. our culture. the architecture of networks. “Material artefacts encode. and inevitably will. The Net is subject to the very same social. Introduction. The Creation of the Media (2004). (2000). in How Users Matter: The Co-Construction of Users and Technology (2005). Crawford. what kind of society it proves to be ultimately will be a political choice.” which describes the society and the web of other artifacts within which technologies are always embedded. government policymakers undertook supremely political objectives with important economic consequences. motion pictures. 144 Paul Starr. Economic. economic. 141 Nelly Oudshoorn and Trevor Pinch. embody. Now that the post-industrial. 145 Starr. 141 A technology is not severable from the culture in which it is embedded. real or virtual. in Technological Innovation as an Evolutionary Process. and broadcasting – took place in the context of larger political and economic transformations.” 142 Technology evolves with us. No single conceptual metaphor can hope to capture all of these elements at once.S. to some extent regulate the Internet. from the emergence of the first newspapers and postal systems to the rise of the mass press. In short. th a complex of users and their applications and content. at 606.” 143 but it actually involves a richer and more complex mix of elements. many tend to neglect some of the most critical elements: namely. and Legal Backdrop In describing the essential architectural and modular ingredients that make up the Internet. information society has come. and legal context.The New “Emergence Economics” of Innovation and Growth Page 25 THE NET’S ORIGINS Overlooked Components: The Social.

“Seeding Networks” (1996). surprisingly few bother to stop to ponder exactly what that truism may mean. a $10 billion commercial online services industry arose in the free market. 150 Ball. he argues. Critical Mass. and other developments that led directly to the contemporary phase of the information revolution.S. advanced telecommunications. at 13. “Internet Business Models. Ferguson. see Katie Hafner and Matthew Lyon. and particularly the World Wide Web.The New “Emergence Economics” of Innovation and Growth Page 26 An Unlikely Birth It has become a truism that the commercial Internet. and academia provided the structure and financial support for the nascent network.became a prolific incubator of many innovations.S. often-reviled institution of our collective aspirations: government. to be decentralized and competitive – proved instrumental in the emergence of computer sciences. National Research Council.” the Internet is a creature born not in the rich soil of the valleys around San Jose. 149 Paul Starr. Bollier. he explains that “virtually all the critical technologies in the Internet and Web revolution were developed between 1967 and 1993 by government research agencies and/or in universities.” 147 The “gift culture of the ARPANET” – the secret scientific research project funded by the U. Where Wizards Stay Up Late: The Origins of the Internet (1996). Nonetheless. Silent Theft. is a phenomenon built largely by end users operating at the periphery of the network. Government spent some $125 million building the Internet’s predecessor networks. but in window-less conference rooms at the Pentagon. distributed network. Instead. Janet Abbate. Inventing the Internet (1997). public investment in science and technology – “channeled through institutions that continued. 152 Larry Press. at 103.” 146 Indeed. military.151 It has been estimated that the U. at 18. 148 Bollier. “the real history of the Internet reaches back to that terribly traditional. After all. 148 As one noted historian has concluded. The comparison between the two. can afford to be that patient. 151 For more on this often-misunderstood history. In particular. and that the top-down mandate to use a particular root protocol allowed the Net to become a platform for bottom-up user choice and freedom. The Creation of the Media (2004). and libertarian culture. government. 152 Only government. it is highly ironic that centralized decisionmaking led to a decentralized Internet. at 101. Manuel Castells. at 17. The Internet’s Coming of Age (2001). The emergence of the home computer out of the “Homebrew Computer Club” an eclectic San 147 146 Richard Whitt and Stephen Schultze May 2008 . or what specific implications can be drawn for the future. that military desire to create a resilient and efficient system led to a highly interconnected.” 154 During than same time period. Certainly the Internet did not start out that way. at 377-79. with the aid of government-sponsored academia. 153 McKnight. High Stakes. 150 The Internet required three decades of subsidies to reach commercial market introduction. No Prisoners: A Winner’s Tale of Greed and Glory in the Internet Wars (1999). The Internet Galaxy (2001). 153 Networking pioneer and entrepreneur Charles Ferguson has observed that new technologies like the Internet typically come from neither the venture capital industry nor from the free market. however. Silent Theft. despite some of the more extreme rants of self-proclaimed “cyberlibertarians. it seems.” 149 Of course. cited in Reinventing the Bazaar. “the Internet was born at the unlikely intersection of big science. As a result. 154 Charles H. military research.” at 59. military -. at 158.

As Ferguson points out. IBM.The New “Emergence Economics” of Innovation and Growth Page 27 is extremely clear and extremely unflattering to private markets. 157 The U. As Richard Ogle puts it. The answer to that question well could dictate how one approaches the Internet as an economic phenomenon. Smart World. Some have noted that the Internet did not so much drive out its competitors as subsume them. HP. “The failure of the mainstream computer industry to anticipate the arrival of the personal computer – an enormous failure of insight and imagination – exemplifies once again the fact that being in thrall to the wrong idea-space can blind you to what seems obvious to others. 158 Beginning in the late 1960s with the original Computer Inquiries. CompuServe. the world was divided into basic communications services (regulated as common carriage). Richard Whitt and Stephen Schultze May 2008 . rather than IBM. proprietary computer networks arose – bulletin boards. Kevin Werbach has noted that “the victory of the interconnected outcomes over the centralized ones was always contingent on historical. and give it access to vital communications links. cost-based pricing.” 156 Some may even see the Internet as the “Black Swan” of the communications world. Lemley and McGowan. First. at 597-600. On the regulatory front. L. 156 Werbach. 160 and enhanced information services (left unregulated). research. at 78. 155 It is unclear whether the free market alone could or would have created such a thing as the Internet. see Whitt. and used to access online services. and general oversight by federal and state regulators. The Black Swan. consumer complaint processes. The Centripetal Network. at 13. The FCC’s Computer Inquiry safeguards governed consumer access to last-mile ramps – ordinary phone lines -. One question is whether this supposed Black Swan event is still endogenous to (arising from within) the market. 157 Taleb calls the Net “unplanned. But somehow these companies managed not to notice. No Prisoners. 158 For a more fulsome discussion of this regulatory history. in the 1980s and early 1990s.” Taleb. and well after. or whether the US Government’s extensive involvement in the Net’s birth and success makes it an exogenous happenstance. or Xerox. High Stakes. 55 FED COMM. J. Network Effects. 160 Common carriage meant a raft of legacy regulations. the Federal Communications Commission (FCC) explored ways to protect the nascent online environment from regulation. and cultural factors. and even Microsoft. Without the existence of a ready alternative like the Internet. private networks. a wholly unexpected event that came out of nowhere to bring a profound and widespread impact to the economy. at 109. The commercial industry’s technology and structure were inferior to that of the nonprofit Internet in every conceivable way.owned and controlled by the incumbent local exchange carriers (ILECs). at 135. 167 (2003). prodding. continuously evolving under the noses of companies like AT&T. at 18. provides an interesting parallel to the Net’s rise over proprietary alternatives.S. The Legacy of the Computer Inquiries. This regulatory framework essentially buttressed the Internet’s own open and end-to-end design principles. tariffing of service offerings. such “closed” networks may well have become the prevailing marketplace norm. and unappreciated upon its discovery. A Horizontal Leap Forward. wholly incompatible. regulatory.” Ogle. online service providers. which is the primary reason that they were so rapidly destroyed by the commercial Internet revolution. Enhanced services were defined as computer-based software applications and Francisco-based hobbyist group. policymakers made key decisions that dictated whether and how the Internet would develop into a mass-market phenomenon. Internet technology was around and available for more than twenty years. AOL. 159 Robert Cannon. Government role certainly was not limited to funding. including market entry and exit requirements. 159 The Computer Inquiry rules did several important things. did most VCs. 155 Ferguson. Neither. and eventual privatization. unpredicted. by the way. email services. economic.

Third. 162 The FCC also took other important steps. and in turn the implications for communications policy going forward. thus protecting them from the excessive per-minute telephony access charges normally applicable to carriers for long-distance telephone traffic that originates and terminates to the ILEC networks. in the Computer Inquiry era spanning roughly from 1980 to 2005. content. different. The Law of Code: Modularity The modular nature of the Internet describes the “what. an organic hodgepodge of disparate infrastructure melded together through common software protocols. why. where. at 23.702(a) (2007). 162 Kevin Werbach observes that the FCC’s decision “meant that data services. providers of enhanced services (known as ESPs) gained the right to access basic services. to the ILECs’ phone networks. protocol or similar aspects of the subscriber's transmitted information. The use of layering means that functional tasks are divided up and assigned to different softwarebased protocol layers. the “physical” layers of the network govern how electrical signals are carried over physical wiring. 165 Thus. following the breakup of AT&T in 1984.01 (2007). or restructured information. which could ride transparently on top of the voice telephone network. independently. Only Connect.The New “Emergence Economics” of Innovation and Growth Page 28 services that utilized the public switched telephone network (PSTN).” Werbach. 163 47 C. THE NET’S ARCHITECTURE The Internet today is a network of networks. The end result was a modular regulatory framework. ESPs and others had the concomitant right to attach lawful devices. using the ILECs’ commercial rates and terms. District Court Judge Harold Greene presided over a consent decree that barred the Bell Operating Companies from providing interLATA information services until 1991. the “transport” layers deal with how data 161 The FCC’s rules defined enhanced services as those services “offered over common carrier transmission facilities used in interstate communications. 163 In addition. were effectively outside of that network’s sphere of influence. the United States had an open and unregulated communications platform by design (the Internet) that was married by regulation to open end points (the local telephone network).” 47 CFR 64. 230 (2007). such as classifying ESPs as end users. Congress retained the FCC’s basic/enhanced split in the form of new definitions of “telecommunications services” and “information services.R 69.S. with targeted common carriage regulation of the lower infrastructure layers. 164 Finally. provide the subscriber additional.C.” or its overall structural architecture. which employ computer processing applications that act on the format. For example. and an “unregulation” regime applicable to the upper applications and content layers. 161 Second.” and added a statutory provision decreeing that the Internet should remain unfettered by regulation.F. or involve subscriber interaction with stored information.S. Understanding the what. Richard Whitt and Stephen Schultze May 2008 . in the Telecommunications Act of 1996. This end user right eventually became known as ISP open access. 164 [cite Modified Final Judgment] 165 47 U. such as computer modems. U. and how of this architecture goes a long ways towards understanding how the Net fits into the rough formula of emergence we discussed above. on a nondiscriminatory basis.

web browser. at 604. Whitt. with standardized interfaces between layers. The general proposition is that the core of the Internet (the network itself) tends to support the edge of the Internet (the end user applications. code is “a set of procedures. 166 Put simply. Applications or protocols at higher layers can be developed or modified with little or no impact on lower layers. stacked in Layers. A Horizontal Leap Forward. others] Richard Whitt and Stephen Schultze May 2008 . in this case its modular structure. at 604-5. The layers are what we build. using the raw materials of code as the building blocks: Engineers use multiple protocols that partition a communication problem into disparate sub-problems and organize the software into modules that handle the sub-problems. 167 Writ large.The New “Emergence Economics” of Innovation and Growth Page 29 packets are routed to their correct destinations. of each layer creates a useful level of abstraction as one moves through the layered stack. Reliance on a modular system of layers greatly facilitates the unimpeded delivery of packets from one point to another. Protocol (2004). A Horizontal Leap Forward. the Internet is comprised of Code. One can view Code. Alexander R. as long as the interfaces between the layers remain constant.” or the place for network functions to reside in the layered protocol stack.” 168 In contrast. Whitt. or other user application or service. as the bricks and mortar. actions. and practices. while lower layers can adopt new transmission and switching technologies without requiring changes to upper layers. at 602 (citation omitted). rather than having to rework the entire set of protocols.” which allows for ease of maintenance within the network.” where applications or protocols at higher layers can be developed or modified with no impact on lower layers. Whitt. 170 Smart Edges: End-to-End The end-to-end (e2e) design principle describes the “where. Functions are allocated to different protocol layers or levels. while the application layers control how those packets are used by an email program. [David Weinberger. the software and hardware components of the network. layers constitute the architectural features of the Internet. In other words. This can result in tremendous efficiencies when one seeks to upgrade an existing application (higher layer) that makes extensive use of underlying physical infrastructure (lower layer). Albert-Laszlo Barabasi. This modularity. at xii. A Horizontal Leap Forward. The flexibility offered through the layering approach allows products and services to evolve by accommodating changes made at the appropriate layer. layering allows changes to implementation of one layer without affecting others. or independence. A Horizontal Leap Forward. 169 Layers create a degree of “modularity. This simple and flexible system creates a network of modular “building blocks. at 601-609. 172 The more precise translation is that a class of functions generally can be more 166 167 168 169 170 171 172 See generally Whitt. Galloway.171 Some have interpreted this as dumb networks supporting smart applications. at 174. Linked (2003). content. and other activities). designed in particular ways to achieve particular ends in particular contexts.

open and stable at the network level while allowing users the freedom to develop innovative applications to run on top of it” 175 Thus. Silent Theft. leaving the power and David D. 8. 176 Rather than relying upon the creativity of a small group of innovators who might work for the companies that control the network. Weiser. at 4-5. Working Paper No. 183 With regard to the Internet. at 83-84. Lemley & Lawrence Lessig. in Creative Destruction: Business Survival Strategies in the Global Internet Economy. 177 Ashish Shah. where control over security. Thinking About Openness in the Telecommunications Policy Context. Internet Business Models: Creative Destruction As Usual. “most Internet businesses operate on the edge of the Internet. or permitted applications and content are handled in the core (in headends and central offices).edu/e2e/papers/Lemley_Lessig_e2epaper. 174 Susan P. Paul M. 207) (2000). Lee W.. general. so that what survives is truly the fittest and not merely the favored. 177 Professor Phil Weiser indicates that e2e network design “allows for diversity of the modes of physical access as well as a plethora of applications and content developed to work with the TCP/IP standard. The End of End-to-End: Preserving the Architecture of the Internet in the Broadband Era 14 (Stanford Law School. Silent Theft: The Private Plunder of our Public Wealth (2002). 183 Steven Shepard. Law and Information Platforms. at 47. at __. 182 David Bolier. As a result. 179 See.stanford.” Id. which is where the intelligence and processing power resides by design. and preferably should not. at 102. Someone to Watch Over Me (September 2005 draft). innovation and creativity become decentralized. 179 Thus. at the level of client applications that individuals set up and manipulate. Crawford. e. Telecommunications Convergence (2000). Silent Theft (2002). e2e also “sets the conditions necessary for a fair fight. and Raul L. be built into the lower levels of the system—the core of the network.” Wu. This differs from traditional telephony and cable networks. 2000). TPRC Paper (September 20. intelligence is migrating from the center of the network out toward the user’s access device.” 173 Instead. 176 Bollier. Rethinking the Design of the Internet: The End to End Arguments vs. communications – information – ideally operate on the edges. the power and functionality of the Internet is left in the hands of the end users. at 6.” 181 By allowing the “intelligence” of the network to be placed at the user level – in applications rather than in the network itself – “the Internet has enabled individual creativity to emerge and flourish in unprecedented ways.” 178 The resulting explosion of innovative applications on the Internet likely never would have happened but for the incorporation of the end-to-end design into the network. L. 1 (2002). TPRC Paper 1 (dated Aug. 174 E2e architecture “is designed to be fairly simple. protocols. 175 David Bollier. the end-to-end argument now has been transformed into a broader principle “to make the basic Internet protocols simple.The New “Emergence Economics” of Innovation and Growth Page 30 completely and correctly implemented by the applications at each end of a network communication. 2003).pdf (explaining role of “e2e” design in producing the “extraordinary innovation” of the Internet). Broadband Debate. 180 By precluding discrimination.g. on Telecomm. and Dale Hatfield. the e2e design enables anyone with a network connection to design and implement a better way to use that network. at 102. The end-to-end principle suggests that “specific application-level functions usually cannot. users remain the driving force in such a system. Vaaler. “E2e can help erase through competition the invariable mistakes that a centralized network planner will make. 181 Lee W. the Brave New World. Douglas Sicker. McKnight.” 182 Even in the converging world of telecommunications. at 21. at 99. & High Tech. Katz eds. (2001). McKnight. Mark A. 173 Richard Whitt and Stephen Schultze May 2008 . Clark & Marjory S. 178 Philip J. 180 As Lee McKnight has observed. available at http://cyberlaw. and open. away from the users at the edge. 1 J. Blumenthal.

while erecting certain barriers (such as firewalls and traffic shaping) that limit pure e2e functionality. Rev. The Centripetal Network. at 3. 186 Werbach. or the “how. Some of the flavor of this scheme can be found in Postel’s Law. creating incentives and opportunities for isolated systems to come together. proprietary islands of connectivity. and moving packets of data transparently across a network of networks: The defining characteristic of the Internet is not the absence of discrimination. but on the links. as well as the widespread distribution of the applications and content and services provided by the edge. By nature. Richard Whitt and Stephen Schultze May 2008 . at 7. so that anyone could use it to create new applications and new networks. 187 Werbach. Elements of the core network.” 185 Of course. He expresses concern that the Net increasingly is being pushed towards disaggregated. 188 Werbach has shown that interconnectivity creates both decentralizing and centralizing trends in the Internet economy. The engineers and entrepreneurs who laid the foundations for today’s commercial Internet developed a set of technical protocols. and both centripetal force (pulling networks and systems into the Internet commons) and centrifugal force (towards the creation of isolated gated communities).” allows for the separation of the networks from the services that ride on top of them. may still allow relatively unfettered user-to-user connectivity at the applications and content layers. the e2e principle can be prone to exaggeration. Openness. and in particular the transport functionality to connect together the myriad constituents of the edge. named after John Postel: “be conservative in what you do. This aspect of the Net goes to its “why. Sallet. IP is completely indifferent to both the underlying physical networks. Application-Centered Internet Analysis. at 9. but be liberal in what you accept from others.The New “Emergence Economics” of Innovation and Growth Page 31 functionality in the hands of the application. and for edges to become embedded in tightly interconnected networks. 85 Va. 188 Werbach. 187 Interconnecting then is the baseline goal embedded in the Internet’s architecture. Only Connect. and to the countless applications and 184 185 Timothy Wu.” 184 In the words of one commentator.” which is the overarching rationale of moving traffic from Point A to Point B. and contractual arrangements to link together diverse networks. One cannot have a modern data network without a core. but a relentless commitment to interconnection…. L. Werbach explains that “the actual development of the Internet focused not on the edges. The Centripetal Network. A Network of Networks: Interconnection Kevin Werbach recently has pointed out an often under-appreciated aspect of the Internet’s architecture: connectivity. And they need to be connected together.” Werbach. In order to have a fully functioning network. Agnostic Protocols: IP The design of the Internet Protocol (IP).” 186 The early Internet was designed with an emphasis on internetworking and interconnectivity. IP was designed to be an open standard. at 8. 1163 (1999). business norms. The Centripetal Network. at 1164-65. at 8. the edge and the core need each other. e2e has become “a policy preference of potentially profound meaning.

