Understanding Global Value Chains – G20/OECD/WB Initiative

Understanding Global Value Chains – G20/OECD/WB Initiative

 

There is lot of opacity in understanding of GVCs.  Efforts are underway since last few years to get better analytical and statistical tools to understand International Trade and Global Value Chains.

Globalization in Trade and Finance encouraged by International organizations such as IMF/WB/OECD/WTO/UNCTAD/UNIDO and others has changed the landscape of Trade.

There is still a long way to go to make better sense of issues and concerns for policy makers.

OECD/WB/WTO along with G20 Trade Ministers have initiated efforts since 2012.

 

From Global Value Chains 

Introduction to GVCs

International production, trade and investments are increasingly organised within so-called global value chains (GVCs) where the different stages of the production process are located across different countries. Globalisation motivates companies to restructure their operations internationally through outsourcing and offshoring of activities.

Firms try to optimise their production processes by locating the various stages across different sites. The past decades have witnessed a strong trend towards the international dispersion of value chain activities such as design, production, marketing, distribution, etc.

This emergence of GVCs challenges conventional wisdom on how we look at economic globalisation and in particular, the policies that we develop around it.

 

Trade in Value Added

The goods and services we buy are composed of inputs from various countries around the world. However, the flows of goods and services within these global production chains are not always reflected in conventional measures of international trade. The joint OECD – WTO Trade in Value-Added (TiVA) initiative addresses this issue by considering the value added by each country in the production of goods and services that are consumed worldwide. TiVA indicators are designed to better inform policy makers by providing new insights into the commercial relations between nations.

 

GVCs and Trade Policy

Global value chains (GVCs) have become a dominant feature of world trade, encompassing developing, emerging, and developed economies. The whole process of producing goods, from raw materials to finished products, is increasingly carried out wherever the necessary skills and materials are available at competitive cost and quality. Similarly, trade in services is essential for the efficient functioning of GVCs, not only because services link activities across countries but also because they help companies to increase the value of their products. This fragmentation highlights the importance of an ambitious complementary policy agenda to leverage engagement in GVCs into more inclusive growth and employment and the OECD is currently undertaking comprehensive statistical and analytical work that aims to shed light on the scale, nature and consequences of international production sharing.

 

From Global Value Chains/Global Production Networks: Organizing the Global Economy

The key organizational feature of the global economy?

  • “Global Value Chains are defined by fragmented supply chains, with internationally dispersed tasks and activities coordinated by a lead firm (a TNC)” (UNCTAD, 2013, p.125; original italics).
  • Data gathering exercises:UNCTAD,OECD,WTO,JETRO…
  • Now firmly on the agenda among leading international economic organizations
  • The international division of labour:imperial/colonialsystems and exchanges of raw materials and finished goods
  • The new international division of labour(NIDL):establishment of overseas production bases of core country TNCs
  • The global division of labour:much more complex global networks lying behind the production of different goods and services

The phenomenon

  • About 60% of global trade, which today amounts to more than $20 trillion, consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption” (UNCTAD, 2013, p. 122)
  • Not new, but since 2000 trade and FDI have increased exponentially, and ahead of GDP growth, highlighting a growth in TNC coordinated global value chains
  • Double counting – approx. 25-30% of value of world trade, e.g. the iPhone example. Not just trade from China to US, but incorporates high value components from Japan, South Korea etc.
  • Beyond national economies and basic trade data, and beyond TNCs and FDI, to more complex organizational structures involving intra-firm trade, arm’s length trade and non-equity modes e.g. subcontracting

 

 

From GLOBAL VALUE CHAIN ANALYSIS: A PRIMER

gvc5

 

From Global Capitalism and Commodity Chains: Looking Back, Going Forward

gvc4

 

From Global Value Chains/Global Production Networks: Organizing the Global Economy

gvc1gvc-2gvc3

 

