Are New Economy “Network Effects” The Same Old “Economies Of Scale?
Is the new economy governed by different principles than the old economy? • Many business gurus claim we now live in a “network society” in which profitability does not diminish as investment expands — and thus is not subject to the old economy concept of “diminishing returns.” • They say there are now “positive feedback loops” because it costs so little to reach a new customer or make a new connection. • Thus, the bigger the network, the higher the returns on investment — and the ultimate network is, of course, the World Wide Web. But how new is all this? The same economies of scale that worked in the late 1800s may also be creating rapid productivity gains in the new economy. Consider steel, for instance: • In 1880, steel rails cost about $68 a ton to produce. • But largely because of economies of scale, the price fell to about $18 a ton by 1900. New companies are selling standardized products to enormous mass markets, just as in the good old days. Ever hear of Microsoft Windows? I