One irony is that a certain centrality of common standards and addressing schemes may well be necessary in order for the Net’s decentralized nature to fully emerge. IP does not care what underlying transport is used (such as fiber. and anyone can add to it.” This network topology and universal connectivity gives meaning to what some have labeled the Net’s three golden rules: nobody owns it. A Protocol for Packet Network Intercommunication. the Net drives convergence at the IP (middle) layer. everybody uses it. Brief History of the Future. or MP3 packets). Instant Messaging. the end result is that IP helps fashion a “virtuous hourglass” from disparate activities at the different network layers. talk about an “edge” versus “core” dichotomy should not obscure the messy reality that the Net includes crucial top-down core elements. using IP. the values imbued into the Net’s architecture were there from the beginning. in which the authors “present a protocol design and philosophy that supports the sharing of resources that exist in different packet switching networks. available at http://cs. yet connected. while the IETF makes critical engineering and standards decisions that are then implemented throughout the system. no central gatekeeper exerts unilateral control over activities on the Internet. music. copper. 5 (May 1974). or what content it is carrying (text. speech. Com-22. what application it is carrying (such as browsers. Network Neutrality. on Comms. Wikinomics. entrepreneurs need not worry about getting permission for their inventions to reach end users.pdf. at __. individuals are free to create new and innovative applications that they know will work on the network in predictable ways. Kahn.mills.192 THE END RESULT: A “VIRTUOUS FEEDBACK NETWORK” From these various architectural components of the Internet. platform for emergence. Indeed. as alluded to earlier. IEEE Trans. pictures. In essence. cable. Government to ensure its universal use on the networks).The New “Emergence Economics” of Innovation and Growth Page 32 devices using those networks. 195 In such an environment. at 273-280. one can see the resulting whole: that. e-mail. A Horizontal Leap Forward. A Horizontal Leap Forward. 195 Naughton.edu/180/reading/CK74. 193 Tapscott and Williams. No. generally speaking. ICANN runs the domain name system (DNS) so that there is common addressing scheme for users. see also 605-09 (general overview of IP). 192 See Whitt. or video). Broadband Discrimination. 194 This governing principle allows for vibrant user activity and creativity to occur at the network edges. 190 Thus. 194 Of course. Moreover. at 146.” 191 Based in large part on how Cerf and Kahn designed that protocol suite (plus more than a little help from the U. the Internet has become a distributed.S. 193 One might refer to this as a “virtuous feedback network. In other words. The interconnected nature of the network allows innovations to build upon each other in self-feeding “virtuous circles. In particular. Vint Cerf and Robert Kahn issued their seminal paper on the TCP/IP protocol suite. Cerf and Robert E. Timothy Wu. at 273. technology platforms such as the Internet are both open (accessible) and communal (adaptable). while at the same time facilitating divergence at the physical networks (lower) and applications/content (upper) layers. One could think of it like the 189 190 Whitt. at 629. 191 Vinton G. Richard Whitt and Stephen Schultze May 2008 . or radio waves). IP enables any and all user applications and content. 189 Thus.” From the above discussion of the Internet’s different yet related design components. the Internet Protocol has become the ubiquitous “bearer” protocol at the heart of the Internet. IP also was designed to follow the e2e principle. In 1974.

it by various accounts an object and a process. e2e. such as the invention of the Internet. The problem with this approach is that it gives economists an escape hatch and allows them to put the most difficult and often most interesting questions outside the bounds of economics. 198 196 Richard Lanham finds that the Net reflects “the comedy of the commons. 196 The Internet is more than that: it is a complex adaptive system. and stable source of electricity allows anyone to build and use myriad of different electric devices.” An initial point is to understand that the Internet as a platform for new ideas and innovations has been slighted in Traditional Economics as a mere “exogenous” influence. 198 Beinhocker. can be seen as an exogenous shock to the economic system…. and the Internet needs to adjust to the realities of security concerns like DoS attacks. The Economics of Attention. Linked. at 13. technologies like the Internet are endogenous elements. Growth long has been a concern for economists as they seek to understand what drives nations to build and maintain wealth. There are exceptions to every rule. whose architecture is much richer than the sum of its parts. In a highly networked economy. and the needs of latency-sensitive applications like streaming video. provide powerful fuel for economic growth and other important effects. at 55. as Emergence Economics has shown. Net-based human activities produce emergent and selforganizing phenomena. the Net’s core principles of modularity. In fact.The New “Emergence Economics” of Innovation and Growth Page 33 electric grid. As the networks and users that comprise it continue to change and evolve. AND “NET EFFECTS” The emergent phenomena of new ideas and innovation. and generate a diversity of what we call “Net effects. Beinhocker puts it succinctly: A change in technology. where individual gain leads to collective benefit. the benefits of innovation in physical and social technologies go beyond traditional economic growth.” as it is developing into an ever-richer community resource that “combines the power of a free market. For example. INNOVATION. channeled through generative networks of agents such as the Internet. Richard Whitt and Stephen Schultze May 2008 . The Origin of Wealth. with the cooperative ownership of the cultural conversation.” Lanham. if technological change is treated as a random. a place and an idea. which in turn fuel growth within the system. where the ready availability of an open. 197 As such. That is not to say these developments are unhealthy. standardized. but how. Will the inevitable changes come organically. 197 Barabassi. The question is not whether the Net will evolve. then one doesn’t need a fundamental theory of the interaction between technological change and changes in the economy. at 174. and interconnectivity are constantly being pushed and prodded by technology and market developments. or will they be imposed unilaterally? And by whom? GROWTH ECONOMY: THE EMERGENCE OF IDEAS. Metaphors seem to fall short when describing the Internet. outside force (like the weather).

which become inventions. and capital as the key elements of the market. come from. In brief. and why? Ideas have a diverse and unpredictable variety of sources and uses. while the atoms are limited. The “Net effects” we will discuss are a variety of pecuniary and non-pecuniary benefits that emerge when networked agents interact.The New “Emergence Economics” of Innovation and Growth Page 34 Benkler also notes that “our theories of growth and innovation assume that industrial models of innovation are dominant. Paul Romer. which in turn brings economic growth and various “Net effects.” 200 In the ordinary transformational cycle.” 201 But we can still try. They are the recipes for combining atoms into useful things. the ideas themselves essentially are unlimited. is the application of ideas. where input becomes output.” THE NATURE OF IDEAS AND INNOVATION So where do ideas. Countless things emerge from a networked. [Hayek cite] Richard Whitt and Stephen Schultze May 2008 . Ideas are the raw material for innovation. connoting an unintended minor consequence of a major economic activity. The Internet and the Project of Communications Law (2007). at 460. Ideas and innovation form an essential feedback cycle. The Wealth of Networks.” 199 Economics for too long has focused only on production. layered. ideas become concepts. and to other ideas. Crawford. Innovation. which are utilized for commercial or other purposes. becomes input again. and in turn create a host of positive economic and non-economic benefits. and cultural benefits outside the purview of standard market analysis. Economists often treat these effects as “externalities” – meaning that the forces cannot be accounted for purely in terms of traditional market transactions. labor. Yet we should be hesitant to impose such a dichotomy on this complex mesh of human activities. now has added knowledge and technology. political. and then innovation. and several social. 199 200 201 Benkler. at __. ideas can be wedded to things. As Susan Crawford puts it. Terms like “spillovers” suggest as much. Hayek claimed that “there is no simple understanding of what makes it necessary for people under certain conditions to believe certain things. they are potentially far more valuable. Not only do “Net effects” help fuel core growth. by contrast. the next two sections will delve into those emergent phenomena that have a direct bearing on the public policy landscape. The evolution of ideas has its own laws and depends very largely on developments that we cannot predict. peer-production (networks allow diversely motivated agents to collaborate). As we will see. It is tempting to think of these Net effects as consisting of “primary” benefits (economic growth) versus “secondary” benefits (miscellaneous “economic” and “non-economic” advances). they can have profound positive impacts on human life. end-to-end platform like the Internet. For purposes of this paper. This includes “spillovers” (non-affiliated entities benefit from others’ innovations). ideas and innovation emerge from the Net. To these. “ideas are not like goods. in ways that drive innovation. who helped found the New Growth school of economics. One pundit has called it invention plus implementation.

In Beinhocker’s language of Complexity Economics. It is difficult to know at any given time how much a particular idea will produce. economists had ignored this reality in their models of economic growth because it was deemed simply too complex. as its cascading effects have yet to be realized. Romer’s key observation was that ideas are non-rival. Since information is a non-rival good. For years. He ultimately concluded that there was no clear single best path. and the ideas that led to it. 205 Romer. ideas also are partially excludable. It also means there’s no limit to the amount of things we can discover. for example. but that the best approach is to foster a diversity of modes of production. interview with Joel Kurtzman. “which means that as we learn more. Romer found that knowledge builds on itself. 206 202 Kenneth J. Because they feed back into the economy in the form of recipes for production. and adaptation tends to spur growth and future innovation more readily than one that is not. ideas can be copied and shared without depriving anyone of their use. at 2. Whereas two people cannot both eat the same apple. In 1990. Technological progress. "The Economic Implications of Learning by Doing. 203 Id. these ideas would be shared for free.The New “Emergence Economics” of Innovation and Growth Page 35 Ideas One reason that economic growth defies simple explanation is that ideas beget future ideas in turn. 204 Paul Romer. meaning that through law and other constructs we can sometimes prevent this sharing from occurring. it takes only one person to invent an idea. Further. From the perspective of social welfare. ideas generate increasing returns.” 202 This simple observation articulates in the language of economics something that seems almost intuitive today. the marginal cost approaches zero as well. and because they can be adapted in new and unexpected ways. This “standing on the shoulders of giants” concept is the familiar motivation for much of our intellectual property law. Richard Whitt and Stephen Schultze May 2008 .” 205 Building upon Arrow’s description of the self-feeding nature of information. which seeks to balance incentives for one innovator to produce with the benefits to innovators down the road. it is also an input. an economy that provides fertile ground for idea creation. Still. ideas that make up Physical Technologies (PTs) or Social Technologies (STs) are particularly valuable in the process of evolution toward more productive systems. “Endogenous Technological Change” (1990). meaning that any number of persons can simultaneously make use of them. Kenneth Arrow noted in 1962 that “Information is not only the product of inventive activity. we get better and better at discovering new things. were considered “exogenous” – outside of the system. economist Paul Romer published a landmark paper entitled “Endogenous Technological Change. seeing ideas as inputs is critically important and fundamentally different from the results in simple linear economic models. 203 In any event.” 204 A second overlooked aspect of ideas is that they can be re-used infinitely. Nonzero (2000). Any one innovation is likely to build on another. and discussed ways in which a society might spur innovation despite this risky environment. However. Arrow described innovation as an inherently uncertain process. Nevertheless. as the cost of transmitting ideas approaches zero. which an entire group then can adapt. at 48. Arrow. reuse. he further examined the nature of ideas. amplifying total output." Review of Economic Studies 29: 155-73 (1962). 206 Robert Wright. However.

Crops also must be grown in a physical place. these costs approach zero. Richard Whitt and Stephen Schultze May 2008 . In a highly networked environment. A final important aspect of ideas is that they flourish in open systems. such as matching buyer and seller. paying sales taxes. something like crops of corn requires physical goods in order to grow (water. A third attribute of ideas is that they are easy and inexpensive to share. Because the marginal cost of copying an idea is zero. and the platforms we use to generate them are most efficient when they facilitate that flexibility. and once purchased cannot be shared without depriving the original owner of the good. Within a firm. they sometimes exist only ethereally on hard drives. and they are transmitted instantly and cheaply. Sharing of innovations has historically involved low transaction costs. Whereas industrial economies based on physical capital require large firms.The New “Emergence Economics” of Innovation and Growth Page 36 On the Internet. and Romer’s explanation of this phenomenon (to be explored further shortly) helps explain how some economies are able to grow much more rapidly than their linear counterparts. certain costs are introduced in each transaction. or Linux and the Nature of the Firm (2002). loosely related individuals operating outside of market dynamics develop critical components of the technological infrastructure that multiply production throughout a variety of sectors of the economy. The network should ideally enable access to markets and should connect people to ideas. it is this: innovation is a good thing. networked economies thrive when small businesses and entrepreneurs innovate in a maximally open environment. The Nature of the Firm (1937). Innovation If there is any one business lesson of the last decade that has acquired near-universal empirical support and expert agreement. 207 When using traditional price mechanisms. Coase’s bright line between individual and firm begins to blur in an innovation economy that takes full advantage of this structure. Online. ideas and the resulting innovation could not behave less like physical goods. they have often been modified to the great benefit of the overall market. Once an idea has been created. negotiating the contract. eliminating barriers to sharing it will lead to the most efficient use and further innovation. these costs can be dramatically reduced or eliminated entirely because activities can be coordinated without negotiating prices. soil). fertilizer. goods have been manufactured primarily for a purpose that was known by the producer. Throughout history. ideas exhibit very different characteristics: they are built on top of other ideas. sharing certain types of goods becomes much more easy and inexpensive than ever before. Economist Ronald Coase first explained in the late 1930s how modern firms are formed in order to reduce transaction costs that would otherwise make many types of production prohibitively inefficient. Coase's Penguin. Ideas are especially flexible in this way. By contrast. Specifically. nonrival ideas can spread effortlessly to the extent that they are non-excludable. Nevertheless. These diversely configured actors then introduce growth-fueling ideas for the next generation of producers. 208 In some cases. the most efficient price is zero. regardless of size. and other overhead related to exchanging the good. transported physically for sale. or incurring other costs. Yochai Benkler. The creation of new and 207 208 Coase. with the advent of the Internet. These intangible ideas increasingly drive the growth of the economy as a whole.

and Erik A. Gaynor. The Gifts of Athena (2002). Christensen. How Users Matter (2003). The 20th Century will be credited by many as the century of innovation. Innovation by Design. not the hierarchical. because it enables independent. 212 Gaynor. Frans Johannson. from the many. The Social Life of Information (2000). entrepreneurism. Scott D. from the autonomous. McKnight. collectively they create technical progress. Innovation by Design. which is finally implemented and commercialized. James M. at 1. Internet Business Models: Creative Destruction As Usual. which yields some type of invention. not the consumers or providers. The Gifts of Athena (2002). Nelly Oudshoorn and Trevor Pinch. 213 Lee W. not the isolated. from the flat. Anthony. Howard Rheingold. 215 Clayton M. Democratizing Innovation (2005). nonintegrated organizations to sell. novelty. Vaaler & Katz. one historian has demonstrated that the accelerating growth of useful knowledge has affected the world more profoundly than all other social and political changes taken together. 209 Indeed. and assemble components and subsystems. McKnight. Mastering the Dynamics of Innovation (1994). It has been defined in some quarters as invention plus implementation. not the few. & Raul Katz eds. How Breakthroughs Happen: The Surprising Truth About How Companies Innovate (2003). Reinventing the Bazaar (2002). not larger organizations. Thackara. innovation involves the process of taking a raw idea and developing it into a concept. The Medici Effect (2004). not the controlled. Christensen. Innovation by Design: What It Takes to Keep Your Company on the Cutting Edge (2002). from the decentralized. Seeing What’s Next (2004). not the concentrated. and pride. Clayton Christensen.” 213 Research shows conclusively that innovation tends to flow from the users. in CREATIVE DESTRUCTION: BUSINESS SURVIVAL STRATEGIES IN THE GLOBAL INTERNET ECONOMY (2001) at 39-41 (Lee W. yet in many ways still rather mysterious and elusive. 214 Clayton Christensen placed the concept of innovation squarely before the general public in his acclaimed trilogy. e. (Gus) Gaynor. Fast Second (2004). 209 Richard Whitt and Stephen Schultze May 2008 . Paul M. Richard Ogle. at 3. “innovation is the key factor enabling growth and change in capitalist economies. Utterback. 7. firms can prosper by Gerard H. In a modular world. The Future of Ideas (2002). from the upstarts. The Innovator’s Solution (2003). Bhaskar Chakravorti. Boru Douthwaite. No matter what you call it – creativity. Markides and Geroski. 211 Gaynor. In the Bubble (2005).. Innovation by Design (2002). Smart Mobs (2002). The Innovator’s Dilemma (1997). not the established. from the connected. processes. Eric von Hippel. at 297. Creative Destruction (2001). Seeing What’s Next (2004). 210 Joel Mokyr. and services are at the heart of any rational conception of economic growth and the fulfillment of human potential. Christensen found that modularity can have a profound impact on industry structure. Vaaler. More specifically. Andrew Hargadon. Mokyr. from individuals and small groups. ingenuity – the global economy feeds on the constant infusion of the products of innovation. and personal fulfillment. While individual innovations tend to be minor and incremental.212 However.The New “Emergence Economics” of Innovation and Growth Page 37 different objects. Innovation flows from those users motivated by profit. McKnight.). buy. eds. Enabling Innovation (2002). 210 Innovation is a muchadmired concept. and Roth. Roth.g. John McMillan. Smart World (2008). The Slow Pace of Fast Change (2003). 214 See. Christensen. John Seely Brown and Paul Duguid.. Larry Lessig. Scott Page. Design Rules (1999). innovation is the fashioned process or product. Clayton M. one chooses to define it. Anthony. 211 Where ideas are the raw makings of a recipe. Baldwin and Clark. at 3. 215 His writings focus on what he calls sustaining innovations – those allowing firms to provide better and more profitable products to their customers – as opposed to disruptive innovations – those offering initially poorer performance along the dimension that existing customers care about the most. The Difference (2007).

