Self-Reinforcing Mechanisms in Economics

Abstract

This chapter looks at corresponding dynamical systems in economics. It shows that the presence of self-reinforcing mechanisms, in very different problems drawn from different sub-fields of economics, gives rise to common themes, common features. The chapter discusses analogies with physical and biological systems and illustrates with theory wherever it is available. It focuses on the less familiar properties of lock-in and path-dependence. The chapter provides examples of multiple equilibria and the dynamics of lock-in under very particular self-reinforcing mechanisms. Conventional economic theory is built largely on the assumption of diminishing returns on the margin; and so it may seem that positive feedback, increasing-returns-on-the-margin mechanisms ought to be rare. In many economic systems, lock-in happens dynamically, as sequential decisions "groove" out an advantage that the system finds it hard to escape from. In a version of the stochastic adopter-sequence model, W. A. Hanson assumes that the two technologies that improve with adoption are proprietary–"sponsored" by firms that can manipulate their price.

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