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I would like to present four myths of the high-tech economy. These are distortions or misunderstandings that seem to be driving strategies and investment decisions in the hightech world. I’ll present these myths as simple statements and in each instance give my own version of reality—a reality that is invariably more complicated.

Let me begin by pointing out a general trend. We are seeing a shift in the economy from localized physical markets and physical interchanges to digital networks of all kinds: business-to-business networks, peer-to-peer networks, web auctions, the digital brokering of commodities, genealogy groups, chat networks, and outsourcing networks. All of these networks are made possible by connectivity, and backed by computers. Most people are aware of this shift. Manuel Castells of Berkeley has pointed out that in a sense this is not new: formal and informal networks have been around for a long time, but we are currently entering an electronic age of competing digital networks. In my language, networks are the first emergent structure, the first dominant pattern, that we are seeing in the digitally-based economy. Factories with inputs and outputs are the dominant patterns of the old manufacturing economy. The network is the dominant pattern of the new digital economy. However, this economy of competing networks will be overlaid onto the old economy of factories and inputs and outputs. The old, manufacturing economy will not be entirely replaced.

Competition in networks will shake out according to what I believe can be almost called a Law: “Of networks, there will be few.”

Myth 1. All Networks are Subject to Network effects

- Specifically, network effects mean that the value of a network to a member increases when additional members are added to the network.

The myth of network effects has encouraged networks to grow their user bases at all costs, assuming that a large user base will magically cause an avalanche of increasing returns. Membership base is not what counts. What is important is how that membership base is used. If I have access to a huge membership base and all I do is fill their orders, then I am not getting real use out of that member base. If on the other hand I can find ways to make use of this member base, then I can generate network effects.

Myth 2. The Coming of the Internet implies a New Economy

- I believe that high technology in general—not merely its digital manifestation—creates a very different economy. One that operates differently, but not just defined by the Internet or the Web. High technology is subject to different rules: it is subject to increasing returns more than diminishing returns. It leads to a very different set of structures and outcomes for the economy, and these new structures are becoming more and more apparent. I would argue that in the last ten or twenty years we are seeing the emergence of a new, hightech economy, and not just an Internet economy.

Myth 3a. High technology is a Local Phenomenon and is Difficult to Transfer to other Regions or Countries

- Deep craft is difficult or impossible to transfer, unless people are collectively transferred. The cultures that create cutting-edge high tech are therefore difficult to replicate. And this is the reason high tech becomes confined to specialized regions. Once it becomes more routine technology, of course, it is easily transferred. And so other places, Bangalore, Scotland, and Finland, can become places of reasonably advanced technology.

Myth 3b. High technology is Mere Knowledge and is Easy to Transfer to other Regions or Countries

- ... extreme high tech innovation is indeed difficult to reproduce. You cannot wave a wand of applied science or knowledge over a country and expect to create high-tech innovation. The reason is that in its essence, cutting- edge technology is not mere knowledge, nor applied science. It is Deep Craft. The high end of high technology is really about craft.

The craft cultures of innovation I have been talking about can start off from a few ideas, and a few key people, and a few key interactions, like bacteria growing on a petri dish. Usually this happens at a university which spins off a new idea, and usually such new ideas have to do with a new field of science. (If they sprang from an old field they could easily be generated and subsumed in the old high-tech locations.) So, little cultures of cuttingedge technology—of deep craft—can come out of nowhere almost organically. They are more likely to appear where scientific knowledge is at the edge, where business conditions are favorable to startups, and where a tradition of previous science and technology exists previously. Once started they become the new Cremonas, and high tech appears in a different location.

High technology then is neither a phenomenon that can easily take off anywhere in the world, nor is it exclusively a Silicon Valley phenomenon. It tends—at least at the extreme edge of innovation—to be localized and hard to replicate elsewhere. But it can come into being anywhere, and quickly grow on the spot. So we will see the continued predominance of the US, I believe. But it will not remain exclusive, and over time it will give way to the entry of other regions.

Myth 4. Current, Nationally-based Political Structures will Last indefinitely

- In reality, the telecommunications revolution will challenge the nation state over the next 50 years, and it will layer new, international governance structures on top of it. This is inevitable.

We are now seeing the next communications expansion in the form of modern telecommunication on the Internet. And this makes possible swift international spillover effects. National governments will try to regulate the international spillovers that do not suit them. They will win some battles, but in the end if they do this alone, they will fail. If the US government for example, tries to regulate something it does not like on the Internet—the downloading of copyrighted material say—it will lose. Such activity can quickly move offshore and start up somewhere else. And so, over the next 50 years we will see constant tensions between existing national governance structures and the global realities of Internet- based commerce. Battles will be won on both sides, but in the end national governance structures will require new international structures to regulate commerce. This I see as totally inevitable. National governance structures will remain. But they will be overlaid by higher, international-level, governance structures. These will not necessarily be offshoots of the United Nations or the World Bank or the IMF, but more likely will be informal international arrangements hardened into independent institutional structures. In the meantime at national level, battles will be fought along the way.

- "Myths and Realities of the High-Tech Economy," W. Brian Arthur http://www.santafe.edu/arthur/, Santa Fe Institute http://www.santafe.edu/, September 10, 2000

File URL here (PDF) http://www.santafe.edu/arthur/Papers/Pdf_files/Credit_Suisse_Web.pdf

Post Date: March 22, 2005 at 6:35 AM CST; 1235 GMT