Bryan Caplan  

Networks and Growth

Larry Summers vs. PSST... Fukuyama on Fukuyama...
When more people use a product, firms have a stronger incentive to improve it.  For some products, however, having more users is an improvement.  We call them "network products."  Phones are the classic example; they're useless unless other people have them, too.  As the Fourth Sector expands, network products have become ever more common.  What good would Facebook or Skype be without all the other users?

In the real world, network goods visibly improve all the time.  But suppose they didn't.  Suppose the Facebook of today used the same source code as it did five years ago, but still attracted new users at the same rate as it did in the real world.  Many economists would be tempted to call this "stagnation," but they'd be wrong.  Even if Facebook's source code stayed the same, the mere fact that more people are using the product causes it to be better.  Why?  Because the point of the product is to amusingly interact with your friends.  The more friends who use it, the more amusing it is.

The upshot: Economists (and people generally) underestimate true economic growth for all expanding network products.  When you measure the quality of network products, you can't simply look at them in isolation.  You have to measure what you can do with them.  Especially in the Fourth Sector, Quantity Is Quality.
P.S. I'm driving to IHS's "Liberty and Society for Graduate Students" seminar in Philadelphia after lunch.  Hope to see you there.

P.P.S. Tuesday night I'm seeing Miss Saigon, the sublimely beautiful open borders/ anti-communist musical.  I can't recommend it highly enough.  Musically and thematically it puts Puccini's Madame Butterfly to shame.

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COMMENTS (4 to date)
Lord writes:

"You have to measure what you can do with them."

No. You have to measure what is done with them. Potential is always in the future.

The Man Who Was . . . writes:

[Comment removed for rudeness. Email the to request restoring your comment privileges.--Econlib Ed.]

Patrick R. Sullivan writes:
When more people use a product, firms have a stronger incentive to improve it.

Funny. The argument about products exhibiting network effects was the opposite; that inferior products would be 'locked in' and no superior product could come along and dislodge the original, thus there would be no incentive to improve. The federal govt. even prosecuted Microsoft on anti-trust grounds on that argument.

Oliver Beatson writes:

I haven't yet seen Miss Saigon. Always one to try to unite economics and musicals, I frequently play "spot the libertarian themes" with Stephen Sondheim's Into the Woods. It's a surprisingly deep piece on morality, behind all the music and dexterous rhyming. As it's all metaphorical, I don't know if it was intended as such, however.

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