Policy and Path Dependence
From QWERTY to Windows 95
Stan Leibowitz and Stephen E. Margolis
Excerpts:
The first explicit application of this concept to economics is credited to Brian Arthur, who warns of the danger of "lock-in by insignificant historical events." Paul Krugman captures the idea in a succinct definition of path dependence: "the powerful role of historical accident in determining the shape of the economy."
On the face of it, the arguments of the advocates of path dependence have tremendous appeal. After all, it is hard to deny that if the right accident occurred, such as a meltdown of a nuclear reactor, it might have considerable consequences. But the type of accident that is envisioned in the path dependence literature is not of that magnitude. Rather, it is of the insignificant kind: a head start, a quirky choice, a passing condition.
Furthermore, lock-in has a very specific meaning in path dependence literature. In some sense, of course, we are all locked in?-if only to eating, breathing, and remaining in our solar system. But that is not what lock-in means in the path dependence literature. In path dependence, getting "locked-in" means having to accept inferior standards or products, even though superior alternatives exist, even though it is known that superior alternatives exist, and even though the costs of switching are not high.
What is especially important is that for Arthur, Krugman, and other path dependence theorists, path dependence is no oddity: it is a likely phenomenon that can affect choices of technologies, networks, standards, industrial location, or almost any arrangement that might exhibit what economists call increasing returns to scale. And according to these authors, increasing returns, which is economist-speak for the idea that bigger is better when it comes to the production of goods and services, is a common phenomenon, one that is found in virtually all high-tech industries.
It is only a small step from there to sweeping policy prescriptions. In general discussions, path dependence arguments have been used to support active management of trade and every sort of industrial policy. Taking one specific case, path dependence arguments have been used to support antitrust actions against Microsoft. A white paper by Gary Reback and a group of coauthors, with assistance from Brian Arthur, uses path dependence arguments to claim that Microsoft's successes in the personal computer software market are due not to Microsoft's ability to provide consumers with handy solutions to their problems, but instead are caused by consumers' inabilities to escape from a path controlled by Microsoft. Reback, et al. chillingly portray the ominous end of that path: "It is difficult to imagine that in an open society such as this one, with multiple information sources, a single company could seize sufficient control of information transmission so as to constitute a threat to the underpinnings of a free society. But such a scenario is a realistic (and perhaps probable) outcome." Lock the doors, it might be Windows 95, come to enslave us.
http://www.cato.org/pubs/regulation/reg18n3d.html