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Macroeconomics needs to consider the potential of network effects

Article Link: http://news.mit.edu/2016/network-effects-hurt-economies-0406

The article talks about the fact that “Relatively small shocks can become magnified and then become shocks you have to contend with [on a large scale],”. In the economic sense it means that shocks in certain narrow sectors can cascade down and effect the economy in a much larger scale. They take into consideration specific examples that illustrate the point of a small monetary drop in a smaller  industrial sector can lead to a larger monetary drop in a much larger economic sector. For example: “for every dollar of value-added growth lost in the manufacturing industries because of competition from China, six dollars of value-added growth were lost in the U.S. economy as a whole”. This conflicts with a previous point of view of economic thought that believed smaller shocks would would dissipate to the much larger economic trends. However, perhaps it is the case that both of these theories tend to be true and perhaps are part of a larger economic thought yet to be fully understood.

I tend to think about what it means to have the network effects be part of the economy as a whole. The biggest aspect of this is trying to capture how the economy looks as a graph. If it was possible to construct the full economy as a graph with all the different companies and factors being nodes, then we would be able to see how prominent network effects are. My idea is that there is some sort of network cascades in economies and I have an idea of what could be possibly be happening in the data that the article discussed. Perhaps, it is the case that the manufacturing industries that were competing with China were “the initial adopters” of the “change from the norm” we discussed in class. It turns out since this cascaded into the rest of the US economy that they were strong enough to cause a complete cascade down all the way to the US economy. Then it is possible that other trends as expressed before in previous economic thought weren’t strong enough to completely cascade and due to the existence of a dense cluster. This idea might not be fully true or perhaps more complex but it would account for the two different viewpoints of economic thought.

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