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outsourcing, or by supplying just one element. 216 Such firms can become, not just a mere link in a value “chain,” but an integral component of a complex and evolving value “net.” Christensen believes that the Internet’s decoupling of services and transport creates innovative new business models across customers and markets. In his words, “IP is the ultimate modular interface.” 217 Users operating at the so-called edge of the Internet are responsible for much of the key innovations that we enjoy today. The Internet in itself can be seen as a rare breakthrough innovation. 218 Lee McKnight posits that the Internet facilitates rapid development and diffusion of innovations by network users. The Internet Protocol acts as a “bearer service”—the general purpose platform technology linking technologies, software, services, customers, firms, and markets—so that the Internet is “an innovation engine that enables creation of a remarkable range of new products and services.” 219 Thus, “the Internet works its magic through rapid development, diffusion, and validation of innovations.” 220 Yochai Benkler describes how the Internet helps disrupt the traditional producer/consumer model by empowering the rise of end users who can play both roles as part of a continuing conversation and exchange of information. The “Great Shopping Mall” can be transformed into the “Great Agora,” featuring unmediated conversation of the many with the many. 221 “The Internet may be considered a disruptive innovation, but in essence it’s a new way of doing business – a new tool to accomplish the same result.” 222 As Crawford puts it, the central presumption of Internet innovation is that “everything not prohibited is permitted.” 223 Obviously, these observations amount to a generalization, one not true for all times, places, and people. Certainly, there are many innovative large, entrenched organizations – think Apple -and countless uncreative small ones. Nor can a market system survive only with innovationchurning entrepreneurs; after all, “big firms remain essential to refine and mass-produce the radical innovations that entrepreneurs have a greater propensity to develop or introduce.” 224 With regard to the Internet, innovations also are not limited to the content and applications layers, or to consumer-facing retail offerings; they happen deep in the logical and physical infrastructure of the network. Indeed, layering with IP at the center allows for significant network innovation below, as well as above, the IP layer. If nothing else, however, the concept of “innovation from the edge” provides a useful corrective to present-day presumptions about how markets actually work in a capitalist society, and highlights the importance of the edge of the Internet to the rest of us.

216 217

Christensen and Anthony, Disruption, at 99. Clayton Christensen and Scott D. Anthony, Disruption, Disintegration, and the Impact of New Telecommunications Technologies, in The Broadband Explosion (2005), 91, 104. 218 Gaynor, Innovation by Design, at 34. 219 McKnight, Internet Business Models, at 40 (citation omitted). 220 McKnight, Internet Business Models, at 41 (citation omitted) 221 Yochai Benkler, From Consumers to Users: Shifting the Deeper Structures of Regulation Toward Sustainable Commons and User Access, 52 FED. COMM. L.J. 561, 565 (2000). 222 Gaynor, Innovation by Design, at 31. Software platforms have been found to accelerate further the process of creative destruction, mainly because code is digital and malleable, and can be distributed over the Net to potentially billions of computing devices around the world. Evans, Hagiu, and Schmalensee, Invisible Engines (2006), at 338. 223 Crawford, Someone to Watch Over Me, at 36. 224 Baumol, Litan, and Schramm, Good Capitalism, Bad Capitalism, at 92.

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ECONOMIC GROWTH
So what is growth? To most economists it means a rising standard of living for a country’s citizens, measured according to the increase in GDP (gross domestic product) per capita. More generally, growth is how much value a nation is perceived to produce for each citizen. To Emergence Economics, growth arises from the discovery of new recipes, and the transformation of things from low to high-value configurations. In shorthand, it is turning ordinary sand into semiconductors. Paul Romer explains it this way: Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.225 Some see undesirable effects from growth, like the disruption of traditional culture, congestion, and damage to the environment. 226 However, “conventional thinking about economic growth fails to reflect the breadth of what growth, or its absence, means for a society.” 227 Most think only of a higher material standard of living, 228 but there are also significant social, political, and moral benefits not priced by the market. More often than not, economic growth “fosters greater opportunities, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy.” 229 However, economic progress needs to be broadly based if it is to foster real social and political progress; conversely, stagnation in living standards can lead to rising intolerance and incivility. 230 Growth’s byproduct of increased leisure also has had “the most liberating and enriching impact on the citizens of the West.” 231 Further, the enhancement of human freedom is both the main object and the primary means of economic development. 232

Paul Romer, “Economic Growth,” from The Concise Encyclopedia of Economics (2007). For a brief recitation, see Vermeij, Nature: An Economic History, at 295-302. 227 Benjamin Friedman, The Moral Consequences of Economic Growth (2005), at 4. 228 It is estimated that the purchasing power of the average American a century ago was one-tenth what it is today. Baumol, Litan, and Schramm, Good Capitalism, Bad Capitalism, at 1-2. 229 Friedman, Moral Consequences, at __. Moreover, “while economic growth makes a society more open, tolerant, and democratic, such societies are in turn better able to encourage enterprise and creativity, and hence to achieve ever greater economic prosperity.” Id. at 15. 230 Friedman, Moral Consequences, at 9. 231 Ormerod, The Death of Economics, at 23. 232 Amartya Sen, Development as Freedom (1999), at 53. “Individual capability depends in part on economic, social, and political arrangements, all of which have strong interlinkages. Development is crucially influenced by these interconnections…. Human beings are not merely the means of production, but as the end of the exercise.” Sen, Development as Freedom, at 296.
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Paul Romer sums it up that “better growth policy could have implications for the quality of life in all dimensions that are so large that they are hard to comprehend.” 233 So economic growth is a key component to a country’s well being. As Romer observes, “By far the most important characteristic of capitalist economies, which distinguishes them from all other previously and currently existing societies, is their slow but steady underlying rate of real economic growth.” 234 Still, economists long have sought to understand the mystery of how economic growth happens, and why some nations seem to make sudden jumps whereas others grow slowly. To be sure, the economy is a complex network of interactions; individual agents, acting according to diverse incentives, create growth as an emergent phenomenon. In the late 1980s, however, a new generation of economists began to understand growth in the context of technological progress that flows from the economy itself. New Growth Theory reminds us that growth comes from within the system itself, and is directly and profoundly affected by conscious decisions made by economic actors. As Susan Crawford puts it, “the economic growth-based story is straightforward: the greatest possible diversity of new ideas that will support our country in the future will come from the online world, because of its special affordances of interactivity, interconnectivity, and unpredictable evolution.” 235 If we wish to secure the Internet as an engine for growth going forward, however, we must first understand how to preserve this generative quality in the midst of complex network effects.

The Road to Romer
Adam Smith’s foundational 1776 work, The Wealth of Nations, theorized that as a firm developed specialized roles for workers, their skills would benefit the productivity of the firm and thus the market overall. The cost of goods they produced would be disciplined by the “invisible hand” of competitive pricing, and the market would converge on an optimally efficient equilibrium. 236 In the mid-20th century, Joseph Schumpeter modified this competitive hypothesis, pointing out that firms often formed temporary monopolies and were subsequently unseated by other firms in an act he called “creative destruction.” The critical advantage of these winning new entrants was their improved technology. Through this process, innovation occurred in a stair-step fashion rather than a continuous line. 237 Much of economic growth theory has focused on how best to encourage development of these technologies. Nobel Prize winning economist Robert Solow recently observed that Schumpeter:

Paul Romer, “Should the Government Subsidize Supply or Demand in the Market For Scientists and Engineers,” NBER Working Paper 7723, June 2000, at 47. 234 Ormerod, Why Most Things Fail, at 48. 235 Crawford, The Project of Communications Law, at 7. 236 Adam Smith, The Wealth of Nations (1776). Robert Reich calls Smith’s invisible hand “the most famous, or infamous, bodily metaphor in all of social sciences.” Cited in Taylor, Confidence Games, at 85. Mark Taylor claims that the image originated not with Smith, but John Calvin, who used it to describe God’s providence in the world. Smith then appropriated Calvin’s doctrine of providence to explain the machinations of the market. Taylor, Confidence Games, at 4, 85. Interestingly, the “invisible hand” also can be reinterpreted for modern ears, as unguided, emergent behavior of the market system. 237 Joseph Schumpeter, Capitalism, Socialism, and Democracy (3rd ed. 1950).

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Richard Whitt and Stephen Schultze May 2008 . the factors of production are land. By the end of the decade. technology fed into the system at a steady rate. Enter New Growth Theory In fact. In 1990.” a fixed part of the background." as the driving force and characteristic figure of the fits-and-starts evolution of the capitalist economy. Romer cited a clear distinction between rival goods (corporeal goods of absolute possession and limited sharing) of objects (atoms).” The New Republic (May 21. 98. organizational innovation in governance. and capital. 238 This distinction between technological and organizational innovation is a mirror of the Physical Technologies and Social Technologies that Eric Beinhocker has identified at the heart of complex economic growth. Romer. More importantly. And to Romer. because it treated this technological advance as something that happened exogenously. but the core question of how to encourage technology and the resulting growth remained unanswered. while technological innovation was in the long run the most important function of the entrepreneur. however. the maker of "new combinations. and there are ideas. younger generations of economists were hard at work on the “increasing returns” problem. In short.” Journal of Political Economy. Solow’s own work on growth theory in the 1950’s was highly influential.… I think that this is Schumpeter's main legacy to economics: the role of technological and organizational innovation in driving and shaping the growth trajectory of capitalist economies. In traditional economic theory. “Endogenous Technological Change. ideas. Even though Solow refers only to the first type of innovation explicitly as a “technology. ideas are what truly matter in generating economic growth. 239 So there are objects. Vol. and management was comparable in significance. he found that technological change and the growth of knowledge should be viewed as endogenous to the system. Schumpeter’s core claims about how technological change happens would lay somewhat dormant until the 1980s. despite the assumption that all the traditional inputs are increasing at a steady rate?” Exogenous factors are background conditions and givens that lay outside an economic model. When it came to explaining what generated this innovation. the Solow model was at a loss. technology had assumed a place of importance. and things. coming from outside the economy itself. they asked “why do some economies appear to grow very rapidly.The New “Emergence Economics” of Innovation and Growth Page 41 worked out his conception of the entrepreneur. Oct. He was explicit that. Knowledge and human nature were simply “givens. finance. 2007). In Solow’s growth model. He accepted Kenneth Arrow’s observation that information (and therefore technological progress) is not only a product of the economy but also an input back into it. labor. versus nonrival goods (non-corporeal goods that can be copied or shared and used by many people at the same time) of ideas (bits). at __.” he is saying the same thing – new ways of working with things and new ways of organizing people are the most important contributions to economic growth. “Heavy thinker. thenunheralded economist Paul Romer released a paper where he concluded that the new factors of production should be classified as people. 238 239 Solow. S71-D102. 1990. but ultimately failed to explain fully the stair-step pattern of technological progress that Shumpeter described. To be sure.

As Romer says. technological progress became a critical fourth component of economic growth models – both on the input and the output sides of the equation. Mechanisms generating new ideas are as important as access to abundant resources for economic growth. In new growth theory.” 247 Pointing to a different component of the “rough equation” for emergence. Economic Growth.” at 5.” at 13.” May 2007. Jones.I. “it is ideas. "Market Structure and the Growth Process. Jones.” 244 The economics of ideas is different from the economics of objects. The Mystery of Economic Growth (2004). Ideas. vol. in THE CONCISE ENCYCLOPEDIA OF ECONOMICS. Philippe Aghion & Peter Howitt. 246 The strongest growth. 246 C. Jones. Nature: An Economic History. 2007). pages 276-305. 245 C. feeds ideas back into the system. 240 At the same time. 245 There also is an increasing return to ideas. 242 Romer. In short. “Endogenous Growth. at 3. But he also altered these basic ideas in critical ways." Review of Economic Dynamics. “Endogenous Technological Change.” at __. but rather a global multiplier of productivity when this non-rival information resource was shared. 2004. “technological change … lies at the heart of economic growth. and the most “virtuous” complex network. ed. “Growth and Ideas. 243 See Elhanan Helpman. and to ideas and objects together. Elsevier for the Society for Economic Dynamics. Professor Charles Jones calls Romer’s “idea about ideas” “one of the most important contributions of economics during the last two decades of the twentieth century. “Growth and Ideas.” at __. that poor countries lack. Henderson. cannot be over-used. Romer explained. never diminishing the usefulness of the information itself. This notion of the increasing return of ideas is one of the central elements of Romer’s theory.The New “Emergence Economics” of Innovation and Growth Page 42 creating a positive feedback effect.I. 241 Optimal growth happens when the non-rivalry of information is balanced by the appropriate degree and type of excludability. ideas are nonrival. in situations where monopoly was neither complete nor highly difficult to overcome. Benkler has observed Romer. at 310. 243 It was called “new growth theory” to distinguish it from the “neoclassical” approach derived from Solow. Professor Jones points out one ground-breaking consequence: the accumulation of ideas is able to sustain growth in a way that the accumulation of capital cannot. growth happens when information fed back into the economy for ongoing re-use. not objects. For example. let alone exponential growth.I. 241 240 Richard Whitt and Stephen Schultze May 2008 . (David R.” 242 Romer’s work ignited a wave of research on endogenous growth – the explanation of how growth is fed by economic factors. 247 Paul Romer. Arrow’s feedback loop of technological knowledge became not simply learning-by-doing within firms. Schumpeter’s “creative destruction” could happen. 1(1) (January 1998). according to Romer. “Growth and Ideas. Helpman. The mystery of why some nations grow at faster rates than others now can be explained in terms of how effectively a particular nation’s economy optimized the creation of these new innovative recipes for growth. A world of objects does not lead to sustained growth. giving innovators incentive to undertake research and development in the first place. he noted Schumpeter’s point that firms can be spurred to innovate in order to gain or retain their market power. Vermeij. meaning that my use of an idea does not inherently reduce the “amount” of the idea available for you to use. Instead. 244 C.

Specifically. including its ability to recombine with other techniques. and Richard Schmalensee. at 112. The Elusive Quest for Growth.The New “Emergence Economics” of Innovation and Growth Page 43 that “what most poor and middle-income countries lack is not human creativity. GPTs play a role of “enabling technologies” by opening up new opportunities rather than offering complete. Mokyr explains that the semiconductor’s unusual properties as an innovation merit its status as a GPT. These complementarities magnify the effects of innovation in the GPT. the GPT literature makes clear that some technologies are especially important when it comes to non-rival reuse and follow-on innovation. meaning that “the productivity of R&D in a downstream sector increases as a consequence of innovation in the GPT technology. motors. one must also consider the extent to which a particular type of technology is a GPT. A GPT is a special type of technology that has broadranging enabling effects across many sectors of the economy. at 176 (differences in productivity growth explain over 90% of the differences across countries in per capita growth). still leaves details to be worked out. 251 Whereas Romer focused generally on the economy overall. Network Neutrality.253 The Internet in particular is a GPT. Joel Mokyr makes a persuasive case that the semiconductor is the greatest “macroinvention” since the emergence of electricity. at 424. 250 Bresnahan and Trajtenberg. at 468. with growth coming from specific applications that depend on ideas in the “general” layer of technology. 398. The Gifts of Athena (2002). final solutions. General purpose technologies ‘Engines of growth’? (1992). economists have expanded upon how electricity.g.” 248 Implications For Technological Change Romer’s work. Over the past decade.” 254 One lesson for policymakers is that when considering the appropriate balance between static incentives and dynamic openness. The foundational work on GPTs was first published by Timothy Bresnahan and Manuel Trajtenberg in 1992. 249 Timothy Bresnahan and Manuel Trajtenberg. personal computers. its complementarity with downstream innovations. Andrei Hagiu. Bresnahan commented: Benkler. 83 (1995). reprinted in Journal of Econometrics 65. 248 Richard Whitt and Stephen Schultze May 2008 . e. at 84. 253 Joel Mokyr. and software platforms all exhibit this characteristic. Looking back at the development of the IT industry more than ten years after his key GPT paper. at 84. David Evans. 252 Citing Trajtenberg’s work. The Wealth of Networks. How does trade between nations affect this dynamic? What is the appropriate balance between the incentives of exclusion and the increasing returns of openness? Are there modes of production in which the innovators share freely from the start? What types of technologies afford the greatest growth potential when they are not restricted by exclusion? One potential answer to the final question has been articulated in the ongoing research on “General Purpose Technologies” (GPTs).. but access to the basic tools of innovation. with “the potential to contribute disproportionately to economic growth” because it generates value “as inputs into a wide variety of productive activities engaged in by users. Invisible Engines (2006) (software platforms are a type of GPT). 251 Bresnahan and Trajtenberg. General purpose technologies. 249 They describe how this particular type of technology is most likely to generate increasing returns in line with Arrow and Romer. 254 Frischmann and van Schewick. See also Easterly. and its consequent pervasiveness in many applications. 250 The result is “innovational complementarities”. Id. while monumental. General purpose technologies. 252 See. and help propagate them throughout the economy.