Key Terms

  • Global Commodities Chains (GCCs)
  • Global Production Networks (GPNs)
  • Global Value Chains (GVCs)
  • Strategic Coupling
  • Economic Deepening
  • Trans National Corporation (TNC)
  • Multi National Corporation (MNC)
  • Multi National Enterprises (MNE)
  • SMILE curve
  • Economic Clusters
  • UNIDO (United Nations Industrial Development Organization)
  • OECD (Organization for Economic Cooperation and Development)
  • WTO (World Trade Organization)
  • WB (World Bank)
  • UNESCAP (Economic and Social Commission for Asia and Pacific)
  • UNCTAD ( United Nations Commission for Trade and Development)
  • ILO ( International Labor Organization)
  • G20 ( Group of 20 Nations)
  • TIVA ( Trade in Value Added)
  • On shoring
  • Off shoring
  • Outsourcing

 

 

Key People

  • Gary Gereffi
  • Neil M Coe
  • Jennifer Bair
  • Henry Wai-chung Yeung
  • Timothy Sturgeon

 

 

Key Sources of Research:

 

Measuring Trade in Value Added: An OECD-WTO joint initiative

https://www.oecd.org/tad/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm

 

 

Global Value Chains

https://www.oecd.org/about/g20-oecd-global-value-chains.htm

https://www.oecd.org/sti/ind/global-value-chains.htm

 

 

OECD Stocktaking Seminar on Global Value Chains 2014

https://www.oecd.org/g20/topics/trade-and-investment/g20-oecd-global-value-chains-2014.htm

 

 

IMPLICATIONS OF GLOBAL VALUE CHAINS
FOR TRADE, INVESTMENT, DEVELOPMENT AND JOBS

OECD, WTO, UNCTAD 6 August 2013

Prepared for the
G-20 Leaders Summit
Saint Petersburg (Russian Federation) September 2013

 

Click to access G20-Global-Value-Chains-2013.pdf

 

 

Inclusive Global Value Chains

Policy options in trade and complementary areas for GVC Integration by small and medium enterprises and low-income developing countries

OECD and World Bank Group

Report prepared for submission to G20 Trade Ministers Meeting Istanbul, Turkey, 6 October 2015

 

Click to access Participation-Developing-Countries-GVCs-Summary-Paper-April-2015.pdf

 

 

GLOBAL VALUE CHAINS: CHALLENGES, OPPORTUNITIES, AND IMPLICATIONS FOR POLICY

OECD, WTO and World Bank Group

Report prepared for submission to the G20 Trade Ministers Meeting Sydney, Australia, 19 July 2014

 

Click to access gvc_report_g20_july_2014.pdf

 

 

Making Global Value Chains (GVCs) Accessible to All

Progress Report
Meeting of the Council at Ministerial Level

6-7 May 2014

 

Click to access MCM-GVC-Progress-Report-May-2014.pdf

 

 

Inclusive Global Value Chains

Policy Options for Small and Medium Enterprises and Low-Income Countries

Ana Paula Cusolito, Raed Safadi, and Daria Taglioni

2016

Click to access 9781464808425.pdf

 

 

Global value chains in a changing world

Edited by Deborah K. Elms and Patrick Low

2013

 

Click to access aid4tradeglobalvalue13_e.pdf

 

 

The rise of global value chains

WORLD TRADE REPORT 2014

 

Click to access wtr14-2c_e.pdf

 

 

Who Captures the Value in the Global Value Chain? High Level Implications for the World Trade Organization

Peter Draper and Andreas Freytag

July 2014

 

Click to access E15-Global-Value-Chains-DraperFreytag-FINAL.pdf

 

 

Joining, Upgrading and Being Competitive in Global Value Chains: 

A Strategic Framework

 

O. Cattaneo G. Gereffi S. Miroudot D. Taglioni

 

Click to access 2013-04_WorldBank_wps6406_Cattaneo_Gereffi_Miroudot_Taglioni_Competitiveness_GVCs.pdf

 

 

