When most of the great companies of the industrial era were founded, even the most brilliant economists believed deeply in the law of diminishing marginal returns. At its core, the principle means that the more of something that is made, the less valuable each incremental unit of that something becomes. If there were one pound of chocolate in the entire world, only the wealthiest individuals could afford to taste its unique flavor. If our oceans suddenly turned to chocolate, the incremental value of that volume would plummet — we'd truly have more chocolate than we really needed. The law of diminishing marginal returns held firm throughout the industrial era. The more of something we made, the less valuable it was to each incremental user down the demand curve. That all changed in the internet era. In the early 1980's, Brian Arthur began speculating that in an increasingly tech-enabled world, the principle failed to capture something. He speculated that some industries actually demonstrated increasing returns. The more of something you distributed, the more valuable each incremental piece became. Arthur's thinking ultimately led to our understanding of network effects and feedback loops. In the world of technology: the more of something you make, the more valuable it can become. Facebook becomes more valuable as more people in your network join. Messaging apps become more valuable as more people sign up. Marketplaces like eBay or Etsy become more valuable to each new member every time a new seller signs up and lists their wares. For leaders that truly understand the implications of increasing returns, a natural deprioritization of profit harvesting should emerge. Consider a business like Amazon Web Services. For years, AWS has invested in driving developer and company adoption of its platform by driving down prices and introducing low cost features to make developer's lives easier. This has led to high levels of AWS specific investment from innovators like CloudHealth Technologies, Qubole, Mapbox, and the like. That ecosystem investment reinforces the value proposition and drives more developer adoption.