“the market is not everything. for example. Not just consumer or users. is that users can easily do numerous things with them. Jonathan L. Economist Paul Romer on growth. or by charging much higher than marginal cost. the Internet had been built solely as a platform for sending email. most applications and business models never would have developed. at 70.The New “Emergence Economics” of Innovation and Growth Page 44 “But let us be clear that the lesson here for Schumpeterian Economics is far more general than the narrow and specific point about “open architecture. it paints an incomplete picture of human behavior. technological change. and an unlimited human future. applications.” 258 Traditional Economics defines the “market” in a fairly narrow way. December 2001. We value things that we will never purchase. people are more than a bundle of economic wants and needs. Zittrain.” 255 Keeping a GPT “general” is not always in the clear interest of firms that might seek to control them. and recognizes no values that are not expressed in actual market choice behavior. but rather by the inventors of complements. 258 Ronald Bailey.” ReasonOnline. Relatedly. at 261. 260 Stanovich. Jonathan Zittrain of the Oxford Internet Institute calls the Internet a "generative platform." 256 generative systems. The Robot’s Rebellion. Instead. the marketplace that held all important human interactions. December 2005. 257 Id. […] The most economically important use of a general purpose technology need not be determined by the inventors of the GPT. 257 THE EXTERNAL IS IN: “NET EFFECTS” Of course. we have meaning beyond our economic activity. the Net is about the less-tangible values. Richard Whitt and Stephen Schultze May 2008 . While these perceptions might be true in the short term. the point is about the role of a permissive. such as the Internet. as the result of trading capital and goods and services. That firm might envision greater profits or efficiency through making a tremendously useful resource more scarce." explaining that it has great “capacity to produce unanticipated change through The important feature of unfiltered contributions from broad and varied audiences. at __. However. Viewed from a broader perspective. 259 Under this view. forward-looking system of innovation in which inventions can come from multiple sources. or by customizing solely for a particular application. the market can be seen as far more than the sum of economic transactions. the greater are the growth-dampening effects of allowing it to become locked-down in the interest of a particular economic agent. and required retooling to do anything else. If. The more general purpose the technology. 259 Benkler. many of which may not have been envisioned by the designers. it can have devastating effects for growth of the economy overall. To many people. the market is more akin to The Great Agora of ancient Greece.260 To the extent Traditional Economics fails to account for these values and activities. the Internet is not just about reducing costs and increasing the supply of goods and services. The Future of the Internet and How to Stop It (2008). Creative Destruction in the PC Industry. 255 256 Bresnehan. Or as Romer puts it. “Post-Scarcity Prophet. whether for pecuniary gain or other intrinsic benefits. or for that one firm’s profits.” which seems like a technical concept from computing.

Economic literature on various types of spillovers reflects this ambiguous nature of externalities versus internalities. Invariably. some of the value “spills over. or both. Spillovers at 103. The private benefits or costs do not completely capture the social benefits or costs. Professors Frischmann and Lemley. Innovation Spillovers When new technologies are developed. if all spillovers were completely captured by the original innovator. they form a synergistic relationship with economic gain and growth. 265 Moreover. the economic conditions of everyone else would not improve. Frischmann and Lemley. Benjamin Friedman makes a similar point when he reminds us that economic growth creates a host of social. Spillovers at 105. at 102. and even rarer that the technology controller can find a way to “internalize” all of the value. and third party benefits. spillovers lift all boats. real spillovers often end up feeding back into the economy in the form of overall social welfare. so one market participant’s actions affects others without compensation being paid or received. Others have used the language of knowledge “leaks” which create a gap between social returns and individual (or firm) returns. and political goods that private markets do not trade or price.The New “Emergence Economics” of Innovation and Growth Page 45 The value of new ideas and innovation goes far beyond the sum of explicit capital exchange. among others. political. it is uncommon for innovations to be completely excludable. If the innovator has the ability to exclude others from using the technology. the public. Spillovers. wish to bring back into economic thinking the overall benefits of preserving spillovers. at 152-53. 263 Regardless of the classification scheme employed. he can charge for its use and thus capture its value. Spillovers here are defined as “uncompensated benefits that one person’s activity provides to another. Richard Whitt and Stephen Schultze May 2008 . at 400. 264 Frischmann and Lemley’s primary thesis is that the social value of innovations far exceeds the private value.” 262 Spillovers generally fall into two categories: unanticipated consumer surplus. Recognizing these very real “externalities” goes against the pervasive bias in Traditional Economics that only that which can be modeled or quantified as directly benefiting pecuniary interests is meaningful. they result in innovation spillovers. social production. 265 Economists sometimes try to distinguish between “real” spillovers that truly benefit parties outside the market. In essence. The Moral Consequences of Economic Growth. 263 Frischmann and Lemley. in addition to being important in their own right. The Elusive Quest for Growth. As will be outlined below. they can benefit the private innovator. spillovers are a type of externality from the perspective of those transactions. 261 These additional benefits are not just along for the ride. However. some economists speak of “network externalities” while others insist 261 262 Friedman. 264 Frischmann and Lemley. it is a simple fact that no innovator has captured all or even most of the social benefits of his or her invention. Pollution is a classic example of a negative externality. and “pecuniary” spillovers that are ultimately resolved and accounted for within a market and between private parties.” Thus. scientific research is a positive externality. Easterly. However. and even the rise of a new “social layer” of the Net. For example. and these spillovers in turn actually encourage greater innovation. while pecuniary spillovers have unforeseen long-term effects through nonrival reuse and follow-on innovation.

at 107. 274 This does not count innovations made available in commerce. and the “networked information economy. traditional economic incentives play a part. The wealth of networks is in their potential for widespread participation in making. Peer Production Yochai Benkler’s The Wealth of Networks lays out the case for social production. 274 von Hippel.” 271 Here we will only distinguish between two broader modes of human behavior intrinsic to his work. L. and agents seek traditional economic gains.” 266 Emergence Economics recognizes that the dynamic and social value of ideas makes them hard to account for purely in terms of internalized private transactions.” Social welfare equals the total income of a society.” 270 Benkler’s major work addresses some nine different “ideal-type information production strategies. 275 Similarly. a form of activity outside the traditional producer/consumer relationship. Democratizing Innovation. social. The Wealth of Networks. and economic relations to produce and self-supply an increasing array of micro-products to met their needs. the principles of 266 Stan Liebowitz and Stephen Margolis. 269 He also points out that “advanced economies rely on non-market organizations for information production much more than they do in other sectors.” and the possibility of reversing the control focus of the industrial information economy. From Wifi to Wikis and Open Source. at 29-32. at Chapters 5-10. which in turn increases social welfare. 127 (2006) (new forms of collaborative production “bind people together in productive. and experiencing information. at 2-3. at 47. 272 The resulting user innovation is important because they get precisely what they want. particularly when it comes to general purpose technologies. provides plentiful examples of this type of production In some of these modes of production. The economics of innovation paint a somewhat different picture. and community. “Network Externalities (Effects). Telecom and High Tech. 268 Benkler. Democratizing Innovation. 267 Benkler discusses the current and potential benefits from social production. 269 Benkler. at 462-63.” entry in The New Palgrave's Dictionary of Economics and Law. at 43. justice and human development. Benkler is interested in peer production. The Wealth of Networks. Traditional economic thinking dictates that the economy functions best when firms maximally internalize “real” spillovers. including autonomy.The New “Emergence Economics” of Innovation and Growth Page 46 on “network effects. The Wealth of Networks. construction of culture. At root. 275 von Hippel. 125. 5 J. using property rights and price signaling to allocate resources efficiently. The internet. of course. This has implications when trying to tally the sum total of beneficial value and activity generated by the Internet. (1998). Richard Whitt and Stephen Schultze May 2008 . The Wealth of Networks. 270 Benkler.”). 267 See also Mark Cooper. “Social welfare is likely to be higher in a world in which both users and manufacturers innovate than in a world in which only manufacturers innovate. 273 Social welfare is very probably increased by the presence of innovations freely revealed by users. at 11-12. sharing. 272 Benkler. The Wealth of Networks. 273 von Hippel. Information agents in highly connected networks with low transaction costs find new ways of working together and generating productivity. democratic participation in the political sphere. 268 He argues that social production serves important values. Democratizing Innovation. 271 Benkler.

“with peer production we will harness human skill. perspectives. Enabling Innovation (2002). and communication have made nonproprietary models more attractive and effective than was ever before possible. or the Net as a “content-delivery supply chain” (as seen by the broadband companies and the FCC). ingenuity. 277 276 Richard Whitt and Stephen Schultze May 2008 . Democratizing Innovation. Wikinomics (2006). at 8. including a variety of social-psychological rewards. 281 von Hippel.” 284 As part of that mission. and intelligence more efficiently and effectively than anything we have witnessed previously. predictive models. The Wealth of Networks. 279 Philip Weiser. 282 Benkler. and acting globally) lead to what its proponents call mass collaboration. The Web Runs on Love. 284 Id. at 125.147 (quoting Kevin Kelly. which evolve in complex and unpredictable ways. J. she touts “cognitive diversity.” Among other things. at A8). not all are purely economic. 2003). peering. in which agents operate under non-traditional incentives. Law and Information Platforms. the benefits of the traditional firm can apply to all individuals. but of course. 280 Volunteer contributors of code to widely used software products are often strongly motivated to innovate by the joy and learning they find in their work. storage. 283 Crawford.” 283 Interestingly. She urges “a changed perspective on the internet that takes as central the evolution of human connections and relationships online. The Wealth of Networks. The Project of Communications Law. Don Tapscott & Anthony Williams. rather than to make money.278 So incentives clearly matter to people. 277 Another group of these modes of production constitutes social production. 33 n. she includes Yochai Benkler and his social production vision in the “application-layer” centric camp.” she claims that a focus only on future applications-layer innovation from the Internet (as promulgated by Web companies). & HIGH TECH L. In “The Project of Communications Law. Not Greed. The “Social Layer” Susan Crawford takes perhaps the most expansive view of the non-pecuniary benefits of the Internet as an ideas and innovation platform.” 279 Research suggests that computer programmers working for money are likely to be less creative than those programming as a hobby in their own time. at 3. sharing. The claim is that. 280 Boru Douthwaite.” which ensures that “people with diverse experiences training. ON TELECOMM. There can be an inverse relationship between creativity and external reward. (Jan. but also new forms of persistent social interaction and dynamic human relationships. 1. and sharing. provides an “impoverished (or at least incomplete) perspective on communications.” 276 The “Long Tail” of economic abundance helps power this peer production. at 96. this allows new “patterns of social reciprocity. at 18. 1 J. which generate not only economic growth. Philip Weiser estimates that 70 percent of all Web pages “are built by individuals from their desire to share ideas. 278 Benkler. The Long Tail.The New “Emergence Economics” of Innovation and Growth Page 47 “Wikinomics” (being open.” 282 In a sufficiently open and ubiquitous network. Crawford views human online communities as a form of complex adaptive system. redistribution. 3. at 462. at 24. Benkler points out that people participate in social production for different reasons. 281 Benkler argues that “the basic technologies of information processing. at __. Chris Anderson. WALL ST. interpretations. Here.

wealth comes from specialized production moderated by perfect competition. the Internet experience reminds us that wealth emerges – as if from an “invisible hand” -. These ideas come from an evolutionary process and are fed back into the system. Most of all. and innumerable other intangible and tangible valuable and interesting things never to come into existence. 34. Along the way. On his analysis. devices. and access). 287 A NEW VISION OF WEALTH The American quest to understand prosperity was founded in Adam Smith’s discussion of the wealth of nations. 288 Beinhocker. at 58. collaborations. many ideas will fail. Social production is a potent model for innovation.when diverse agents connect and evolve.111.134. distribution.The New “Emergence Economics” of Innovation and Growth Page 48 and tools are online. economic development. 287 Crawford. The “social layer” enriches our existence in incalculable ways. but unforeseen breakthroughs will eclipse the losses of these failed experiments. or other forces.” which goes beyond seeing the “content” layer of the Internet as the “social layer. Spillovers are central. at 318. undue market power.” 286 The existence of such a social layer promotes diversity. applications. 285 Crawford at 27 n. Crawford sums it up nicely: Treating the internet like just another proprietary. The interconnected nature of our real and ethereal networks multiplies the potency of these technologies. Richard Whitt and Stephen Schultze May 2008 . growth. The “invisible hand” operating in the marketplace generates optimal outcomes. and offers new ways to work and cooperate. human creativity. “Wealth is knowledge. Someone to Watch Over Me. Page. the picture is more complex.” 285 She sees the Net as allowing “innovation in social relationships at a system level. Physical constraints no longer limit the process of production. Promoting wealth involves safeguarding the generative potential of these technologies. The Origin of Wealth. and its origin is evolution. whether they are at risk from government hubris. Scott E. and the decentralization of democracy. the democratization of information (in creation. but also more true to our contemporary reality. From the perspective of Emergence Economics. 286 Crawford at 33 n. competing network that is no different from the telephone network will cause as-yet-unborn technologies. Scott Page has substantiated a similar point about the benefits of diversity: individuals with vastly different backgrounds and life experiences can yield superior outcomes versus like-minded experts. The Difference (2007). and shareable ideas motivate core growth.” 288 Proscribing the exact nature of competition takes a back seat to understanding whether competitors are motivated to innovate.

This paper will not have accomplished its primary objective. COMMUNICATIONS POLICY Politics is the art of looking for trouble. hopefully in a manner that maximizes tangible and intangible benefits for all concerned. some argue that public policy is its own complex adaptive system.. breathing incarnation of all of us.” Id. We will suggest that this goal can be accomplished through market-driven policies that favor both an open. 290 We will address more specific communications policy topics in a forthcoming paper on adaptive policymaking. with a mere overview of the teachings of what we have come to call here Emergence Economics. and then misapplying the wrong remedies. and of the importance of emergent market phenomena such as ideas. where are we? Hopefully at this point the patient reader has come to a new appreciation for the complexities of agents and networks evolving together in adaptive markets. Steven Winter. however. 289 Barbara Cherry. Kevin Werbach. we will recommend some useful mechanisms for markets and states not just to coexist uneasily.the discovery and proliferation of more and better ideas. and innovations. Our aim here is not to argue for one exclusive approach to communications policy. Barbara Cherry and Johannes Bauer. The Centripetal Network (2007) (network science and the law).g.S. better broadband network facilities. carved out of equations and metaphors on a university lecture hall blackboard. Michael Katz and Howard Shelanski. FCLJ 59:2. 369 (2007). but rather two distinct and different ways of approaching matters of considerable economic importance to each of us. We will see that these two human constructs are not polar opposites. 291 Here we will use the overarching topic of communications law and policy to suggest a course of possible action for lawmakers and regulators to encourage – cautiously and deliberately -. and other economic and non-economic benefits. or grapple with specific thorny policy issues. Indeed. Strandburg urges legal scholars to “jump on the network bandwagon in greater numbers” because of “the important conceptual advances and analytical tools that network science provides. 291 See. Law and the Science of Networks (2006) (network science and the law). and bigger. the marketplace of goods and services and technologies and ideas does not exist in a pristine state. at 1296. co-evolving with the economic sector. Katherine Strandburg et al. Adaptive Regulation: Contours of a Policy Model for the Internet Economy (2004). 289 By enlisting the assistance of our new learnings. misdiagnosing it.. 290 Others have sought to bring the most recent insights of science to bear on the law. generative Internet platform. Mergers and Innovation (2006) (innovation theory and the law). of the Internet as an optimal platform for massive emergence. A Clearing in the Forest (2001) (proposing to unite cognitive science and the law). Richard Whitt and Stephen Schultze May 2008 . finding it. This final section will address how Emergence Economics can help us gain a new outlook on the appropriate roles of government and market in our daily affairs. Some have even given book-length treatment to the combination of law and science. The Telecommunications Economy and Regulation as Coevolving Complex Adaptive Systems: Implications for Federalism. The market is the living. but to reinforce each other’s strengths. and economic growth. And a considerable part of that “us” is The State. Legal Implications of Network Economic Effects (1998) (network effects and the law). To repeat what now should be obvious. ~ Groucho Marx So after several dozen pages of intermediate economics and a smattering of Internet history and technology. but rather to suggest ways to shift the terms and ground of the debate so that they more faithfully reflect economic realities. Lemley and McGowan.The New “Emergence Economics” of Innovation and Growth Page 49 POLITICAL ECONOMY: EMERGING IMPLICATIONS FOR U. e. We have something more constructive in mind.