Global value chains, development and emerging economies

Gary Gereffi

2015

Click to access WP_18.pdf

 

 

GLOBAL VALUE CHAINS IN A POSTCRISIS WORLD A DEVELOPMENT PERSPECTIVE

Olivier Cattaneo, Gary Gereffi, and Cornelia Staritz

2010

Click to access Gereffi_GVCs_in_the_Postcrisis_World_Book.pdf

 

 

 

Global value chains and global production networks in the changing international political economy: An introduction

Jeffrey Neilson1, Bill Pritchard1 and Henry Wai-chung Yeung

2014

http://www.tandfonline.com/doi/pdf/10.1080/09692290.2013.873369

 

 

Combining the Global Value Chain and global I-O approaches

 

 

 

Global value chains and world trade : Prospects and challenges for Latin America

René A. Hernández
Jorge Mario Martínez-Piva Nanno Mulder

 

http://repositorio.cepal.org/bitstream/handle/11362/37176/S2014061_en.pdf?sequence=1

 

 

 

Global value chains in a post-Washington Consensus world

Gary Gereffi

2014

 

https://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/10696/2014%20Feb_RIPE_Gereffi,%20Gary_GVCs%20in%20a%20post-Washington%20Consensus%20world.pdf?sequence=1

 

 

GLOBAL VALUE CHAINS AND DEVELOPMENT: Governance, Upgrading & Emerging Economies

Gary Gereffi

Director, Duke CGGC Duke University

2016

Click to access 697_10587.pdf

 

 

 

MaPPing gLoBaL VaLUe CHainS

Koen De Backer and Sébastien Miroudot

2014

Click to access ecbwp1677.pdf

 

 

 

Global Value Chains/Global Production Networks: Organizing the Global Economy

Neil M. Coe

2013

Click to access DrCoe.pdf

 

 

 

GLOBAL VALUE CHAIN ANALYSIS: A PRIMER

Gary Gereffi
Karina Fernandez-Stark

July 2016

 

http://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/12488/2016-07-28_GVC%20Primer%202016_2nd%20edition.pdf?sequence=1

 

 

 

WHY THE WORLD SUDDENLY CARES ABOUT GLOBAL SUPPLY CHAINS

GARY GEREFFI AND JOONKOO LEE

Duke University

http://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/10699/2012-07_JSCM_Gereffi%20&%20Lee_Why%20the%20world%20suddenly%20cares%20about%20global%20supply%20chains.pdf?sequence=1

 

 

 

The Economic Crisis: A Global Value Chain Perspective

 

Gary Gereffi

 

Click to access a-global-value-chain-perspective.pdf

 

 

The governance of global value chains

Gary Gereffi John Humphrey Timothy Sturgeon

2005

 

Click to access sturgeon2005.pdf

 

 

Global production networks and the analysis of economic development

Jeffrey Henderson, Peter Dicken, Martin Hess, Neil Coe and Henry Wai-Chung Yeung

2002

Click to access 2002_RIPE.pdf

 

 

GLOBAL VALUE CHAINS: INVESTMENT AND TRADE FOR DEVELOPMENT

UNCTAD 2013

Click to access wir2013_en.pdf

 

 

Asia and Global Production Networks

Implications for Trade, Incomes and Economic Vulnerability

Benno Ferrarini David Hummels

2014

Click to access asia-and-global-production-networks.pdf

 

 

 

Global Production Networks: Theorizing Economic Development in an Interconnected World

By Neil M. Coe, Henry Wai-Chung Yeung

2015

 

 

Toward a Dynamic Theory of Global Production Networks

Henry Wai-chung Yeung

Neil M. Coe

 

Click to access 2015_GPN_theory_paper_EG%20Vol91(1)_29-58.pdf

 

 

Global Value Chains and deVelopment

unido’s support towards inclusive and sustainable industrial development

2015

Click to access GVC_REPORT_FINAL.PDF

 

 

