The Economy is a Network

The 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 latest post today – 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 this network diagram from Valdis Krebs:

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.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

15 thoughts on “The Economy is a Network

  1. Excellent post Tim! If could summarize it in my own words: In a thick economy, connections create more value than transactions. The economy is a network, or a complex system of many interdependent agents interacting, transacting and connecting and has to be treated as such, rather than as a ‘simple’ or ‘complicated’ system with known and predictable cause and effect relationships (see also Dave Snowden’s Cynefin framework for more context on the distinctions). I wrote a post a little while ago not dissimilar from yours – the topic was open innovation – but you can insert “economy” everytime you read “open innovation”, and the point about connections>transactions is the same: http://bit.ly/asx03Q. Wonder whether you will agree.

  2. It looks like we’re thinking along very similar paths here. I would definitely agree with the way that you have rephrased things. I somehow missed your post when it first went up – so thanks for the link!

  3. This is outstanding, Tim. You’re starting to give me ‘post-anxiety’ to come up with things that are just as good. I forwarded it onto some of our economic policy friends in the government sector.

  4. It really does, doesn’t it Jon? :-) Thanks for the kind words – I did a poor job of pointing to antecedents here, sorry about that!

  5. I wasn’t gently chastising you, Tim. I was just trying to reinforce my beliefs 😉

  6. I know Jon- I apologised both because mentioning wireaerchy would have made it a stronger post and also because itcwould have been good to give you a plug. But I did take your original comment at face value. :-)

  7. This is outstanding, Tim. You’re starting to give me ‘post-anxiety’ to come up with things that are just as good. I forwarded it onto some of our economic policy friends in the government sector.
    thanks

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