March 5. criminal laws. Putting aside the heroic but misguided notion of the pure “free market. yet interconnected agent.” IEEE Internet Computing. at 425. an unwelcome outside influence that usually does far more harm than good. intellectual property laws – these and more provide the grounding for modern day economic activity. at 6. and legislation. business models evolve. Milton Friedman famously remarked that “The government solution to a problem is usually as bad as the problem. at 224. one of perfect efficiency and optimal outcomes. Richard Whitt and Stephen Schultze May 2008 . Critical Mass. Beinhocker has observed that “the economic evolutionary system is constructed out of a vast array of Social Technologies.” 296 Or as Philip Ball puts it. 1999. a form of human-made culture. The Mind of the Market. active. shaping the parameters of what companies and individuals can do.are a social construction. 298 Ball. 296 [Friedman citation] 297 Ball. The Biology of the Broadcast Flag (2004). property law. Contract law. supporting role in the market. Law and economics form the background context for each other.” 298 As the history of the Internet amply demonstrates. 300 Beinhocker. 295 Crawford. 299 From this perspective. and for the Net itself. even if from the sidelines. regulations. “free-market fundamentalists argue total noninterventionism is the best way to let the economy reach equilibrium. at 222. “Building the Perfect Beast. securities laws. Critical Mass. tort law. taxation. The Origin of Wealth. bully pulpits -. 299 Beinhocker. Obviously. 294 “Attention should be paid to the evolutionary ecosystem of the law as the background medium in which innovation occurs. government should be seen as a separate. lacks serious foundation. The Imagined World Made Real (2006). unhindered by facts and based largely on predetermined views about the role of governments. Each is a particular and extraordinary manifestation of evolutionarily-constrained human intelligence. 292 The misleading element of that metaphor is that the two are not separate and distinct spheres of influence.” 300 292 Rohit Khare. edicts.” 297 Emergence Economics comes at the question from a slightly different direction.uci. Like economies. and social factions grow and prosper. in Ball’s words.The New “Emergence Economics” of Innovation and Growth Page 50 THE OVERALL ROLE OF GOVERNMENT The Co-Evolution of Markets and Governments Some have called economics and law the 8th and 9th layers of the Internet. More critically. at 472. “it is time to recognize such claims for what they are: expressions of faith. operating within the market itself. worker and consumer protection laws. 294 Shermer. found at: http://www. 293 Law itself is a self-organized emergent property of thousands of informal mores and restrictions codified over time. we now know that the idea of an equilibrium market. political systems – laws. Seventh Heaven.” 295 Traditional Economics tends to view government as a corrupting exogenous force. many of which rely on government. 293 Henry Plotkin. principles. government can and does play a constant. Dreams of a Grand Unified Protocol. The Origin of Wealth. at __.edu/~rohit/IEEE-L7-applcore.” the economy simply could not survive without laws and regulations to prop it up.ics.html.

Beinhocker argues that the true market perspective on human behavior is neither Left (humans are inherently altruistic) nor Right (humans are inherently self-regarding). McMillan. at 422. 306 [cite Hayek] 307 Beinhocker. It is thought that gene-culture coevolution resulted in strong reciprocity in human beings. “The existence of a free market does not of course eliminate the need for government. Richard Whitt and Stephen Schultze May 2008 .).” Gintis. at 96. treats cooperation as the result of the interaction of selfish agents maximizing their long-term individual material interests. Beinhocker reminds us however. Bayl. we are actually a mix of both. 301 Of course. 303 Beinhocker. at 28. but “how to combine states and markets to create an effective evolutionary system. at 48. Moreover. 306 On the other hand. and thus improperly attempt to impose ill-fitting top-down solutions on the market. that firms too are hierarchies. But in turn. The Wealth of Nations. and Fehr. Moral Sentiments and Material Interests (2005). And of course. considers the willingness to subordinate selfinterest to the needs of the social group to be part of human nature. or private. but also to punish group members who behave selfishly. with its uniquely coercive authority. favored by sociologists and anthropologists.” 307 Surprisingly (at least to some). so that they are willing to engage in market transactions. 302 In addition to serving as “market rule-setter and enforcer. Regulation can be public. favored by economists and biologists. Id. Beinhocker explains. Hayek in particular pointed out that policymakers have knowledge coordination problems. The Wealth of Nations. Capitalism and Freedom (1962. or what behavioral economists call “strong reciprocity. Rather. 305 Further. 1980 ed. 302 This legal superstructure also serves the vital purpose of instilling trust and cooperation in strangers. The Wealth of Nations. Reinventing the Bazaar. 305 As one set of researchers puts it: “The behavioral sciences have traditionally offered two contrasting explanations of cooperation. they are conditional cooperators and altruistic punishers … which we call strong reciprocators. at 149. A key distinction between a capitalist and socialist economy is whether the ultimate arbiter of economic fitness is a market or a hierarchy.” the state also can provide goods and services that markets otherwise would undersupply. while useful and necessary. The law of the jungle decidedly is not the law of the free market. economics should inform the law. citing behavioral psychology. the Left also is correct that markets. Hayek endorses an active role for government – at least for some purposes: 301 Ormerod.The New “Emergence Economics” of Innovation and Growth Page 51 The state. with similar constraints about reaching and imposing flawed judgments. [We show that] a significant fraction of people fit neither of these stereotypes. On the contrary. 304 Beinhocker. at 427 (emphasis in original). are not optimally efficient. the question comes down to how much government is enough. Bowles.” Milton Friedman. 303 The easy assumption is that only the state can be a hierarchy. Another. Butterfly Economics. The question is not states versus markets. and the impact on other agents in the market can be much the same: constraints on freedom of choice and action.”304 This means we are predisposed to cooperate in social situations. is critically important in setting the rules of the game. One. economies cannot hold. Without such trust. So the workings of the economy rely on the government. In truth. at xi. No less a conservative authority than Milton Friedman observes. that role has far greater legitimacy in democratic societies. the Right is correct that the economy is too complex for central planning to work effectively. government is essential both as a forum for determining the ‘rule of the game’ and as an umpire to interpret and enforce the rules decided on. possess no perfect rationality. and utilize no good market feedback mechanism. at 15.

to provide the service which. we should take “a pragmatic approach to the market. Evolution of Economic Institutions: A Critical Reader (2007). Butterfly Economics. The Policymaker As Adaptive Economic Agent Easterly observes that “Government is not a single. at 85. and the inherent complexity and unpredictable movements of markets.. The Elusive Quest for Growth. and try to see the market with fresh eyes. due largely to our data gathering and processing shortcomings as agents. 87-88. their constituents. see also Taleb. if selected. not an argument for leaving things just as they are…. The liberal argument is in favor of making the best possible use of the forces of competition as a means of coordinating human efforts. all-knowing actor. are. however. Markets are not magic. They are agents in the economic system. both the elected and their constituents). Hodgson. Whether a policymaker acts or does not. Yet short-term prediction and control of the economy is inherently impossible. that the profit could never repay the expense to any individual or small number of individuals’ – these tasks provide. 308 Stated differently. ‘though they may be in the highest degree advantageous to a great society. 312 Ormerod. In no system that could be rationally defended would the state do nothing. policymakers have a unique power: the unilateral coercive authority that comes from the state. Government instead is a coalition of politicians representing different factions. Further. as just another agent operating within the economic system.” 309 If we no longer assume (as Traditional Economics does) that markets invariably converge on optimal efficiency. 311 Geoffrey Hodgson has written extensively about the evolution of political institutions as the stuff of social life. In fact. e. The human desire to predict and control runs deep. McMillan. both types of decisions have repercussions in the world. in the words of Adam Smith. however. the policymaker needs to overcome the typical analytical flaws of economic agents. The Road to Serfdom (2007 edition). indeed. Instead. at 180 (corporations and governments Richard Whitt and Stephen Schultze May 2008 . Reinventing the Bazaar. acts as a representative of government. of such a nature. whether an individual or an agency. at 75-90. So the policymaker invariably has an impact on the surrounding ecosystem of the market. there is reason to believe that government intervention may in some instances be beneficial.” 310 The policymaker. policymakers in modern democracies are answerable to political hierarchies (if elected. guided by the thinking of Emergence Economics. 310 Easterly. True. at 258. Policymakers can have a role in facilitating positive outcomes from this ecosystem. 311 As such. at 226. nor are they immoral. the policymaker possesses all of the cognitive constraints – and adaptive flexibility – of any other agent. to supplement it where it cannot be made effective. 312 The pitfalls 308 309 Hayek. To create conditions in which competition will be as effective as possible. but this role should be carved out carefully. The Black Swan.The New “Emergence Economics” of Innovation and Growth Page 52 It is important not to confuse opposition against [central] planning with a dogmatic laissez faire attitude. as well as their own complex adaptive systems. the question is not whether government necessarily is part of the market. a member of Congress or the Federal Communications Commission (FCC). against the quasi-religious view that it is always right or fundamentally evil…. but what that role should be. a wide and unquestioned field for state activity. See.g.

one rooted in Emergence Economics and its useful lessons. Social Technologies. Given policymakers’ all-too-apparent constraints. policymakers can “tinker” with the fitness landscape in a way that can bolster. and not hinder. then.315 The crucial question. and only provides some suggestions on ways to use Emergence Economics as a guiding instrument. U. Modern technologies have enabled us to build powerful shared platforms where all variants of person-to-person interaction are possible. But this does not mean that policymakers need remain on the sidelines.S. 184. Reinventing the Bazaar. Richard Whitt and Stephen Schultze May 2008 . then. not more -. at 149. the evolutionary process. 313 Much economic policy in the West has been and remains conducted on the basic of short-term forecasts of the economy. selecting. at 425. We need a new approach to our nation’s communications policy. widespread access to overestimate their ability to understand the subtle changes that constitute the world). in brief. Ideally. 313 John McMillan. 316 A COMMUNICATIONS POLICY APPROACH FOR INNOVATION AND GROWTH Our new economic and technology foundations necessarily implicate significant changes to our public policy thinking. As Mokyr has demonstrated. and the effective workings of the market in providing growth and other emergent benefits. Government laws and policies inevitably help shape part of the fitness environment within which companies compete and other agents make their choices.” 314 The vigor of markets comes from their decentralized nature. The Origin of Wealth. considerable caution is warranted. policymakers will not attempt to intervene in the day-to-day processes of the American marketplace. 316 Ormerod. “Politicians have sought to change the world. In general. Our species can only survive and flourish when our power of communication is fostered. at 96. human communications matter. government should do less.The New “Emergence Economics” of Innovation and Growth Page 53 of central planning are fundamentally problems of information.but less still can become more. is how those government actions affect that fitness environment. the complexity of the market itself. if done better. that government generally should leave to market mechanisms the workings of the evolutionary algorithm: agents differentiating. Why Communications Policy? So why focus on communications policy? Because first and foremost. Where important policy objectives must be achieved. then. 314 Ormerod. 315 Beinhocker. they empower people to find creative solutions to problems. We next will sketch out one approach to communications policy that should support greater levels of innovation and growth. policymakers and citizens. Butterfly Economics. But the point is to interpret it correctly. at 182. and amplifying specific Physical Technologies. Butterfly Economics. This means. and Business Plans. This treatment necessarily will be brief at this point. It is our contention that policymakers should have as their ultimate aim to foster an ecosystem in the communication sector that imparts greater economic and non-economic benefits for all agents – producers and consumers.

which facilitates the exchange of information on all levels. economic growth. Benkler. This turn has been made possible by new electronic and telematic technologies. and thus. through which information acts on information to form feedback loops that generate increasing complexity. for good or ill. have a profound impact. and other Net effects. at 106. at 338. and the sheer volume of accessible information. on the national economy. 320 As we have seen. In short.The New “Emergence Economics” of Innovation and Growth Page 54 such platforms greatly aids in the dispersion of useful knowledge. from individuals to governments. Richard Whitt and Stephen Schultze May 2008 . communications policy should be seen potentially as a major lever. For the most part. whether upward or downward. in general. The more information is exchanged. the more complexity. 317 Here are several different yet related ways that the concept has been described: Information and communications are core elements of autonomy and of public political discourse and decision making. 318 The complexity of human interactions has been fostered throughout the ages by communications technology. The information revolution occurs when information turns on itself and becomes self-reflexive. Mark Taylor. form the basic frame of reference through which we come to understand ourselves and others in the world…. there is a real need to correct decades of flawed thinking that underpins what passes for communications policy in this country. Culture and knowledge. and how we disseminate its implementations. The Moment of Complexity (2001). The basic components of human development also depend on how we produce information and innovation. at 464. Frontiers of Complexity (1995). broadly conceived. The Wealth of Networks. Computer networks are now transforming the nature and speed of such communications. The forces of Traditional Economics have found fertile ground in the communications field. at __. Government policies inevitably affecting the Net specifically. The Compelling Need To Rethink Our Priorities and Approaches In conjunction with the critical role of communications in economic and non-economic human endeavors. and 317 318 319 320 Mokyr. Peter Coveney and Roger Highfield. the more feedback processes occur. and the communications sector more generally. incumbent actors and industries have embraced Traditional Economics as a basis to argue for less regulation. The Gifts of Athena. They claim that the “free market” should have primacy. 319 The parameters of the current Information Age become clear when we understand the information revolution not only as a major sociocultural change but also as something like an orbital movement in which information revolves in such a way that it begins to act on itself. Communications is the basic unit of social existence. This is why the information revolution issues in the moment of complexity. the Internet so far has been an optimal platform for generating new ideas and innovation. for economic development and growth.

by defining their combined Internet access/broadband transmission service as a unitary information service. 3. One recent prominent example is the FCC’s 2005 decision deregulating the incumbent LECs.” and that media should “serve the public interest” by being “vibrant. market failure is endemic. For some of these players. and only of the broadband providers themselves – not the Internet. 321 For example. January 24. FCC 05-150 (released September 23. “Bundles of Joy: The Ubiquity and Efficiency of Bundles in New Technology Markets. free markets and individual sovereignty. successful innovations do tend to create market power. Indeed. Vol. Of course. In one order after another. Wireline Broadband Order. and thus outside tradition common carriage regulation such as the Computer Inquiry nondiscriminatory access safeguards. or any potential impact on the generative Internet itself. we think it goes too far to claim that to be the case in nearly all instances. 324 Federal Communications Commission. save citations to filings by broadband providers themselves. The Federal Communications Commission apparently can do little in this environment but follow the prevailing economic notions. 65-69. Stan Liebowitz and Stephen Margolis. Neither the “Right” nor the “Left” realize that in many cases they are operating from false premises. the agency parrots the thinking of the dominant players. 2005).freepress.” The FCC also adopts easy assumptions about the state of the broadband market. the order rarely utilizes the word “Internet. 322 As just one example. on both sides of an issue. individual liberty. Without a deeper and richer appreciation for economic realities.” The Richard Whitt and Stephen Schultze May 2008 . but certainly do not constitute the only source. it is impossible to discern whether and how any of these viewpoints should be given credence.” www.net/node/121. or that “a product achieves a degree of market power… wherever an innovation succeeds.” www.cato. without recourse to record evidence. 321 They also argue that a relatively modest version of the nation’s antitrust laws offer the only way to deal with competition/market power concerns. aside from discussing and dismissing concerns by Internet service providers. in that order is whether the costs of the Computer Inquiry regulations outweigh their benefits to the broadband providers. 322 Yet policy opponents of the incumbents tend to argue from the other extreme: that government regulation inevitably is the best response to deal with economic or social concerns. 325 Wireline Broadband Order at paras. Free Press states that the “broken” media system “isn’t natural. 326 For example. none of those concepts is entirely self-evident. No. and couches its policies in the vernacular of Traditional Economics. nowhere in the 86-page order does the order discuss broadband as a platform to the Internet. at least as articulated by the incumbent LECs and their allies. because they invariably create efficiency and do not foreclose competition. as we have discussed. at 46. The sole question the Commission saw fit to ask. 325 Tellingly. 2008. 323 For example. one side with approval. The analysis focuses tightly on a traditional analysis of costs and benefits.org/about/our mission. 2.” Perspectives from FSF Scholars. the Progress and Freedom Foundation (PFF) states that its mission is based on “a philosophy of limited government. 326 Notably the order is littered with phrases including words like “expect” and “anticipate” and “predict. or its users. and answer.” Id. diverse and independent. free markets and peace. though. The Cato Institute similarly cites “traditional America principles of limited government. 324 That Wireline Broadband Order exemplifies many of the flaws of relying on traditional economic thinking.” www. the other with approbation. While we acknowledge that bundling often can be pro-consumer and pro-competition. 43. a recent white paper argues that there are almost no forms of “bundling” and tie-in sales that raise anticompetitive concerns in technology markets. CC Docket 02-33.The New “Emergence Economics” of Innovation and Growth Page 55 “perfect competition” always produces the optimal results in the public interest.pff. both camps see the market as a coldly efficient machine.org/about. and governments are best equipped to rectify the market’s many failings. or at least well defined. As we explain above.323 In short.php.