Global Value Chains: The New Reality of International Trade

Sherry Stephenson

December 2013

Click to access E15_GVCs_BP_Stephenson_FINAL.pdf

 

 

GLOBAL VALUE CHAINS SURVEYING DRIVERS AND MEASURES

João Amador and Sónia Cabral

2014

Click to access ecbwp1739.en.pdf

 

 

GLOBAL VALUE CHAINS AND INTERCONNECTEDNESS OF ASIA-PACIFIC ECONOMIES

Asia Pacific Trade and Investment Report

2015

 

Click to access Chapter%207%20-%20GVCs%20in%20the%20Asia-Pacific.pdf

Click to access Full%20Report%20%20-%20APTIR%202015.pdf

 

 

Global Capitalism and Commodity Chains: Looking Back, Going Forward

JENNIFER BAIR

2005

COMPETITION & CHANGE, Vol. 9, No. 2, June 2005 153–180

 

 

Global Value Chains: Development Challenges and Policy Options

Proposals and Analysis

December 2013

Click to access E15-Global-Value-Chains-Compliation-Report-FINAL.pdf

 

 

Globalizing’ regional development: a global production networks perspective

Neil M Coe, Martin Hess, Henry Wai-chung Yeung, Peter Dicken and Jeffrey Henderson

Click to access 2004_TIBG.pdf

 

 

Multilateral approaches to Global Supply Chains

 

International Labour Office

2014

 

Click to access wcms_485351.pdf

Increasing Returns, Path Dependence, Circular and Cumulative Causation in Economics

Increasing Returns, Path dependence, and Circular and Cumulative Causation in Economics

 

Increasing Returns is another term for Positive Feedback loop.

Path Dependence is also known as Lock-In

Circular and Cumulative Causation is another name for Positive Feedback Loop.

 

Vicious Circle – Bad gets to worse, Failure leads to more failure

Virtuous Circle – Success breeds Success, Wealth gets more wealth

 

See this Document – Book Foreward by Geoffrey Hodgson

Geoffrey Hodgson foreward in a book The Foundations of Non Equilibrium Economics.

 

Key Economists :

  • Allyn Young
  • Gunnar Myrdal
  • Karl William Kapp
  • Kaldor
  • Veblen
  • Paul Romer
  • Knut Wicksell
  • W. Brian Arthur
  • Paul David
  • Steven Durlauf
  • Nicholas Georgescu-Roegen

 

Various Increasing Returns, Circular and Cumulative Causations Theories

  • CCC Theory of Allyn Young
  • CCC Theory of N Kaldor
  • CCC Theory of Gunnar Myrdal
  • CCC Theory of T Veblen
  • CCC Theory of Paul Romer
  • CCC Theory of Paul Krugman
  • CCC Theory of W. Brain Arthur

 

Circular Causation in Kaldor Theory

kaldor

 

 

Key Sources of Research:

 

A A Young

Increasing Returns and Technical Progress

The Economic Journal

1928

Click to access young28.pdf

 

 

Kaldor, N. (1966)

Causes of the Slow Rate of Economic Growth of the United Kingdom,

Cambridge: Cambridge University Press.

 

 

Kaldor, N. (1970)

“The case for regional policies,”

Scottish Journal of Political Economy, 17, pp. 337-348.

 

 

Kaldor, N. (1985)

Economics Without Equilibrium,

Cardiff, University College Cardiff Press.

 

 

Kaldor, N. (1996)

Causes of Growth and Stagnation in the World Economy,

Cambridge, Cambridge University Press

 

 

 

Kaldor, N., 1981.

The role of increasing returns, technical progress and cumulative causation in the theory of international trade and economic growth.

Economie appliquée, 34(4), pp.593-617.

 

 

Nicholas Kaldor on Endogenous Money and Increasing Returns

Guglielmo Forges Davanzati

2013

 

Click to access Forges.pdf

 

 

Fujita, Nanako.

“Myrdal’s theory of cumulative causation.”

