In this brief position paper, we want to look at some theoretical properties of a particular category of models and see to what extent they are applicable to problems of structural change. More specifically we will look at the properties of self reinforcing mechanisms or positive feedback systems as opposed to diminishing returns and negative feedback where the system evolves to a single and stable equilibrium. Positive feedback systems (`positive' should not be interpreted as `good' but in the sense of a catalytic influence) give rise to a specific kind of behavior.
Even though other authors have made significant contributions, it is the credit of Brian Arthur to have formalized this idea of positive feedback in the form of non-linear Polya processes. Arthur restricts his approach to high-tech industries and how markets come to choose for a particular technology rather than another. However we will try to apply his ideas to issues of structural change. By structural change we mean any change in structure of an national economy, a commercial organization or any other system (financial market, ...). Applying here simply means looking for examples that, at first sight, bear some resemblance to the discussed properties. We therefore do not claim that positive feedback models are completely applicable to the kind of phenomena described. The following should be seen as a Gedankenexperiment and could serve as a basis for discussion.
A second example discusses the transformation of Eastern Europe. Again we take some quotes this time from an article by Wyplosz. It illustrates the fact that even though there are theoretical reasons to assume a system will evolve in a specific way, small or relatively unimportant events cause reality to diverge from theory.
`During the course of 1989, there was a widely shared feeling of enthusiasm as formerly planned economies in Europe announced their determination to embrace the market system. It was expected that the shift would take the shape of a J-curve. After an early, possibly deep and longlasting recession, fast growth would set in and allow CEE, within a decade or two, to catch up with Western Europe ... Three years later, a deep sense of disappointment, sometimes even failure is developing among a number of observers. To varying degrees, measured output has fallen dramatically, unemployment is quickly rising above Western European levels, inflation which initially exploded is still not under control and budget deficits deepen...
The addition of minority discontents may result in major political difficulties and this leads governments to avoid actions that generate strong minority objections... There is a need therefore to pay attention to such `details' as political acceptability.' [Wyplosz93]
The third example also comes from the same area, namely the transformation of Eastern European economies. This time we give a quote from an article by van Wijnbergen who gives two reasons, both of them related to micro-behavior, that at an aggregated level lead to unexpected results.
`How should prices be decontrolled, slowly or in a big bang? Why is it that governments committed to eventual price flexibility so often seem to be unable to let go of `temporary' controls? How can one explain that after price increases early in a programme of price controls, output often rises while at the same time shortages also increase? This paper argues that intertemporal speculation, hoarding and the political economy of price reform go a long way towards explaining all these puzzles. We show that the interaction between shortages and political vulnerability of reformist governments to early perceptions of failure make for a strong argument against gradualism in the decontrol of prices...
Price controls often focus on commodities that are storable and can thus be used in intertemporal speculation... The smaller the initial price increase, the lower the observed supply eleasticity and the greater the probability that the programme of reform will be abondoned' [Wijnb92]
A final example focuses more on organizational and decision making change in companies due to the introduction of new technology, hand held computers in this case. Again it illustrates the fact that relatively small changes can have a dramatic impact on the overall organization and the way it functions.
`For example, the U.S. textile industry has begun implementing a series of electronic connections among companies as part of the Quick Response Program... these electronic connections link companies all along the production chain, from suppliers of fibers (such as wool and cotton) to the mills that weave these fibers into fabric, to the factories that sew garments and , ultimately, to the stores that sell the garments to consumers. When such networks are fully implemented, they will help companies respond quicker to demand. For instance, when a sweater is sold in New York City, a scanner reading the bar-coded label may automatically trigger ordering, shipping and production activities all the way back to the wool warehouse in South Carolina. This new, multiorganizational structure will reduce inventory costs every year' [Malrock95]
Malone W., Rockart J.F., Computers, Networks and the Corporation, Scientific American, special issue 1995, pp. 140-147
van Wijnbergen S., Intertemporal speculation, shortages and the political economy of price reform, The Economic Journal 102, November 1992, pp. 1395-1406
Wyplosz Ch., After the honeymoon. On the economics and the politics of economic transformation, European Economic Review 37, 1993, pp. 379-386