and such new services.” 333 Nonetheless. Richard Whitt and Stephen Schultze May 2008 .”330 The counter-assertion that such line drawing resulted. the FCC claims that such arguments are premised only on “snapshot data” that are “both limited and static. broadband providers could “produce new or improved services in response to consumer demand. absent this compulsion. at para. at para. “this does not mean that we sacrifice competitive ISP choice for greater deployment of broadband facilities. are forthcoming.” as compared to “larger trends” in “the dynamic nature of the marketplace forces. 85. at para. 327 Id. and an assumption that a line could be drawn between the network functions and computer processing without impeding technological innovation. the conclusions are rendered with far more certainty. there is little evidence that such new investment. 331 [cite to BroadNet paper]. Absent the ISP access rules. The sad reality is that the independent ISP industry all but disappeared in the wake of the FCC’s decision. 331 The Commission further “expect[s]” that “facilities-based wireline carriers will have business reasons to continue making broadband Internet access transmission services available to ISPs without regard to the Computer Inquiry requirements. at para. but the FCC’s decision must have played at least some pernicious role. not in an arguable reduction of broadband network innovation.” Id. 328 Id. but an explosion of online innovation. 63. 70. and growing far more competitive with expected imminent entry by providers of fixed and mobile wireless services. 332 Id.The New “Emergence Economics” of Innovation and Growth Page 56 the FCC claims that the then-current broadband market is competitive. and broadband over powerline (BPL) services. 44. and finality. at para.” Id.” Id. 43. despite this lack of confidence. at para. 64. to the point where policymakers and industry players today refer to the integrated broadband/Internet access providers as “ISPs” – effectively acknowledging the reality that there are no others.” 334 The Commissioners felt obliged to add. Three years later.” 332 This expectation is reached despite the fact that “we cannot state unequivocally that incumbent LECs would not otherwise provide wholesale access. than this couched language otherwise would warrant. 327 To those who point to persistent market concentration between the cable companies and telephone companies. at paras. 50. at para. 329 [cite to Atkinson papers] The Commission also cites the incumbent LECs themselves for the self-serving proposition that “the additional costs of an access mandate diminish a carrier’s incentive and ability to invest in and deploy broadband infrastructure investment. Unfortunately. although it was plainly presented. at para. 50. 329 Amazingly. and little record evidence of current or expected market competition. 333 Id. 335 Id. satellite services. 330 Id. the FCC posits. 33.”335 But that is precisely the high-stakes calculus the agency utilizes here. the FCC concludes. “The Computer Inquiry rules themselves reflect a fairly static picture of network development. So the FCC – an independent regulatory body charged with holding industry expertise and operating in the public interest – renders decisions that display little appreciation for the agency at one point even admits that much of its analysis is based on “what our predictive judgment tells us about how [the broadband] market is likely to develop. such duopoly “snapshots” endure to this day. 71. leading to the Internet itself.”328 Of course. “the public interest is best served if we permit competitive marketplace conditions to guide the evolution of broadband Internet access service. the FCC casually dismisses one of its more singular achievements of the late 20th Century. at para. seems never to have been seriously contemplated. 79. Causality is always difficult to assign. 334 Id.

and whether independent ISPs were able to strike adequate wholesale deals to provide competing ISP services). whether governmental or corporate.and far less bounded -. [cite]. 338 In particular. 47 U.regulation of Internet-based services. As Ormerod observes. (5) rejected without a more searching analysis its own Computer Inquiry precedent drawing lines between Internet access and broadband networks. at 238. 340 Mokyr. we should look towards a different approach. rather than more flexible deregulatory tools such as forbearance. whereas its defenders will usually be a motley group of consumers and inventors and perhaps a few groups with a direct interest in economic growth.” 339 Mokyr finds that in centralized bureaucracies. infra.The New “Emergence Economics” of Innovation and Growth Page 57 teachings of Emergence Economics. 336 (6) acted through revamped statutory definitions. The FCC for one needs a framework and some conceptual tools that respect the economic world as actually lived. which would allow them to revisit the decision’s factual support after a certain period of time (including. the agency in particular: (1) relied on arguments and evidence largely from interested party agents. Moreover. whether broadband deployment and competition was developing as anticipated. In the case of the Wireline Broadband Order. “there is a built-in tendency for conservatism” and resisting innovation. Richard Whitt and Stephen Schultze May 2008 . 338 Ormerod. the Commission added to its failings by not allowing for any post-decision accountability. for example. 340 But there is more to it than that: The political economy of technological change thus predicts that it will be resisted by well-organized lobbies. the incumbent broadband providers.C. imperfect markets plus imperfect regulators equal a strong dose of caution.S. Technological creativity has proven to be politically vulnerable. by defining its way out of common carriage treatment of broadband networks under Title II. and content under Title I. This disturbing trend currently is playing itself out in the VoIP arena. As we transition from existing communications-related industries to a new world ruled by IPbased networks and applications. we have more to lose than to gain from government involvement in Internetbased markets. if certain computer processing in fact is so tightly wedded to underlying network functionality. 337 One of the many ironies of the FCC’s ostensibly deregulatory decision is that. (3) conversely failed to factor in the potential impact on the Internet as a generative platform.2. “the history of technological progress is the history of a endangered and much-resisted species. applications. government clearly can impede innovation.c. why would facilities-based Internet access not be defined as a telecommunications service? The agency then could deal separately with the regulatory implications through statutory tools such as forbearance. See Section IV. (2) kept a tight focus on the costs and benefits to a single set of agents. (4) recognized the broadband carriers’ supposed market incentives to invest in broadband networks. The struggle between the two parties will always take the form 336 For example.C. especially if such intervention is based on misunderstanding or even ignorance of market dynamics. 337 and (7) generally showed a decided lack of skepticism about its own predictive judgment. The Gifts of Athena. 339 Mokyr. 10 (2007). the agency instead has opened wide the door to equally pernicious -. Caution Ahead Generally speaking. at 223-34. as the Commission claims. The Gifts of Athena. without appreciating their more obvious market incentives not to strike commercially-viable deals with competing ISPs.

The New “Emergence Economics” of Innovation and Growth Page 58 of a non-market process. government policymakers need not approach the Internet as some precious museum piece. a voluntary group that collaboratively has defined the ever-evolving core protocols for decades. but the means of achieving those objectives are not so obvious. This framework can be understood as comprised of goals. the ultimate end goal of more good ideas. Mokyr. The tools are the practical mechanisms for achieving all of the above (computer programs that model different components of the rocket ship). or that public policy should be skewed relentlessly in that direction. In particular. Defining Our Mission In crafting a game plan for revamping U. largely informed by outdated if not fatally flawed economic theory. Richard Whitt and Stephen Schultze May 2008 . At the same time. a constantly changing process reflecting countless human choices. Similarly. The objectives are the intermediate term aims (building and testing a rocket ship to send a man to the moon). Instead. this balancing act must begin with an express presumption (but only that) that interconnected. may be obvious. lead to the triumph of the new technology. and flexible in devising and implementing policy measures. Beyond that. communications policy. and tools. 341 Putting aside this “purposeful self-interested resistance to new technology. Kevin Werbach has nicely summed up the challenge: to engage in a balancing act between the centripetal and centrifugal forces that shape the Net. because relying on market forces would.S. Consistent with our discussion in 341 342 Mokyr. The Gifts of Athena. first we will need to distinguish between different elements of a policy framework. but to date have preserved agents’ ability in the network to connect in a transparent fashion. That skepticism should be tempered by an understanding of agent limitations – users and firms alike -. In our view. shared standards that come out of this group reflect the diverse constituencies involved. The Net in many ways is a living thing. be definition. programs. layered networks provide optimal value. One remarkable example is the Internet Engineering Task Force (IETF). and promises so much more. we are offering a needed corrective to the static thinking of the recent past. 343 The Internet community has developed many successful mechanisms for evolving itself through iterative selfgovernance. It would be as much a mistake for a government official to tamper with the evolutionary algorithm so as to attempt to preserve the Net as it is.and an often-opaque marketplace. policymakers must be vigilant. 343 An important distinction to keep in mind is means versus end. The open. end-to-end. at 220. at 253-54. As we shall see. objectives. longest term things to be accomplished (landing a man on the moon). which should be forever fixed in the same configuration. or the follow-on objectives of an open Internet and more broadband. The Gifts of Athena. as it would have been to prevent its original creation and launch in the name of preserving the original commercial online companies. there is real value in retaining certain core elements against counter forces. The goals are the largest. the means are influenced by a healthy skepticism that legislators and regulators will get the formula right.” 342 by the same token we do not intend to imply that the Internet inevitably is the only source of innovation or growth. The programs are the specific. because the Net has brought such amazing benefits. short-term aims (devising elements of the engine that will power the rocket). open to new ideas.

Generative Internet First. trends. innovating. Even a “failed” idea for most agents in the market increasingly can manage to succeed with at least some of us in the niches. at 35-36. for economic growth and other beneficial Net effects. As we have seen. These two objectives essentially are the flip side of each other. at 35. The Long Tail. One overarching goal for policymakers. to numerous niches served by smaller players (who also have a chance to become big players). Romer calls for a “combinatorial explosion of ideas. An Open. Id. enabling good ideas to persist and replicate. and More. and other aspects of human communications. or some. is to churn through the various options – ideas.” 346 Of course. The “Long Tail” of the Internet suggests that fitness landscapes can be enabled for a much wider array of options than otherwise has been available previously to market agents. 345 Crawford interprets this as “allowing the end-to-end. through each and all of us. As we have seen.” 344 By driving an increased quantity of beneficial new ideas. and competing with each other. the raw material. but also a means of distributing and validating ideas. One Goal: More Good Ideas At this point. the Net is not just an e-commerce platform. content-neutral. Bigger Broadband. among other things. especially in the communications field. more potential innovation is enabled. or a few.The New “Emergence Economics” of Innovation and Growth Page 59 previous sections. while more modest yet flexible about the particular programs and tools used to accomplish them. memes – and select what is most fit. the chief aim is to be bold about the vision of goals and objectives. we should want to promote an “open” Internet. capable of adaptive power by myriad end users interacting. whether fit to all. helps extend economic growth beyond the “winner take all” mentality. ideas are the fodder. Richard Whitt and Stephen Schultze May 2008 . The Internet and the Project of Communications Law. We have two such objectives in mind uniquely geared for communications policy: An Open Net. each involving enhanced access to generative platforms. The market’s role. should be to see the market generate a greater number of useful ideas. Two Objectives: Open Net and More Broadband With the end goal in mind – More Good Ideas – we next need a more near-term set of objectives that will drive us to that end goal. what is good or bad is not for any of us to decide unilaterally for anyone else. An enormous gradation of ideas. She recently argued that a key organizing principle for communications law should be to support the emergence of diverse new ideas online. Susan Crawford appears to agree with this goal. we trust that the turn in the discussion will appear almost self-evident. can exist on the Net. 344 345 346 [cite to Romer] Crawford. layerindependent functions of the internet to flourish and allow groups and human attention to pick and choose from among the bad ideas presented online.

or otherwise conducive to serving the needs of innovation and entrepreneurism. 347 He observes that openness can vary based on different perspectives on the network – content and applications accessed by end users. and between. 8. where the content moves through the network (such as unique identifiers and routing databases). routers. 352 Conversely. then. 348 Id. the government should see as one of its objectives adopting policies that do not interfere with – if not enhance -. denied. the Bell System traditionally was completely open at the content layers. and of course the e2e principle. with no single decision-maker able to impose its will on others. and e2e are positive network characteristics that should be preserved and promoted. At bottom. at 6-7. receive. and logical interfaces. but almost completely closed at the network layers. and interact with any and all combinations of applications and content. policymakers must presume that such marketplace is not adequately open or competitive. the consumer will suffer.the consumer—and all but ignore the other ends. in an open and competitive marketplace. as we will see. at __. even if its own “right to access” remains untouched. or otherwise constrained in their ability to exercise fully their rights of choice in the marketplace. because any end user could communicate with any other end user. the physical interfaces. it is true that the Internet today is not an absolutely “neutral” place.the salient features of the Net. In such a situation. if broadband providers take certain actions that end up reducing the supply of such applications and content. 3 (March 2003). policymakers may need to adopt specific 347 Jonathan Sallet. This reverses the usual policy formula (if a market is competitive. 350 Kevin Werbach. The whole point of the Net is that it is a robust freewheeling marketplace of ideas and commerce and interaction. we should want all ends of the network to be open. Given the critical importance of innovation and competition from the edge of the Internet. player actions are OK. 349 Notably the FCC’s “Internet Freedom” principles only focus on one end of the broadband connection -. through any and all interoperable devices. we should want users to operate freely. Vol. Breaking the Ice. interconnectivity. and not be required to secure before-the-fact approval for their lawful activities. for example. Just how open must an open network be for an open network to be labeled “open”?. Kevin Werbach also reminds us to think about openness at. No. 351 In a sense. 352 [citation] Richard Whitt and Stephen Schultze May 2008 . 351 The “traditional” formulation of network neutrality is that all users of the Internet should expect. network connectivity. and (b) are struck in a relatively competitive environment. in that the various servers. This approach overlooks the fact that. if not competitive. because there was no right to attach terminal equipment or interconnect competing networks. versus the network and ISP connectivity utilized by competing network providers. IP as an agnostic “bearer” protocol. We have less concern about the “neutral” state of the Net’s architecture because commercial arrangements between Net players (a) do not otherwise deliberately block or degrade other parties’ access to the Net. not OK). The combination of layering.The New “Emergence Economics” of Innovation and Growth Page 60 So how do we define openness? Jonathan Sallet has talked about the various ways of thinking about open networks. openness. In particular. have allowed end users to utilize the Net as a ubiquitous platform for their activities. and focuses on concrete actions in the market. should users be limited. 350 Given the enormous positive values springing from the Internet. and content delivery networks that comprise it can and do distinguish routinely between various forms of traffic. where the network meets content (such as technical standards for modems). 349 The Internet itself provides important clues about the degrees of openness that serve our larger goal of more good ideas. 348 As Sallet notes. The mantra of “innovation without permission” also helps clarify what we mean here. First Monday. to retain the ability freely to utilize connectivity to send.

355 Broadband’s externalities present a unique challenge to any objective of fostering more. and more competition. Spillovers. the Net has its share of unseemly conduct and criminality. bigger pipes. broadband is an innovation platform of its own. Numerous parties have called on the United States to adopt a national framework for broadband deployment. For example. and R&D for broadband technology. and (4) regional externalities (particularly impacts on rural communities). 357 Frischmann. broadband for everyone (developing digital literacy and broadband applications). What we are touting here is an environment. rather than as the desired outcome. Further. and a source of network-based innovations. both direct and indirect. going forward we should remain “open” to other ways of thinking about openness. “because effects” (money made because of something) are greater than “with effects” (money made from selling that something). Robert Atkinson separately has discussed the various components of his own proposed national broadband policy. 358 Robert Atkinson. 357 Robert Atkinson sees four kinds of positive externalities (what we have called innovation spillovers) attributable to broadband networks: (1) network externalities (network effects). As we have seen. at 54-62. Framing a National Broadband Policy. More and Bigger Broadband Another major national policy objective to support More Good Ideas should be more and bigger broadband networks. which he categorizes as broadband everywhere (providing separate incentives for rural deployment). We are really talking about the end points serving the consumer.” 354 John Windhausen.” January 2008. at __. at __. 353 To argue for an open Net as an objective is not to suggest any particular approach to making it happen. at __. meaning something more like “broadband neutrality” or “on-ramps neutrality” -. As a faithful reflection of humanity. Spillovers. In addition to enabling richer use of the Internet. 354 The supporting action plan includes tax incentives. a new universal broadband fund. 358 Broadband is unique in that “the social returns of broadband investment exceed the private returns to companies and consumers…. 355 Atkinson. EDUCAUSE recently issued a white paper seeking policies that will give every consumer access to a minimum of 100 Mbps by 2012. where the relative lack of competition renders the threat of unilateral gatekeeping more significant and tangible. to preserve the workings of the Internet ecosystem. infrastructure typically generates large social benefits not captured by the infrastructure provider.phrases which at this point we doubt will catch on in the “marketplace of ideas. Richard Whitt and Stephen Schultze May 2008 . 356 For broadband networks. Thus. as if the Net itself is supposed to be completely neutral. Framing A National Broadband Policy. faster speeds. “A Blueprint for Big Broadband. (2) prosumer investments (consumers become both users and producers).” which inaptly is referred to by too many proponents and opponents alike as a prescriptive approach to regulation. it is a misnomer to refer to “Net” neutrality. EDUCAUSE. Still. (3) competitiveness externalities (international leadership in technology). A related point comes from the debates over “network neutrality. To be open to the best does not imply to be open to all.The New “Emergence Economics” of Innovation and Growth Page 61 programs based on “tinkering” with the adaptive ecology. municipal networks. not a prescription. COMMLAW CONSPECTUS 16: 147 (2007). it is not all good out there on the Net. There is considerable reason to believe that there are significant externalities from 353 The current debate over network neutrality is focused only on last-mile broadband connectivity. 356 Frischmann.

