How network effects hurt economies
When large-scale economic struggles hit a region, a country, or even a continent, the explanations tend to be big in nature as well. Macroeconomists — who study large economic phenomena — often look for sweeping explanations of what has gone wrong, such as declines in productivity, consumer demand, or investor confidence, or significant changes in monetary policy. But what if large-scale economic slumps can be traced to declines in relatively narrow industrial sectors? A newly published study co-authored by an MIT economist provides evidence that economic problems may often have smaller points of origin and then spread as part of a network effect. “Relatively small shocks can become magnified and then become shocks you have to contend with [on a large scale],” says MIT economist Daron Acemoglu, one of the authors of a paper detailing the research. The findings run counter to “real business cycle theory,” which became popular in the 1970s and holds...