As Brian Arthur states our understanding of markets is based on Alfred Marshall’s assumption of diminishing returns. This means that we model for markets that face limitations in the profits of the goods they produce so that prices are given to obtain only one equilibrium. Marshall lived in an economy similar to what we can see today, the transformation of raw material into final products, only that now with all kind of brands and the ease of substitution of this basic products is harder for a company to gain all the market share. While Marshall’s perfect competition may apply for this case where profit margins won’t be large, it ignores and wrongly models for what Arthur calls “increasing-returns markets”. For Marshall in an economy of certainty, where you can plan your production depending only on the demand and supply, it was optimal to have a world of hierarchy.
Now instead of having only business processing raw material we face new business processing ideas into new products such as Smartphones, new software, medicines, etc. It matters because these new kind of business doesn’t have a repetitive production process along time and their main competition is no longer focused on quality and low costs since they have increasing returns. This new enterprises are looking for the next innovation, that depends on the performance of, usually, small teams that are often motivated rather than exploited. Since the future of the company strongly depends on them we observe a share of knowledge and how hierarchy dissolves.
Although it is good to have innovations public policies are not prepared to solve the problem of increasing returns business or just different type of business that are propagating along with globalization, thus allowing them to raise inequality. The problem aren´t the new business, that often provide everyday problem solutions, but the failure of governments to regulate them and look for the consumers security. One recent example are the U.S senators that commit to regulate Facebook, failing because of their lack of knowledge.