S. it may be appropriate for the government to get involved. “The profit/loss statements of individual firms fail to take into account the positive externalities from a widely deployed broadband network. Joseph Farrell & Philip J. In Atkinson’s words. October 2007. at i. and feedback. We will only note that Joseph Farrell and Philip Weiser describe how broadband providers might tend to internalize “complementary” externalities (“ICE”). Even where these exceptions do not apply. connectivity. 363 It is one thing to take away impediments that prevent new broadband platforms from emerging in the fitness environment. communications policy. Framing A National Broadband Policy. save to get out of the way. the nature of innovation spillovers would argue that overall social welfare in this domain rarely is served by private firm internalization alone.” at 14. however. and that if left to themselves. as Barbara van Schewick has explained. 363 Atkinson warns appropriately that the role of government is not proactively to subsidize the deployment of additional broadband networks. Fall 2003. it would be useful to equip ourselves with conceptual tools to make the task somewhat easier.com/abstract=812991. and higher quality education. at 61-64 (it is unavoidable that scientists use Richard Whitt and Stephen Schultze May 2008 . For many this incentives system is the root cause of the “network neutrality” policy debates. 364 Taleb. At the same time. “The Role of Competition in a National Broadband Policy. TELECOMM. such involvement should be limited to “tinkering. 362 Atkinson and Weiser. at 135-139. and our adaptive brains cannot easily handle certain ways of thinking.” 359 Broadband providers seek to capture (internalize) those externalities – meaning they want to gain the “because effects” revenues and profits. Talk of algorithms and environments. “A Blueprint for Big Broadband. J. and Open Access Policies: Towards A Convergence of Antitrust And Regulation In The Internet Age. 362 On the competition front. and stories are far more potent than ideas. AND HIGH TECH L 5 (2007). See also Smart World. As we will argue. at xxviii. 1.” through a mix of additional inputs. 17 HARVARD J. When it comes to ways of understanding. at 7. they identify a variety of exceptions to this tendency. The Black Swan. “enable. “Third Way. the larger point is that these positive externalities do not appear to register in the incentives structure of the broadband providers. market forces alone will lead to less investment in broadband than is societally optimal. Available at SSRN: http://ssrn. frames. and argue that such private internalization mitigates competitive and consumer harm.” Id. It is quite another thing to seek to compel private parties to uptake a specific technology where the economics normally would not support such a result. it is not clear that the government has a major role. so that investment generates total social value in excess of individual firm value.” 361 Where these positive externalities exist. lower-cost health care. Towards an Economic Framework for Network Neutrality Regulation. processes and platforms. largely because it is not clear that otherwise it makes sense economically for a “third pipe” competitor to enter the market. One Unifying Conceptual Framework: Modularity As we prepare to examine some examples of helpful tinkering (as well as unhelpful tampering) in U. makes it somewhat easier to conceptualize what is actually taking place when the micro-level activity of millions of human beings emerges into the macro-level activity of “the market.” An EDUCAUSE White Paper (January 2008). 360 However. & TECH. Vertical Integration.” ITIC. L. The metaphoric language we have been employing is one such example. which we will not address here. Frischmann and Lemley. Barbara van Schewick. 361 John Windhausen.” We humans are literal creatures. Modularity. Rob Atkinson. 364 “We 359 360 Robert Atkinson.The New “Emergence Economics” of Innovation and Growth Page 62 high-speed broadband. Spillovers. including economic growth. metaphors. at __. but don’t promote. broadband providers retain incentives to disadvantage non-affiliated application innovators despite the ICE principles. Weiser. Furthermore.

physical and logical. not activism. [cite]. are what is in the end user’s control and visibility. at 132. at 621-24. while the lower two layers. While there are several different ways to think about the modular components of the Internet. Philosophy in the Flesh (1999). applications and content. Breaking the Ice. a visual map. are what is in the network’s control and visibility. as discussed in Section II above. at 627. 366 George Lakoff and Mark Johnson. Another overarching conceptual tool for policymakers (and itself a metaphoric construct) is the so-called “layered” approach to communications policy. has expanded the model to include the interfaces between the layers. logical.The New “Emergence Economics” of Innovation and Growth Page 63 are not manufactured to understand abstract matters. The Black Swan. one of the authors urged adoption of this approach to guide decisionmaking in the communications and information policy space.” Moreover. 373 The networks/stuff dichotomy sounds similar to the physical/ideas split identified by Paul Romer. combinatorial character. The original paper urged restraint. and content. in order to facilitate understanding by decision makers. 370 The four layered model can be modified in several ways. to guide decisionmaking. even if they both reveal and conceal). at 58-9. at 283-85.” Beinhocker. 365 Because our entire mental machinery (another metaphor there) is embodied. and there is “stuff” (mainly software-enabled interactivity) that rides on top of the network. 374 The layers metaphor is intended to provide a flexible conceptual framework. the layers framework was intended to inject considerable caution into the policymaking process. 366 Policymakers should use this vital knowledge to craft conceptual language that resonates with other market agents. 369 Whitt. unless there was a compelling regulatory paradigms as frames or maps to make sense of the world. 369 The top two layers of the model. 368 The layered framework mirrors the actual functional architecture of the Internet. and match up to evolutionary schemata’s “building-block. Just as importantly. 371 [cite Wu paper] 372 Kevin Werbach. Further. applications. 373 The chief idea behind the layers approach is to allow for a more concrete analysis of policy issues. A Horizontal Leap Forward. Tim Wu has recommended that the model be reduced to two layers. and providing a correct focus on the relevant operation of the Internet. In a prior paper. 368 Interestingly. the model that appears best to combine simplicity and precision is a four layered approach: physical. 370 Susan Crawford rightly derides the persistent use of “content” as a placeholder for all the myriad activities of the Internet. in a compelling paper. A Horizontal Leap Forward. by placing the disputed function at a proper layer of the network. 367 Such a modular model would replace the existing “silos” approach under the Communications Act of 1934. 374 Whitt. to highlight the ways that different players and activities can affect the other modular components of the network. [Crawford cite] We must remind ourselves that software applications are merely the tools (the means). which treats regulated entities and their service offerings in the context of legacy industries. in important ways Crawford’s “social layer” of “content” encompasses all layers of the Net. Beinhocker discusses modules as the components of Business Plans that are subject to differential selection in the market. 371 Kevin Werbach. we cannot think or speak without employing a vast array of metaphors. different layers of the network may display different economics of scarcity and abundance. while “content” is but one type of end “product. 372 More fundamentally. A Horizontal Leap Forward. For example. 367 See generally Whitt.” but instead crave the tangible and the palpable. the first principle of layers is that there is network. 365 Taleb. Richard Whitt and Stephen Schultze May 2008 . The Origin of Wealth.

While not perfect. “a leashed puppy is still a puppy. economic growth. where the agency declines to regulate broadband networks merely because the end user perceives that they typically are used in conjunction with a particular non-regulated consumer service (Internet access). the more narrowly the regulation focuses on the layer it is attempting to control. the less it will impair other layers.” Justice Scalia. CC Docket No. 376 Whitt. the layers principle also preserves the emergence of innovation. feedback.S. but then nothing could. 02-33 et al. and should be a satisfactory surrogate until the Internet changes into something else. rather than some artificial construct found on a chalk board.” 376 Generally speaking. the Werbach echoes that point. its foundation is the reality of the market we have today. and other salient Net effects. Only Connect. a layered framework can help us understand the various components that collectively lead to that market success. as discussed previously. opinion). at 637. The layers framework cannot hope to capture all the complexity and dynamism of the actual Internet. at 10-11.. or someone discovers a better conceptual ordering mechanism. 545 U. the FCC gets this latter element hopelessly muddled in its Wireline Broadband Order. which of course usually is unitary.. As Justice Scalia’s dissent aptly observed (in metaphorical language. Scalia goes on to chide the FCC for “turn[ing] statutory constraints into bureaucratic discretion. and an analytical tool. “absent a compelling regulatory interest and consideration of layers-respecting alternatives. As we will explain in the next section. 967 (2005) (Justice Thomas. FCC 05-150 (released September 23. and deregulate the more concentrated bottom layers (broadband connectivity). A Horizontal Leap Forward. the layers model fits nicely in the policymakers’ (metaphorical) tool box of Emergence Economics. reduce transparency. However. However. slip op. dissenting. 2005). this dichotomy would still allow certain “tinkering” with the fitness environment – providing useful inputs. Id. Nor is the framework intended to impose a normative value onto the market.” and ironically paving the way to use its ancillary authority under Title I as an independent basis for greater regulation of currently unregulated markets. 375 Richard Whitt and Stephen Schultze May 2008 . or cause substantial “innocent use” problems.at most -. 377 Whitt. As a supreme irony. layering as a conceptual tool remains clearly superior to today’s strangely enduring legal silos. incentives. stating that one lesson of the layered regulatory model is that “regulators should be increasingly hesitant to impose obligations at higher levels of the protocol stack. Unfortunately. at 4. at 48. appropriately enough).The New “Emergence Economics” of Innovation and Growth Page 64 justification and a carefully tailored remedy. policymakers should not adopt legal regulations that violate the integrity of the layered nature of the Internet. Brand X.” Werbach. at 625. even if it is not offered on a ‘stand-alone’ basis. the FCC has adopted a regulatory regime premised on what can only be described as a “contra layers” approach: regulate the competitive top layers (VoIP applications). Understood correctly as a conceptual framework. and connectivity. Moreover. The success of “dismodular” companies like Apple is a salient reminder that there are beneficial pathways other than modular ones. NCTA v. APPLYING THE FRAMEWORK: ENABLING WITHOUT DICTATING Not Dictating the Evolutionary Process So what specific lessons can Emergence Economics impart to communications policymakers? We believe in brief that policymakers should endeavor -. 375 As noted there.to foster the market’s processes. 377 By seeking to preserve the integrity of the Internet. A Horizontal Leap Forward. Federal Communications Commission. This muddle was given life by an equally confused Supreme Court decision that deferred to the Commission’s reliance on defining a service offering based solely on the consumer’s point of view in purchasing it. Wireline Broadband Order. rather than interfere with or even attempt to replace those processes.

the market comes closest to the meritocracy we should want. The Elusive Quest for Growth. 379 Ball notes that “There are few easier targets than governmental. Why Most Things Fail. or industry. for example).” Harnessing Complexity. regulatory. The government should resist mightily such entreaties. there are deep underlying reasons for the inability to plan and control outcomes successfully. old industries die and new ones are created. who are in most need of them. Trusting the evolutionary process of the market amounts to trusting ordinary people to make the right decisions about their lives. evolution necessarily includes extinction. “Principles derived from working with complexity problems shed valuable light on the issues confronting policy makers and designers. While the effects of adaptive change can be ameliorated through targeted government intervention (worker education and retraining programs. Agents in the old industries typically will plead for protection against the new technology. In many such cases these unwanted outcomes can be put down to a failure to appreciate the interconnected and interactive nature of the system concerned. 382 378 379 Ormerod.” 380 Government officials’ predictive ability. at 181-82. else innovation and growth are threatened. Richard Whitt and Stephen Schultze May 2008 . and complexity of the open market. and planning decisions that had had the opposite of their intended effects. Much as forest rangers sometimes allow fires to burn out the ecosystem for its own sake. and the likelihood of unintended consequences in a CAS like the market. Such a stance is democratic with a small “d. the forces of change themselves should not be impeded. 381 Easterly. and the ability to understand the effects of changes in policy on the system in question. Further. policymakers should want the fitness threshold – the minimum productivity level necessary for survival – to be sufficiently high for a healthy overall system. or preferred over not-as-preferred. should loom large as potential drawbacks. Policymakers should respect that process and not try to disrupt what is beneficial to the system as a whole. 378 As we have seen. at 454. at 22. To paraphrase Winston Churchill. selecting. Why Most Things Fail. or adapted to not-as-adapted. at 231. under Ormerod’s Iron Law of Failure.” Moreover. Favoring any particular outcome interferes with the contest itself. So policymakers should not attempt to level the proverbial playing field to benefit one company. while the results may not be optimal or efficient for all. In the public policy arena often it is those who shout most loudly and vociferously about the disciplinary virtues of the free market. merits. The innovation/market process involves weeding out the good from the not-as-good. and amplifying – should be left to the effectiveness. at 55-57. or sector. As the path of growth proceeds. 382 Ormerod. Critical Mass.The New “Emergence Economics” of Innovation and Growth Page 65 basic workings of the evolutionary algorithm – differentiating. 380 Ball. There will be losers as well as winners from economic growth.” Effective policymakers need to possess at least two characteristics: the ability to make reasonably accurate forecasts. “markets are the worst economic system – except for all the alternatives. 381 and refrain from interfering in the weeding-out process.

the creative. Don’t Select Second. often according to self-interest that does not align with overall growth. Here. Beinhocker discusses how the “Big Man” process of selection can slow down or even halt the process of evolution. working according to a myriad of strategies. but interfering with the evolutionary process at this stage 383 384 Beinhocker. than government entities. Richard Whitt and Stephen Schultze May 2008 . at __. 383 When the government steps into this process directly. will be far better at generating new ideas. or in regulatory capture by market actors. as well as similar thinking that comes from outside. proposing. entrepreneurial.The New “Emergence Economics” of Innovation and Growth Page 66 Don’t Differentiate First. If the government can provide a venue for collaborative differentiations. it risks over-emphasizing narrowly conceived technologies or business plans. and the heart of markets. rather than the overall economic wealth of the society. and to innovate toward what they think will be the “most fit” for the economic landscape. the policymaker should not have any direct role in business plan selection. or allocating resources to the highest bidders—can become a form of selection favoring certain agents over others. while individual businesses erect intentional or unintentional walls between themselves. New technologies undoubtedly are exciting. the fitness function maximized is the wealth and power of the Big Man (and his cronies). Businesses. and deductive tinkering energies of the population are directed toward pleasing the Big Man. the process is distorted. Selection is the heart of evolution. it can productively support the process without controlling it. The Origin of Wealth. Market actors must be free to select the Physical and Social Technologies that make up their Business Plans. it should not be the policymaker’s role to amplify the “most fit” business plans. Whole sectors often face critical dilemmas or limitations. For example. If a single agent controls the system. He explains that: In a big man system. there is a limited role for the policymaker when businesses rely on government-controlled resources. and having them tested in the marketplace. The instinct to pick outcomes can manifest itself in well-intentioned bureaucratic design. 384 Policymakers need to be attuned to Big Man thinking that arises from within government structures. Similarly. This is not to say that there should be no governmental role in encouraging the differentiation process. The Origin of Wealth. Don’t Amplify Third. such as rights-of-way or radio spectrum. Beinhocker. Beinhocker discusses how the balance between bureaucratic and entrepreneurial tendencies in the market can sustain the evolutionary process of consistent incremental process and occasional big jumps. Thus. Even tempting calls for solutions in the name of enabling the market—like creating new or stricter property rights. it may be helpful to facilitate convening the relevant market actors to fashion cooperative solutions. or emphasizing particular market alternatives. policymakers should not be in the habit of creating. at 288.

When agents close off access to knowledge—through obfuscation. Business Plans that fail will be de-emphasized. In contrast. but also. 385 One can characterize this role with different metaphors: enabling the “econosphere. and amplifying Business Plans would be seen as interfering in economic evolution…. amplification should happen only at the level of individual agents as they navigate the fitness landscape.” filling in market “gaps. The Origin of Wealth. if not primarily. Instead. we believe environmental “tinkering” can be accomplished in at least four different ways: (1) feeding the evolutionary algorithm through diversifying inputs. and here the government may again have a limited and indirect role. from technological progress. Amplifying either legacy or new approaches threatens the ability of the market to sort itself out according to the wishes and actions of market players. Artificially bolstering a successful but nascent approach at the same time threatens to push aside competing innovations. where important policy goals and objectives are at stake. without picking/subsidizing the winners. As long as market[s] provide the mechanism for selecting and amplifying Business Plans. To the extent that growth comes not only from capital markets or government subsidy.” The fundamental point is to improve the market’s ability to formulate and present different options (the quantity function). For purposes of this discussion of communications policy. while leaving the selection processes themselves undisturbed (the quality function). are a different matter…. or hindering/bolstering the losers. Richard Whitt and Stephen Schultze May 2008 . so that communications links are optimized. strict propertization. is to experiment with different changeable elements of the fitness environment within which the evolutionary algorithm operates.” tinkering with inputs. the government’s role is to generate conditions in which such growth can occur. (2) fostering connectivity between agents. policies that shape the fitness environment. or resistance to shared standards—their actions are counter-productive to the market-wide process of amplification. Amplification of good ideas across the multiple agents or sectors happens when agents observe or actively exchange knowledge. (3) shaping the fitness landscape in order to create 385 Beinhocker. As this amplification occurs. agents will explore variations on the successful strategy by tweaking it and iterating through the differentiation and selection processes once again. selecting. such as Business Plans and their accompanying Physical Technologies and Social Technologies. technological combinations that work will be repeated and spread. As Beinhocker puts it: Policies that get the government involved in differentiating. at 426 (emphasis in original). Enabling the “Econosphere” A potentially appropriate role for government. This presumes a certain degree of connectivity or cooperation. then the economic evolutionary process will innovate and adapt in response to those regulations.The New “Emergence Economics” of Innovation and Growth Page 67 is very risky. or revising rules of the “contest. while leaving Business Plan selection and amplification to market mechanisms. or successful current plans.

