The Economy is a Network

The Economy is a NetworkThe word “network” causes a lot of the same problems that “innovation” does – it is used in so many different ways that it is often hard to tell exactly what the user means, it’s in fashion to the point of sounding like hype, and as a consequence a lot of people are ready to stop using it altogether. So when I say that “the economy is a network” it can cause some confusion. Do I mean it is like a network? That is has network-like properties? That it’s something between a hierarchy and a market?

No. I mean that the economy is a network – and that the best way to analyse it as a network. In network analysis, a network consists of nodes (people, firms, countries and so on) and the connections between them (economic exchange, friendship, family relationships, disease vectors and so on). An economic network then is one where people are the nodes, and the economic relationships form the connections between them.

Thinking about economics in this way leads to some useful insights. I was reminded of this when I read Umair Haque’s post – The Real Roots of Recovery. Here is how he sets up the problem that he’s trying to address:

“What is an economy? Is it just rivers of money and stuff, flowing back and forth between consumer and producer, resting on a bed of information? That’s more or less the way we’ve conceptualized it. It’s why economists often say that banks and funds make up the “financial economy,” while industries that make stuff are the “real economy.”

When we conceptualize an economy that way, the implicit goal for both “producers” and “consumers” is merely accumulation of money and stuff. More, more, more. That’s what I call a “thin” economy. That kind of economy is thin in three ways: it’s brittle, easily broken; it’s fragile, crisis-prone; and it’s as shallow as Paris Hilton.”

His suggestion is that to make a stronger economy, a “thick” economy, we need to focus on making real connections with others.

“Yet even that’s just a beginning. The economy is “constructed” by us: built anew every second of every day by each of our billions of tiny decisions, emergently. The real change begins with each of us, and the choices we make.”

This is a network story! The issue with networks is that ties are expensive to maintain. If we think about economic ties, the involve money, attention, time and care. My read of Haque’s argument is that we tend to only think of the ties in terms of exchange. In this view, we choose to buy a loaf of bread, we pay for it, and that’s that. That’s thin. A thick network tie will consider attention, time and trust as well.

What does this mean in practical terms? If we think of our economic relationships as network ties, then the idea that every transaction is a one-off makes no sense at all. Each time we need something, we have to figure out who is cheapest, where they are, and how to make that transaction. On the other hand, if we think of economic relationships as network ties, as something that persists – we value them differently. Now trust becomes more important, as does attention. We want ties that we don’t have to worry about because we know what we’re getting. We want a stable, persistent network. The way to get that is to build relationships with the people in our personal economy. We don’t have to recreate a whole new network each time we need something.

Viewing the economy this way also changes where we want to be in the economy. Take a look at the network diagram from Valdis Krebs above.

The people that I’ve circled are those with high betweenness centrality (learn about that here). In an exchange economy, those are great positions to be in because you can take advantage of your position in between two big clusters. Any goods or information that has to pass between the two groups has to go through you, and this is profitable. However, this also leads to a brittle network. If you lose the people with high betweenness, the network breaks down as the groups become isolated.

If you take a network view of the economy, you become worried about the overall structure of the network. You build links between people so that there is redundancy in the network (network weaving!). This is the strategy that O’Reilly Media has used very successfully. In a network economy, we try to build up the structure of the network to increase resiliance.

Finally, thinking about the economy as a network helps with innovation. In an exchange economy, you just have to get your new ideas out there. If they are better, people will buy from you. Everyone that has ever tried to get a new idea to spread knows that it’s not this easy. We have to get people to disconnect from whatever ideas they’re currently using and adopt ours. If we think of the economy as a network, this process makes sense. Our innovative ideas (new products, newservices or new ways of doing things) have to build new connections. Often this means that we need people to break old connections. This is the central problem in idea diffusion.

The economy is a network. Think about it this way and suddenly we move beyond transactions. The nature of the economic ties between us becomes much more important. These ties involve money, time, attention and trust. If we pay attention to these four things as we build up our economic network, we’ll start building a thicker, more resilient economy.

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Tim KastelleTim Kastelle is a Lecturer in Innovation Management in the University of Queensland Business School. He blogs about innovation at the Innovation Leadership Network.

Tim Kastelle




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No Comments

  1. Spiro Spiliadis on January 10, 2011 at 7:51 am

    “His suggestion is that to make a stronger economy, a “thick” economy, we need to focus on making real connections with others.”

    We call this Value Networks, and the only way to get value from the network is to “work the net” as Harold Jarche would say.

    Thus an economy to be thick enough has to go through the transition of working day in and out so that….

    “Networked learning as “an individual, disciplined process by which we make sense of information, observations and ideas.”

    But here’s the problem, social gaves us that break free ability so that we can reach next level value(s) but the ability to function is where the thick economy will come from, you have to be able to build a foundation around you that is agile enough to either help you find value in the network, or the network to find value from you.

    This is how we drive new economy to networks, The human capital is the economy….

  2. Raf Stevens on February 2, 2011 at 4:27 am

    This article has the same focus as my crowdsourced-book-project “The New Trade” in which I argue that in a hyperconnected world we need to emotionally connect to each other in order to make business work today… we need to trade “stories”! It is all about peer2peer storytelling.

    Download THE Manifesto that I have written about it here:
    Raf Stevens

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