Here’s one for your next pub quiz: what do Jonathan Ross’ £18 million salary, a backwards-running clock in Florence and Microsoft Windows have in common? The answer is they all demonstrate aspects of a phenomenon called “increasing returns” by economists, “lock-in” by marketeers, and “positive feedback” by engineers. The basic idea is the same in every case: that some process runs away with itself instead of settling down to a nice, steady plateau.
Positive feedback is familiar to most of us as that horrible noise that happens if you bring a microphone too near to the loudspeaker it’s connected to. Sound from the speaker feeds back into the amplifier and is amplified some more in an exponential spiral that’s stopped only by the limits of mechanical motion of the speaker cones. To most engineers, positive feedback is a dangerous toy compared to its peaceful sibling of negative feedback, which forms the basis of almost all control systems. Negative feedback takes the output from some process and feeds it back into its input in negated or sign-reversed form, so that far from making that process run faster it slows it down. As a result, a steady balance is reached, an equilibrium point from which the system is then reluctant to shift thanks to the damping effect of the feedback.
That’s where the connection with economics comes in, because classical economic theory has it that markets possess this same self-stabilising property – prices of some commodity may fluctuate wildly for a while, but will soon settle down to an equilibrium, at precisely the famous “market-clearing” price where supply exactly matches demand. Negative feedback is at work here because when something gets more expensive people buy less of it, which introduces that vital minus sign.
Adam Smith described this effect 200 years ago as the invisible hand over, but it still dominates modern economic thinking in the form of neoclassical theory. The problem is that it’s only partially true, but is held like a religious dogma by free-market zealots. It’s always been clear to anyone not in thrall to such dogma that market equilibrium breaks down from time-to-time, but what’s been recognised only recently is that economies exhibit positive feedback even in normal times, in the shape of speculative bubbles, winner-takes-all rewards and lock-in. The new wave of economists refer to such effects as “increasing returns”, as opposed to the “diminishing returns” in classical theory responsible for market stability.
Increasing returns may appear whenever any commodity becomes more useful the more people have it: if you were the only person in the world with a phone it would be useless, but the more of your friends have one the more useful it becomes; the more people use Microsoft Windows, the more software is written for it, so the more people use it; on Facebook, Bebo or MySpace, the more people use them, the more people want to use them.
Lock-in happens when one of several competing standards achieves complete monopoly once a critical number of people use it, because economies of scale make the alternatives unviable: for instance, the QWERTY keyboard, the ABC arrangement of the foot pedals in cars, or the fact all clocks run “clockwise” (we know that in the 15th century some ran the other way, because Uccello’s 1443 clock still runs anticlockwise over the main door of the Duomo in Florence). Jonathan Ross’ salary is another case of increasing returns: once you pass a certain degree of fame, your value to tabloid newspapers and TV channels may inflate exponentially because they’ll pay anything not to let their competitors have you – the “talent” fractionates out into a handful of winners and the rest.