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Edge Economy

I have just read an interesting post by Umair Haque
As always Umair is controversial and passionate but as usual he is touching on something important as well.
Thanks to Umair I finally have a name for the type of economics I have been becoming increasingly interested in.
“Edge Economics”
I don’t know who coined the term but I do know that Umair introduced it to me. I also don’t really know what Umair means by it. All I know is that it captures for me the essence of the economic revolution that has been gathering pace over the last few hundred years.
So what do I mean by Edge Economics.
By Edge I don’t mean “edgy” or “peripheral”. I mean Edge as in the mathematical definition from graph theory. The Edge is the connection between two Vertices (nodes) in a graph. The Edge is the relationship or connection between nodes as opposed to the node itself.
Edge Economics then, is the economics of systems where the connections between things play an important or pivotal role in the creation of wealth compared to the node.
The Edge is incredible. Consider the network which is the human brain. Estimates suggest there are around 100 billion neurons in the brain. That is quite a lot. But these are the nodes. The number of possible connections or edge configurations of the brain is larger than the number of atoms in the universe!!!
So the brain has a configuration space larger than the number of atoms in the universe, pause for just a moment.
Now, there are a lot of atoms in a drop of water, let alone the ocean, let alone the planet, let alone the solar system let alone the galaxy let alone the whole universe! The configuration space is virtually infinite (well not quite but you know what I mean).
In the human brain, the individual isolated node, the neuron, is not of huge value. It is how these nodes are connected that makes the brain. The edges drive the value.
Of course any given brain must choose a subset of that connection space because actual connections take many atoms. But the crucial point is that connections can be made and broken. The brain can move through some of the configuration space even in one persons life time.
Google PageRank looked at the web as a graph of documents and realised it was the edge that contained the most important information about relevancy not the document (node). The web made it easy to create a node but crucially it made it even easier to create an edge. Google realised that the structure of the edge contained an imprint of how people had actually reacted to a node and with the right algorithm they could extract that imprint. The network had in some way recorded our collective reaction to the document. This is an example of how the Edge can enable collective intelligence.
The brain, the web and the economy are complex adaptive networks. The structure of the network changes and adapts in response to what is happening. It is a complex system because feedback makes it path dependant and unpredictable like the weather. [See my previous post on complexity for more examples and a cool video.]
The value of the nodes compared to the edges is a fascinating question and of vital importance to business strategy.

What is the cost of creating or destroying an edge versus a node? That is a critical parameter.
Consider the economy as a graph. A market as a subgraph. The node is a market participation (business or a consumer). The edge is the way these link together to exchange.

Sourcing something from the market is creating an edge. Doing it in a company is building a bigger node. How big should the nodes be and how many edges should there be?

Turns out that this question was thought about by Ronald Coase in 1937 in his paper, “The Nature of the Firm”. Here Coase recognised that sourcing from the market had high transaction costs and that the firm existed because doing some things in a command and control fashion could be cheaper than the cost of using the market.

In effect Coase tells us the size of the Nodes is based on the relative transaction costs of organising production internally compared to sourcing from the market. I think Coase is only half the story but it already give us a lot of food for thought.

Technology has already radically reduced the cost of creating both nodes and edges. I think the semantic web and shared innovation will reduce these costs by further orders of magnitude. Small companies in complex ecosystems of shared infrastructure can allow markets to reorganise in real time not planned capital investment time. Goodbye Gorilla, hello ecosystem.

That shared infrastructure could include hardware, software, data, access and audience. Some might call that a platform but I call the whole thing an ecosystem to under line the symbiotic relationships inherent. This is not value flowing one way. It is not a value chain. It is a living thing. Without the ecosystem, the platform is nothing. Without the platform the ecosystem couldn’t exist.
Check out Ebay, Amazon, Apple App Store & iTunes, FaceBook, and many more. Some good, some bad.

But here is the real kicker. Nobody has to own the platform. They might but they don’t have too. It can be open and shared. Think about the web as a platform. Google didn’t need to own the web platform to make a huge fortune from it.

Android versus Apple iStore anyone :-)

Posted on Wednesday, August 27, 2008 at 11:52AM by Registered CommenterJustin Leavesley in , , , | Comments1 Comment

Reader Comments (1)


in fact, that's a very, very good description of the edge economy, and why it's different from a core-focused economy - you understand it very well.

thx for the response.
August 27, 2008 | Unregistered Commenterumair

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