Evolutionary and Institutional Economics Review 3, no. 2 (2007): 275-284.

 

 

Gunnar Myrdal’s Theory of Cumulative Causation Revisited

Nanako Fujita

 

Click to access paper147.pdf

 

 

Circular Cumulative Causation (CCC) à la Myrdal and Kapp — Political Institutionalism for Minimizing Social Costs

Sebastian Berger

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.587.5765&rep=rep1&type=pdf

 

 

European Contributions to Evolutionary Institutional Economics: The Cases of ‘Cumulative Circular Causation’ (CCC) and ‘Open Systems Approach’ (OSA).
Some Methodological and Policy Implications

Sebastian Berger and Wolfram Elsner

 

Click to access European_Institutionalism_Berger_Elsner_JEI_No_2_07_5_07.pdf

 

 

Dutt, Amitava Krishna.

“Path dependence, equilibrium and economic growth.”

In Path Dependency and Macroeconomics, pp. 119-161. Palgrave Macmillan UK, 2009.

 

 

Setterfield, Mark.

“Notes and comments. Cumulative causation, interrelatedness and the theory of economic growth: a reply to Argyrous and Toner.”

Cambridge Journal of Economics 25, no. 1 (2001): 107-112.

 

 

Setterfield, Mark.

“‘History versus equilibrium’and the theory of economic growth.”

Cambridge Journal of Economics 21, no. 3 (1997): 365-378.

 

 

Setterfield, M. (2009)

“Path dependency, hysteresis and macrodynamics,”

in P. Arestis and M. Sawyer (eds) Path Dependency and Macroeconomics (International Papers in Political Economy 2009), London, Palgrave Macmillan, 37-79

 

 

Setterfield, M.

(1997a)

Rapid Growth and Relative Decline: Modelling Macroeconomic Dynamics with Hysteresis,

London: Macmillan.

 

 

 

Kaldor’s 1970 Regional Growth Model Revisited

A.P.Thirlwall

ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/1311.pdf

 

 

Argyrous, George.

“Setterfield on cumulative causation and interrelatedness: a comment.”

Cambridge Journal of Economics 25, no. 1 (2001): 103-106.

 

 

Endogenous Growth: A Kaldorian Approach

Mark Setterfield

2010

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.163.8257&rep=rep1&type=pdf

 

 

Increasing Returns and Long Run Growth

Paul Romer

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.589.3348&rep=rep1&type=pdf

 

 

O’Hara, P.A., 2008.

Principle of circular and cumulative causation: Fusing Myrdalian and Kaldorian growth and development dynamics.

Journal of Economic Issues, 42(2), pp.375-387.

 

 

Path Dependency and Macroeconomics

edited by P. Arestis, Malcolm Sawyer

 

 

Main Currents in Cumulative Causation: The Dynamics of Growth and Development
Phillip Toner
Palgrave Macmillan UK, May 12, 1999 – Business & Economics – 228 pages

 

 

 

Why is Economics not an Evolutionary Science?

Thorstein Veblen

(with an introduction by Jean Boulton)

 

https://emergentpublications.com/ECO/ECO_other/Issue_12_2_6_CP.pdf?AspxAutoDetectCookieSupport=1

 

 

 

On the evolution of Thorstein Veblen’s evolutionary economics

Geoffrey M. Hodgson

 

Click to access evveblenec.pdf

 

 

 

“Different epistemologies beneath similar methods: The case of causal loop thinkers.”

Maruyama, Magoroh.

Human Systems Management 9, no. 3 (1990): 195-198.

http://content.iospress.com/download/human-systems-management/hsm9-3-07?id=human-systems-management%2Fhsm9-3-07

 

 

The feedback concept in American social science, with implications for system dynamics.

Richardson, G.

(1983, July).

