Increasing Returns and the Two Worlds of Business

Our understanding of how markets and businesses operate was passed down to us more than a century ago by a handful of European economists--Alfred Marshall in England and a few of his contemporaries on the continent. It is an understanding based squarely upon the assumption of diminishing returns: products or companies that get ahead in a market eventually run into limitations, so that a predictable equilibrium of prices and market shares is reached. The theory was in rough measure valid for the bulk-processing, smokestack economy of Marshall's day. And it still thrives in today's economics textbooks. But steadily and continuously in this century, Western economies have undergone a transformation from bulk-material manufacturing to design and use of technology--from processing of resources to processing of information, from application of raw energy to application of ideas. As this shift has taken place, the underlying mechanisms that determine economics behavior have shifted from ones of diminishing to ones of increasing returns.