I am currently reading Andrew Chen’s The Cold Start Problem, as is everyone these days, it seems. But not everyone has heard the story I’m about to tell.
On a fine Tuesday morning, a young group of ambitious entrepreneurs founded a startup to tackle the interoperability and health care record challenge the healthcare system in the US faces. To defeat this seemingly invincible Kraken, the team brought in other individuals from different walks of life: technologists, expert change managers, designers, investors and they even brought a philosopher on board. It seemed to them that monsters such as the one they endeavored to defeat could not be brought down except by challenging convention. After months of training and building a blockchain-based application, the band of misfits launched their product. Using a combination of unique business model and customer acquisition strategies, this group convinced patients to use their software as the single access point to their healthcare information, enabling them to share their records with whomever they desired. This, of course, solved the problem of having to resort to medieval methods of sharing their information and saved medical practitioners the pain of making mistakes that could’ve been avoided had they had access to complete and timely information about their patients’ medical history.
Though this has not happened yet, it is a story from the future and a vision that will inexorably be brought to reality. My question is how this will happen.
From my participation in the healthcare system in the US, one answer to how this vision will come to fruition is that somehow a group of solutions will come together to create network effects. And, although so far in my reading Andrew Chen has discussed how network effects come about, he has not discussed why they’re so powerful.
Personally, I found the answer in Hayek. Network effects, to my mind, solve an important problem regarding the use of information, which Hayek describes as the real economic problem that society faces: “The economic problem of society is thus not merely a problem of how to allocate ‘given’ resources” The knowledge of how to best use resources is contained in the minds of individuals. The right system to connect these individuals becomes the crux of the issue. Hayek proceeds:
If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them.
How do we connect these individuals so that they can make the right decisions?
Network effects are defined by two parts, as Chen suggests: the network and the effects. The phenomenon has several characteristics:
- The network is defined by the the connection between those seeking to acquire a good or service and those seeking to provide it;
- The providers of the network do not own the underlying assets, they just connect the people.
What matters, however, is the connection. And this is the key. To solve the economic problem that society faces, Hayek explains that people do not need to have exhausting information to carry out their activities, to purchase the good or service that another offers: “All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses.” This information is provided through prices, which is the key effect in a network.
The power of prices cannot be overstated, and that is part of the reason that sharing information in the healthcare system is difficult, that “the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them” are not, in fact, responsible for making decisions. If we want to harness the power of network effects and the pricing system, we need to empower individuals to make use of the information they have at their disposal to make the proper decisions.
 F. A. Hayek, “The Use Of Knowledge In Society,” accessed https://www.cato.org/sites/cato.org/files/articles/hayek-use-knowledge-society.pdf
 Andrew Chen, The Cold Start Problem, p. 22-23