LOCKED IN

Dick Pountain/16 December 2007/13:36/Idealog 161

Here's one for your next pub quiz: what do Jonathon Ross's £16m salary, a backwards-running clock in Florence and Microsoft Windows have in common? The answer is that they all demonstrate aspects of a phenomenon that goes by different names in different disciplines, called "increasing returns" by economists, "lock-in" by marketeers and "positive feedback" by engineers. The basic idea is the same in every case though, that some process runs away with itself instead of settling down to a nice steady plateau.

Positive feedback is familiar to most of us as that horrible howling noise that happens if you bring a microphone too near the loudspeaker it's connected to. Sound from the speaker feeds back into the amplifier and gets amplified some more, and so on in an exponential spiral that's only stopped by the limits to mechanical motion of the speaker cones (which may be damaged by the experience). To most engineers positive feedback, while not without applications, is a dangerous toy compared to its peaceful sibling negative feedback, which forms the basis of almost all control systems, from your central heating thermostat to fly-by-wire aircraft controls. Negative feedback takes the output from some process and feeds it back into its input in *negated* or sign-reversed form, so that far from making that process run faster it slows it down. As a result a steady balance is reached, an equilibrium point from which the system is then reluctant to shift thanks to the damping effect of the feedback.  

That's where the connection with economics comes in, because classical economic theory has it that markets possess this same self-stabilising property - prices of some commodity may fluctuate wildly for a while but will soon settle down to an equilibrium, at precisely the famous "market-clearing" price where supply exactly matches demand. Negative feedback is at work here because when something gets more expensive people buy *less* of it, which introduces that vital minus sign. Adam Smith described this effect as the "invisible hand" over 200 years ago, but it still dominates modern economic thinking in the form of neoclassical theory. The problem is that it's only partially true, but is held like a religious dogma by free-market zealots. It's always been perfectly clear to anyone not in thrall to such dogma that market equilibrium breaks down from time to time - in slumps, crashes and recessions - but what's been recognised only recently is that economies exhibit positive feedback even in normal times, in the shape of speculative bubbles, "winner-takes-all" rewards and "lock-in". The new wave of economists refer to such effects as "increasing returns", as opposed to the "diminishing returns" in classical theory that are responsible for market stability.

Increasing returns crop up in any market where a commodity becomes *more* useful the *more* people have it: those twin "mores" are the signature of positive feedback. The mobile phone is a perfect example: if you were the only person in the world with a mobile it would be utterly useless, but the more of your friends who have one too, the more useful it becomes. Microsoft Windows is another example: the more people who use it, the more software there is for it, so the more people use it. Similar effects occur with Web 2.0 style services like FaceBook, MySpace and Flickr where the more use them, the more use them...

Lock-in is another aspect of increasing returns - when several product standards compete, one often achieves a complete monopoly once a critical number of people are using it, because economies of scale make the alternatives unviable. Classic examples are the QWERTY keyboard and the ABC arrangement of foot pedals in modern cars: there were alternatives to both early in the 20th century that are long forgotten. Same goes for clocks - in the 15th century not all clocks ran in the same direction, but lock-in to what we now call "clockwise" happened so long ago that we'd have forgotten the others were it not for the fact that one - designed by Uccello in 1443 - still runs anticlockwise over the main door of the Duomo in Florence. And contrary to free-market theology, the market does *not* infallibly choose the better option (think Betamax versus VHS, Intel v Motorola) the winner very often being selected purely by chance events. It's all reminiscent of the process of "symmetry-breaking" that cosmologists and particle physicists talk about, where some arbitrary fluctuation causes a system to settle into one of several possible equilibria. 

But what about Jonathon Ross's salary you cry? Well, he's also a case of increasing returns, along with most of our film stars, sportspeople, and those oddballs like Jordan and Paris H who're famous for being famous. Once you pass a certain degree of public notoriety your value to tabloid newspapers or digital TV channels becomes such that they'll pay outrageous amounts of money to get you, rather than let their competitors have you - the "talent" fractionates out into a few winners and the rest. The positive feedback may become so vicious that star salaries inflate to a point that threatens the profitability of the whole enterprise, as has repeatedly happened in Hollywood, and may now be happening to the BBC (which also has licence-payers money to insulate it from competition). The remedy is highly unpalatable nowadays, the wet blanket of taxation.