Click to access richa001.pdf

 

 

Path Dependence in Aggregate Output

STEVEN N. DURLAUF

 

Click to access 9870fa9010ed42d897dae442a3316d5cf805.pdf

 

 

Nonergodic Economic Growth

STEVEN N. DURLAUF

 

Click to access Nonergodic%20Economic%20Growth.pdf

 

 

Evolution and Path Dependence in Economic Ideas: Past and Present

edited by Pierre Garrouste, Stavros Ioannides,

European Association for Evolutionary Political Economy

 

 

Path dependence, its critics and the quest for ‘historical economics

Paul A. David

Click to access swp00011.pdf

 

 

Positive Feedbacks and Research Productivity in Science: Reopening Another Black Box

Paul A. David

 

Click to access David(1994)_PositiveFeedbacks_Marstrand3_re-release%5B1%5D.20070702.120531.pdf

 

 

Increasing Returns and Path Dependence in the Economy

By W. Brian Arthur

University of Michigan Press, 1994 – Business & Economics – 201 pages

 

 

Positive Feedbacks in the Economy

W. Brian Arthur

26 November 1989

 

https://files.itslearning.com/data/ntnu/open/co35568/1558085.pdf?

 

 

Complexity economics: a different framework for economic thought

W. Brian Arthur

March 12, 2013

 

Click to access Comp.Econ.SFI.pdf

 

 

A webpage for resources on Path dependence in Economics

http://www2.econ.iastate.edu/tesfatsi/apathdep.htm

 

 

The Foundations of Non-Equilibrium Economics: The Principle of Circular and Cumulative Causation

edited by Sebastian Berger

 

 

The New Approach to Regional Economics Dynamics: Path Dependence and Spatial Self-Reinforcing Mechanisms

Domenico Marino and Raffaele Trapasso

 

Click to access Chapter%2015%20The%20New%20Approach%20to%20Regional%20Economics%20Dynamics;%20Path%20Dependence%20and%20Spatial%20Self-Reinforcing%20Mechanisms.pdf

 

Positive Feedback Mechanisms in. Economic Development: A Review of Recent Contributions

A RODRFGUEZ-CLARE

Click to access Positive%20Feedback%20Mechanisms%20in%20Economic%20Development.pdf

 

 

Increasing Returns and Economic Geography

Paul Krugman

JPE,1991

March 4, 2010

 

Click to access krugman91.pdf

Increasing Returns and Path Dependence in Economics

Increasing Returns and Path Dependence in the Economics

  • Increasing Returns
  • Self Reinforcement
  • Positive Feedbacks
  • Lock-in

 

Key People:

  • W. Brain Arthur
  • Ken Arrow
  • Scott Page
  • Paul David

 

From Increasing Returns,  Path Dependence in Economy 

Forward to the book by K Arrow

The concept of increasing returns has had a long but uneasy presence in economic analysis. The opening chapters of Adam Smith’s Wealth of Nations put great emphasis on increasing returns to explain both specialization and economic growth. Yet the object of study moves quickly to a competitive system and a cost-of-production theory of value, which cannot be made rigorous except by assuming constant returns. The English school (David Ricardo, John Stuart Mill) followed the competitive assumptions and quietly dropped Smith’s boldly-stated proposition that, “the division of labor is limited by the extent of the market,” division of labor having been shown to lead to increased productivity.

 

Other analysts in different traditions, especially the French mathematician and economist, A. A. Cournot (1838), saw clearly enough the incompatibility of increasing returns and perfect competition and developed theories of monopoly and oligopoly to explain the economic system implied by increasing returns. But this tradition acts like an underground river, springing to the surface only every few decades. Alfred Marshall expanded broadly, if vaguely, on the implications of increasing returns, including those for economic growth, irreversible supply curves, and the like, as well as the novel and far-reaching concept of externalities, where some, at least, of the increasing returns are captured, not by the producer but by others.

 

The implications of increasing returns for imperfect competition were developed, though far from completely, by Edward Chamberlin and Joan Robinson in the 1930s. There was sporadic emphasis on the role of increasing returns in economic growth by Allyn Young (1928) (but only in very general terms) and then by Nicholas Kaldor in the1950s. Many developmental theorists, particularly in the 1950s, advocated radical planning policies based on vague notions of increasing returns.