Adaptive strategy suggests that policymakers should levy many small bets. connectivity. policy decisions in these contexts should be seen not as enduring mandates. are simply inevitable. Richard Whitt and Stephen Schultze May 2008 . failure at the detailed. 386 387 388 389 Mark Taylor. and perhaps implemented. individual level. all things will be possible. and act within the inherent limitations of human endeavors. Why Most Things Fail.” 388 Policymakers should prize their own unique position to ability to tinker. 386 A related issue is that policymakers of all persuasions appear chronically unable to admit that any single aspect of their policy has failed. trial-and-success) fashion. these relatively modest steps can provide major emergent benefits. Only where an overarching policy decision requires some form of market implementation should one or more of these steps even be considered. But if done correctly. failure creates fodder for future growth. but as a series of experiments that compete to evolve over time. The notion of enabling from within the given construct of the market has its roots in the insight that some constraints. Harnessing Complexity. Policymakers would be wise to heed this insight. The only viable freedom is not freedom from constraints but the freedom to operate effectively within them…. incentives. to facilitate better decisions through generating greater flows of timely and accurate information. whether plant or animal. Why Most Things Fail. are always cruel because they cannot be fulfilled.” 389 In all respects. adaptation as a function of entire populations. such as lack of foresight and uncertainty about outcomes. and feedback is not to endorse their use in any or all situations. We need change and evolution to make progress. the role of variety and experimentation. Again. One should be willing to execute for today. and the potential of decentralized and overlapping authority. In the words of Mark Taylor. and learn from the mistakes made. and thereby encourage “perpetual novelty. and (4) enhancing market feedback mechanisms. a noted expert on complexity theory: One of the perennial promises of visionaries is that in the future.The New “Emergence Economics” of Innovation and Growth Page 68 economic incentives and increased market trust for certain activities. Such promises. to suggest these potential steps of supplying inputs. The Moment of Complexity. or fitness not achieved. company or government policy. 387 They must accept that both “market failure” and “policy failure” are inevitable. More to the point. Whatever constraints we suffer in this world will disappear and we will be able to enjoy a freedom now barely imaginable. in a trial-and-error (or better. Axelrod and Cohen. then. at 29. however. at vii. “Paradoxically. and adapt for tomorrow. is absolutely necessary for the health and vitality of the system as a whole. Ormerod. at 224 (emphasis in original). Possibilities are inevitably limited by constraints that can never be overcome. Constraints provide the parameters within which thinking and acting must occur. Ormerod. at viii.

additional inputs to feed the algorithm. By allowing. Ideas are the key input. providing different plans and technologies for agents to experiment with in the market through selection. but leave the development of new knowledge to the larger environment. By all accounts.The New “Emergence Economics” of Innovation and Growth Page 69 Feed the Algorithm The policymaker can “feed the algorithm” of evolution by adding additional inputs to the process. at 402. optimal amounts of novelty. both good and bad. knowledge. financial. without disturbing the quality of decisions derived ultimately from the algorithm itself. math. at __. Many experts have discussed the urgent need for technology policy to support research and development. for example. at 6-7. These inputs include Business Plans. By the same token. for economic growth. by 390 391 Case. Rise Above the Gathering Storm (2007). and engineering. A diversity of inputs – PTs. and knowledge capital necessary for US prosperity. at 4. and yield a richer outcome.” at __. because they can become innovation (when combined with implementation). National Academies of Science. and Social Technologies. As just one example. but he also highlights an overlooked component: supply subsidies that increase the number of trained scientists and engineers. and providing additional funding for scholarships and fellowships in science. Competition. This can be done. 392 Romer. this puts the government in the role of a lab technician. physical technologies (when combined with things). and even nudging. In some ways.” in part by increasing federal support for various R&D-related tax credits. 390 An inescapable conclusion of Paul Romer’s work is the need to find ways to increase economic growth. and social technologies (when combined with processes). The key is to influence the quantity of inputs. government-sponsored R&D can help create generative platforms. 393 Romer. and growth are generated. through tax credits and investment in R&D. tax and subsidies mechanisms are joined with market-like mechanisms that impose market-based tests for success. Interview. One way to feed the evolutionary algorithm is to use the government’s spending authority to channel resources. 394 Friedman. Romer believes that the classic R&D model for both governments and firms must be addressed. big and small. 394 Foster Agent Connectivity The policymaker also can foster connectivity and networking between various agents in the market. “Government Subsidize. so that command and control. and BPs -serves as the raw material for differentiation. 391 As the Net’s own origins plainly show. STs. 392 He talks about increasing demand subsidies (government spending on R&D). Physical Technologies. the National Academies of Science issued a joint paper calling for enhancing “the human. supplementing market forces from within via inputs to the emergence algorithm can strengthen the evolutionary process. Even light-touch moves can have big downstream effects. 393 Others concur that government should encourage the pace of technological advance. Richard Whitt and Stephen Schultze May 2008 . The Moral Consequences of Economic Growth. the market by itself is not sufficient to provide every useful input to the rough equation for emergence.

397 Tapscott and Williams.The New “Emergence Economics” of Innovation and Growth Page 70 strengthening or adding links (lines of communication) between nodes (agents). knowledge. 399 Mokyr. “Vibrant markets rest on robust common foundations: a shared infrastructure of rules. Tapscott and Williams.” like their ancient counterparts. 399 “The knowledge revolution in the 18th Century was not just the emergence of new knowledge: it was also better access to knowledge that made the difference. of conventions and rules – are not in place. tied to one or more “tinkering” programs. at 74. The Gifts of Athena. e. “eliminating the causes of resource scarcity” (rather than premising US policies on such scarcity.. understand that “creating a shared foundation of knowledge on which large and diverse communities of collaborators can build is a great way to enhance innovation and corporate success. Wikinomics. The “Public Interest” Standard: The Elusive Search for the Holy Grail. Federal Communications Law Journal 50(3) 30 (1998). So policymakers should facilitate ways for agents to communicate via the Net. institutions. If there is no unitary way to describe it. Some suggestions include: “bolstering unitary access” (users can reach each other over the open Internet platform via every communications platform). 401 See. or institutions – of science and the markets. Wikinomics. the more knowledge will be cumulative. at 178. to provide More Good Ideas via additional agent connectivity. standards. perhaps we should consider recasting the standard as a series of interrelated public interests. and then private actions. or allowing intermediaries to create artificial forms of it). and the greater the supply. 398 Joel Mokyr. Richard Whitt and Stephen Schultze May 2008 . convenience. emerging from a mix of first public. and consequently is an easy target in some quarters as hopelessly vague and foundation-less. The notion that communications policy should serve the “public interest” is at the heart of the Communications Act.” 397 Of course. Nevertheless.” 400 Policymakers can look to this salient example as a model for fostering greater connectivity between agents in the market. Erwin Krasnow. The Gifts of Athena. Despite the slippery nature of the standard as a matter of law. 398 He found that the lower the costs of access. Joel Mokyr has produced a masterly historical and analytical account of how the costs of accessing useful knowledge (roughly equivalent to our Physical Technologies and Social Technologies) determine how likely it is that such knowledge will expand. at 5. 395 What some call the “New Alexandrians. this principle rarely has been well-defined.” 396 We cannot always rely on competition and short-term self interest alone to promote an optimal infrastructure for ideas. New growth will not happen if the right infrastructure. “removing barriers to the free flow of information” (sharing More Good 395 396 Romer interview in Reason Online. and necessity” language was first adopted by Congress in the Interstate Commerce Act of 1887. and technologies provided by a mix of public and private sector initiatives. at 8.g. at 178. Perhaps one problem is that a single public interest single standard is insufficient for the multiplicity of uses to which it can be applied. and then borrowed for the Radio Act of 1927. the Internet is the single best example of such a shared infrastructure. 400 Mokyr. The Gifts of Athena (2002). 401 The “public interest. Historically the language has been used to justify a variety of government programs and regulations related to transportation and communications infrastructure. the FCC ultimately must explain most of its decisions with reference to that phrase.

There would have been no Internet (at least as we now understand it) without that prescient policy decision taken years before the successful rise of commercial online services for consumers. Bigger Broadband will empower more productive agents. and “executing a plan for ubiquitous access to the Net” (countries that give priority to More. “preferencing open systems” (which lead to new modes of speech/communication). at 13. The FCC’s rules established the basis for market forces eventually to evolve new and beneficial Social and Physical Technologies. at 426. 406 Thus. the policymaker can serve as a “fitness function shaper.”404 Countries where activities that promote growth are rewarded will grow faster than countries where this is not the case. and then allow agents operating under unfettered economic and non-economic conditions to meet those goals.” which amounts to acting so that “the evolutionary processes of the market can be better shaped to serve society’s needs. Bad Capitalism (2007). Unfortunately. As discussed previously. citing Amartya Sen. Shape the Landscape Encouraging greater increases in income over a shorter period of time arguably is the central economic policy task of any nation. The Origin of Wealth. the best way to use the fitness landscape to achieve policy objectives is to employ market-based incentives. Development as Freedom (1999). One of the best examples of a public policy built on a correct understanding of “shaping the landscape” is the FCC’s Computer Inquiry decisions. 403 With regard to four decades of repeated attempts to turn poverty into prosperity. Over the past several years. setting broad policy goals. at 177. for example. A vision of the public interest informed by Emergence Economics would invariably appreciate the collective economic and social benefits of openly interconnected agents. Beinhocker. as well as tremendous “non-market” spillovers). it has been argued that economies that want to advance faster should embrace a mix of entrepreneurial and big-firm capitalism. the Commission created its basic/enhanced regulatory dichotomy largely as a way to fence off the online world from unwarranted carrier-style regulation. Good Capitalism. Easterly. at 143. incentives for growth obviously matter. By shaping the metaphoric landscape in which agents operate – providing incentives to scale particular mountains. The Elusive Quest for Growth. Id. The Elusive Quest for Growth. more recent FCC activities constitute a negative counterpoint. “neither aid nor investment nor education nor population control nor adjustment lending nor debt forgiveness proved to be the panacea for growth. Easterly concludes.The New “Emergence Economics” of Innovation and Growth Page 71 Ideas means more growth). or supporting the discovery and sharing of path shortcuts – policymakers encourage policy objectives without interfering with the core activity of evolution. William Baumol.” 407 Because incentives provide useful signals to all agents in the market. Robert Litan. 405 The contribution of the entrepreneur in the growth process is substantial. and Carl Schramm. 402 And in that quest. Richard Whitt and Stephen Schultze May 2008 . the FCC inexorably has imposed various carrier regulations on a wide swath of 402 403 404 405 406 407 Crawford at 29. This can be achieved by. at 13. Easterly. These formulas did not work because they ignored the basic principle of economics: people respond to incentives.

3d 226 (D. 451 F. and perhaps enhanced decisionmaking tools as well. and reduce. democratic interests tend to favor greater transparency. FCC. The point is not that these programs should not apply to VoIP applications. First Report and Order and Notice of Proposed Rulemaking. Bounded rationality. backward-looking mandates with legacy systems. Telecommunications Equipment and Customer Premises Equipment by Persons with Disabilities. Report and Order and Notice of Proposed Rulemaking. aff'd in relevant part. openness. not amplify. Cir. and a voice. the agency is actually hampering the growth and innovation of these technologies. Nuvio Corp. Enhance Feedback Mechanisms A final form of tinkering involves creating or enhancing market feedback mechanisms. intelligibility. 7518 (2006) (2006 Interim Contribution Methodology Order). Universal Service Contribution Methodology. 20 FCC Rcd. as Enacted by The Telecommunications Act of 1996: Access to Telecommunications Service. American Council on Education v. asymmetric information flows. 489 F. “As a general rule. Cir. 2006). However. v. The means employed by the agency – creating specific technology mandates for programs like E911 (emergency services). 409 [examples]. 408 This trend threatens to stifle innovative new applications. 21 FCC Rcd. 22 FCC Rcd. but rather how and when they should apply. the government should not attempt directly to alter the market outcome. at least to some degree.C. the range of More Good Ideas.C. FCC. Cir. policymakers should give them what they need to take that leap: more information. 2006). Vonage Holdings Corp. rather than imposing specific. TRS (relay service). and trying to ensure they are clearly heard. First Report and Order and Further Notice of Proposed Rulemaking. and foresight. 14989 (2005) (CALEA First Report and Order). The policymaker can help even the odds. IP-Enabled Services. 410 Paul Starr. policymakers could have a role in maximizing the voices in the marketplace. Because consumers and users are adaptable and able to learn and grow. Agents as consumers or users typically lack information. the FCC should have established broad guidelines. CALEA (law enforcement). 2007). This means providing agents with more and better information. 473 F. 20 FCC Rcd. CPNI (customer privacy). for VoIP technology providers to meet within a prescribed period of time. aff'd. v. 408 Richard Whitt and Stephen Schultze May 2008 . and involve tampering with the actual process of evolving solutions. The Creation of the Media. Telecommunications Carriers' Use of Customer Proprietary Network Information and Other Customer Information. The concern is that by tampering with the evolutionary processes. Implementation of the Telecommunications Act of 1996. and cheap access to information. Implementation of Sections 255 and 251(a)(2) of The Communications Act of 1934. so they can make informed decisions. Report and Order and Further Notice of Proposed Rulemaking. 11275 (2007) (TRS Report and Order). 6927 (2007) (CPNI Order). IP-Enabled Services.” 410 One way to do this is to arm the users with tools to better discern truth from falsehood. aff'd.3d 1232 (D.3d 302 (D. and USF (contributions to universal service) – often go beyond tinkering via market incentives. E911 Requirements for IP-Enabled Service Providers. or even general mandates. essentially filling in various information or transparency gaps in the market. 22 FCC Rcd.The New “Emergence Economics” of Innovation and Growth Page 72 Voice over IP (VoIP) applications and services. and can be easy victims in a marketplace tilted against them. linear thinking – these findings and more suggest that users stand little chance when negotiating with more powerful agents. cognitive biases. FCC. at 17. Report and Order. To be clear.C. See Communications Assistance for Law Enforcement Act and Broadband Access and Services. 409 In particular. 10245 (2005) (VoIP 911 Order).

and various government decisionmaking processes. August 2007. 417 Many of these ideas mesh nicely with the “tinkering” approaches we have recommended here. at __. at 37-48. while increasing costs unnecessarily to providers. if even a small fraction of end users are more aware of the policies and limitations on service. Framing a National Broadband Policy. He points out that the U. The Art of Spectrum Lobbying. including an inability to anticipate. at 23. The Difference (2007). only one-tenth the estimated value of the spectrum usage rights. governments can initiate a virtuous cycle of interaction between policymaker and citizen. 414 Robert Atkinson. Diamond goes on to dissect various paths to failure by group decision-making. Taleb.” 415 due to the general public’s scientific ignorance. at 142-45. Thus. creating user-generated mapping interfaces to track broadband deployment. 2006. A “Third Way” on Network Neutrality. The Art of Spectrum Lobbying. 413 Robert Atkinson and Phil Weiser. The Art of Spectrum Lobbying. Consumer choice can be taken to an extreme.S. 414 More information also can help promote self-help. this dichotomy between acceptable “tinkering” and unacceptable “tampering” might be usefully viewed as such: 411 Jared Diamond. As with all things. more information is not always better. act accordingly. including raising the visibility level. to boost agent transparency and establish a sound fitness environment to accommodate greater competition. if possible. the unprecedented nature of spectrum applications. 416 Snider offers up a host of proposed substantive and procedural changes.107. attempt to solve. automating the build-out requirements. Snider. 416 Snider. It also acts as a form of self-discipline on the affected firms and other entities. and if there are strict sanctions for their violation. Id. and then adhere to such policies. A mutually beneficial “cognitive diversity” can result. removing the spectrum holdup ability. 412 Some lean on user transparency as a key remedy to the network neutrality conundrum. Id. Black Swan. Reflecting echoes of behavioral economics. 417 Snider. after all. at 168 n. and more information about market decision points. Moreover. Nonetheless. New America Foundation. ITIF. perceive. policymakers need to seek an appropriate balance. at 419. Jim Snider’s recent paper calls spectrum the “invisible resource. reducing complexity. 411 So allowing users greater transparency into market processes. and actually solve major problems. and even paralysis. and imposing stricter transmitter and receiver standards. tracking the natural resource. rationalizing the license modification process. Government has raised some $40 Billion since 1993 in spectrum auctions. Atkinson separately has discussed another tool for policymakers. 413 Among other suggestions. 412 Scott Page.H. in the context of the fitness diagram from Section I. Collapse (2005). at 419-440. Those entities would be less likely to pursue anti-competitive or anticonsumer practices if they must advertise them to the world. they can use software/hardware tools to engage in their own efforts to monitor their broadband connections – and. with students imparting knowledge by challenging their teachers’ assumptions and asking questions that the teachers had not previously considered.The New “Emergence Economics” of Innovation and Growth Page 73 Transparency not only alerts and educates those few who bother to make themselves educated agents/consumers/citizens/producers. A more aggressive example of this call for feedback mechanisms comes from federal spectrum policy. May 30. Phil Weiser and Rob Atkinson call on the FCC to adopt a “notice and monitoring regime” that would require broadband providers to announce details about their provision of service to consumers. too many options can mean confusion. 415 J. education can and does go both ways. Richard Whitt and Stephen Schultze May 2008 .

unpredictable. At the same time. or the eighth floor of the Federal Communications Commission.” and further inputs. or the West Wing of the White House. or even wrong. throughout the network. a way of approaching and understanding the network economy that is being brought about by the Internet. While the larger field of academic economics continues to progress. and incorporate the newer ways of thinking. For our country’s economic and social interests to be better served. incentives. In particular. Emergence Economics offers us a conceptual framework.” Only when private markets and public policies learn to work constructively with each other.S. Richard Whitt and Stephen Schultze May 2008 . in the form of innovation “spillovers. and not in needless conflict. communications policymakers should determine whether and how to tinker with the market’s inputs. of economic growth and other “Net effects. But with new frameworks come new ways of seeing. nor to blindly assume that it is evolving toward perfect efficiency. broadly beneficial. and feedback – and then stand back to let the process itself unfold. The government’s unique role in all this.” where no market player – whether government or firm – unilaterally can pick winners and losers. Congress. should be to experiment with the optimal background conditions for a dynamic. That framework seeks neither to deterministically engineer this dynamic economy. disruptive innovations tend to emerge from the edges of the Net. connectivity. With empowered agents working through connected networks via evolutionary processes. for the most part news of these developments has not reached the chambers of the U. however.The New “Emergence Economics” of Innovation and Growth Page 74 diversification connectivity landscaping feedback some role for policy only market forces differentiation selection amplification BP PT ST CONCLUSION What we have here labeled and critiqued as Traditional Economics holds many important truths about our human condition. but also essential inputs that drive economic growth. that situation should change. Numerous researchers also have shown how game-changing. many of the key assumptions and verities of that influential form of economic thinking have been proven overstated. Paul Romer has amply demonstrated that knowledge and technology are not just outputs of the economy. we are more likely to unlock the full-blown emergence of new ideas and innovation. mutually reinforcing activity thrives in an environment of open “generativity. can those emergent benefits be realized in our everyday lives. at best. and evolving environment. This sort of edge-driven. These innovations in turn create far-reaching benefits to unaffiliated entities.