tragically uncareful councils of Troy. But now, in an age where connection decides so much, control over gates has a unique leverage. When you finally can feel out the topology of our age, when in anger or frustration or hope or wonder you are ready to act, then this is among the first questions you have to ask. I’m on the topology now, where are the gates.
Gates in an age of instant, everywhere, smart networks are, you can imagine, different from the ones that girded Troy or the Tang dynasty. It’s not merely that they’re made of bits and algorithms not bricks, it’s that the underlying nature of their power is different. The most visible evidence of this distinction was first observed by economists a couple of decades ago, as they contemplated the fortunes of the information age, wealth that had been assembled at an eye-watering pace. Unlike traditional businesses which turned over time into competitive slugfests with very low profits, many high-tech firms seemed to run with a new, nearly inverted logic. “Our understanding of how markets and businesses operate was passed down to us more than a century ago by figures such as Alfred Marshall,” the economist Brian Arthur wrote in the Harvard Business Review in the summer of 1996. “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.”23! Marshall had been the first to name this phenomenon in the 1890s: “Diminishing Returns”. As any line of business gets more competitive, the profits - or “returns” to investment - shrink. Henry Ford invents a car, he has no competition at first and fairly prints money. But Ford doesn’t enjoy his monopoly for long. Pretty soon the Dodge brothers follow him into business, as does Walter Chrysler and then a cascade of new auto companies. They all take a piece of the pie; profits for every carmaking firm diminish. Then the Japanese pile in. The Koreans show up. These new companies compete with growing intensity. Marginal profits decline for everyone. Then the Chinese. And the Indians.
As he studied the balance sheets of infotech firms, Arthur noticed something strange: Returns were increasing over time. As their markets matured some companies made more marginal money with each passing day, not less. Marshall’s 19t Century industrial economics had never contemplated such a lucrative arrangement. “Increasing returns,” Arthur explained, “are the tendency for that which is ahead to get farther ahead. They are mechanisms of positive feedback that operate—within markets, businesses, and industries—to reinforce that which gains success or aggravate that which suffers loss.” In other words: Winner takes all. No second place. Arthur was thinking, as he wrote, about the then-nascent computer software business. Say for instance, Arthur sent you a copy of his paper to read before publication as a Microsoft Word document. Well, if you wanted to see what he had to say, you'd pretty much have to own a copy of Word yourself. If you then
231 As he studied: Brian Arthur, “Increasing Returns and the World of Business” Harvard Business Review (1996)
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