 

From Path Dependence

 

A survey of the literature on path dependence reveals four related causes: increasing returns, self-reinforcement, positive feedbacks, and lock-in. Though related, these causes differ. Increasing returns means that the more a choice is made or an action is taken, the greater its benefits. Self-reinforcement means that making a choice or taking an action puts in place a set of forces or complementary institutions that encourage that choice to be sustained. With positive feedbacks, an action or choice creates positive externalities when that same choice is made by other people. Positive feedbacks create something like increasing returns, but mathematically, they differ. Increasing returns can be thought of as benefits that rise smoothly as more people make a particular choice and positive feedbacks as little bonuses given to people who already made that choice or who will make that choice in the future. Finally, lock-in means that one choice or action becomes better than any other one because a sufficient number of people have already made that choice.

 

From Positive Feedbacks in the Economy

 

Conventional economic theory is built on the assumption of diminishing returns. Economic actions eventually engender a negative feedback that leads to a predictable equilibrium for prices and market shares. Negative feedback tends to stabilize the economy because any major changes will be offset by the very reactions they generate. The high oil prices of the 1970’s encouraged energy conservation and increased oil exploration, precipitating a predictable drop in prices by 198x. According to conventional theory the equilibrium marks the “best” outcome possible under the circumstances: the most efficient use and allocation of resources.

Such an agreeable picture often does violence to reality. In many parts of the economy stabilizing forces appear not to operate. Instead, positive feedback magnifies the effect of small economic shifts; the economic models that describe such effects differ vastly from the conventional ones. Diminishing returns imply a single equilibrium point for the economy, but positive feedback—increasing returns—make for multiple equilibrium points. There is no guarantee that the particular economic outcome selected from among the many alternatives will be the “best” one. Furthermore, once chance economic forces select a particular path, it may become locked in regardless of the advantages of other paths. If one product or nation in a competitive marketplace gets ahead by “chance” it tends to stay ahead and even increase its lead. Predictable, shared markets are no longer guaranteed.

If increasing-returns mechanisms are important, why have they been largely ignored until recently? Some would say that complicated products—high technology—for which increasing returns are so prevalent, are themselves a recent phenomenon. This is true, but only part of the answer. After all, in the 1940’s and 1950’s economists like Gunnar Myrdal and Nicholas Kaldor identified “cumulative causation” or positive feedback mechanisms that did not involve technology. Orthodox economists avoided increasing returns for deeper reasons.

Some economists found the existence of more than one solution to the same problem distasteful—unscientific. “Multiple equilibria,” wrote Josef Schumpeter in 1954, “are not necessarily useless, but from the standpoint of any exact science the existence of a uniquely determined equilibrium is, of course, of the utmost importance, even if proof has to be purchased at the price of very restrictive assumptions; without any possibility of proving the existence of uniquely determined equilibria—or at all events, of a small number of possible equilibria—at however high a level of abstraction, a field of phenomena is really a chaos that is not under analytical control.”

Other economists could see that increasing returns would destroy their familiar world of unique, predictable equilibria and along with this the notion that the market’s choice was always best. Moreover, if one or a few firms came to dominate a market, the assumption of perfect competition, that no firm is large enough to affect market prices on its own (which makes economic problems easy to analyze), would also be a casualty. When John Hicks surveyed these possibilities in 1939 he drew back in alarm. “The threatened wreckage,” he wrote, “is that of the greater part of economic theory.” Economists restricted themselves to diminishing returns, which presented no anomalies and could be analyzed completely.

Studying such problems in 1979, I believed I could see a way out of many of these difficulties. In the real world, if several similar-sized firms entered a market together, small fortuitous events—unexpected orders, chance meetings with buyers, managerial whims—would help determine which ones achieved early sales and, over time, which firm came to dominate. Economic activity is quantized by individual transactions that are too small to foresee, and these small “random” events could cumulate and become magnified by positive feedbacks over time to determine which solution was reached. This suggested that situations dominated by increasing returns should be modeled not as static, deterministic problems, but rather as dynamic processes with random events, and with natural positive feedbacks or non-linearities. With this strategy an increasing-returns market could be recreated theoretically and watched as its corresponding process unfolded again and again. Sometimes one solution would emerge, sometimes (under identical conditions) another. It would be impossible to know in advance which of the multiple solutions would emerge in any given run, but it would be possible to record the particular set of random events leading to each solution and to study the probability that a particular solution will emerge under a certain set of initial conditions. The idea was simple and it may well have occurred to economists in the past. But making it work called for non-linear random-process theory that did not exist in their day.

 

 

Key Sources of Research:

 

Competing Technologies, Increasing Returns, and Lock-In by Historical Events

W. Brian Arthur

The Economic Journal, Vol. 99, No. 394. (Mar., 1989), pp. 1

 

Click to access Arthur_1989.pdf

 

Path Dependence

Scott E. Page

Center for the Study of Complex Systems, University of Michigan, Ann Arbor 48104,

 

Click to access Page2006.pdf

 

Increasing Returns and the Two Worlds of Business 

by W. Brian Arthur

April 27, 1996

 

Click to access Arthur_B.pdf

 

Path Dependence in Decision-Making Processes: Exploring the Impact of Complexity under Increasing Returns

Jochen Koch,Martin Eisend,  Arne Petermann,

 

Click to access 0a85e5395b8bf886d7000000.pdf

 

“Lock-in” vs. “critical masses” – industrial change under network externalities

Ulrich Witt

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.336.6781&rep=rep1&type=pdf

 

Complexity and the Economy

W. Brian Arthur

Click to access arthur1999a.pdf

 

Arrow, Kenneth J.

“Path dependence and competitive equilibrium.”

History Matters. Essays on Economic Growth, Technology, and Demographic Change, Hrsg. Timothy W. Guinnane (2003): 23-35.

Click to access Arrow.pdf

 

 

Path dependence, its critics and the quest for ‘historical economics’

Paul A. David

Click to access 0deec53b482217c114000000.pdf

 

The Complexity Turn

John Urry

 

Click to access Urry-The-Complexity-Turn.pdf

 

 

“Silicon Valley” Locational Clusters: When Do Increasing Returns Imply Monopoly?

W. Brian Arthur

SFI WORKING PAPER: 1989–007

https://www.semanticscholar.org/paper/-silicon-Valley-Locational-Clusters-When-Do-Arthur/435d47aad77998366d32924e8c1b9988c31c4380/pdf

 

David, Paul A.

“Why are institutions the ‘carriers of history’?: Path dependence and the evolution of conventions, organizations and institutions.”

Structural change and economic dynamics 5.2 (1994): 205-220.

Click to access 00b7d529bc11dee673000000.pdf

 

Increasing Returns,  Path Dependence and Study of Politics

 

Click to access Pierson%20APSR%202000.pdf

 

Increasing Returns and Path Dependence in the Economy

by W. Brian Arthur,

Univ. of Michigan Press,

Ann Arbor, 1994.

http://tuvalu.santafe.edu/~wbarthur/Books/Preface.html

 

Complexity economics:
a different framework for economic thought

W. Brian Arthur

2013

 

Click to access Comp.Econ.SFI.pdf

 

Increasing Returns and the New World of Business

by W. Brian Arthur

1996

 

Click to access HBR.pdf

 

COMPETING TECHNOLOGIES, INCREASING RETURNS,

AND LOCK-IN BY HISTORICAL EVENTS

W. Brian Arthur

Click to access EJ.pdf

 

 

Positive Feedbacks in the Economy

W. Brian Arthur

26 November 1989

 

Click to access SciAm_Article.pdf