Path dependency is like a cheetah sprinting full speed after
an antelope. Out of the corner of its eye, the cheetah may see even bigger
game, but it's already barreling after the smaller one, and changing course
would require enormous energy. Therefore it's easier just to continue in
the same direction.
This phenomenon has occurred repeatedly in economic history. The QWERTY
keyboard system was developed in 1873 to solve the problem of jamming keys
on typewriters. By spacing out the most commonly used letters, typing was
slowed down enough to reduce key-jamming. But today's electronic keyboards
do not suffer from this problem. There is no longer any reason to use QWERTY,
especially since a better system, DSK, speeds up typing by 10 percent.
So why do we still use QWERTY? Because changing would require a massive
change -- the nation's typists would have to relearn an entirely new system.
Keyboard manufacturers would have to retool their production lines, and
write off any reserve supplies or backlogs of QWERTY keyboards as a loss.
Computer keyboards are easier to change; all a manufacturer needs to do
is reprogram a computer chip. But no individual company wants to risk being
the first one to change. What if they changed, and no one else did? It
takes a group agreement of very large proportions to initiate the revolution.
And this inertia keeps us tied to QWERTY.
Another example of path dependence is the gasoline engine. Stanford
economist Brian Arthur tells a famous story:
"In 1890 there were three ways to power automobiles -- steam,
gasoline and electricity -- and of these one was patently inferior
to the other two: gasoline… [A turning point for gasoline was] an 1895
horseless carriage competition sponsored by the Chicago Times-Herald.
This was won by a gasoline-powered Duryea -- one of only two cars to finish
out of six starters -- and has been cited as the possible inspiration for
R.E. Olds to patent in 1896 a gasoline power source, which he subsequently
mass-produced in the "Curved-Dash Olds." Gasoline thus overcame
its slow start. Steam continued viable as an automotive power source until
1914, when there was an outbreak of hoof-and-mouth disease in North America.
This led to the withdrawal of horse troughs -- which is where steam cars
could fill with water. It took the Stanley Brothers about three years to
develop a condenser and boiler system that did not need to be filled every
thirty or forty miles. But by then it was too late. The steam engine never
Some might think it's natural that gasoline should have won out
over steam, because gasoline engines are obviously much more powerful and
efficient. But that's a mistaken way to look at it. The gasoline engine
has had billions of dollars poured into its research and development over
the last century. If steam had received similar attention, then it is conceivable
we would all be driving high-powered steam cars today, and shaking our
heads over the idea of gasoline.
Much the same thing happened with nuclear power. There are three kinds
of nuclear reactors: light-water, heavy-water, and gas-cooled. Of the three,
light-water reactors are by far the worst choice for civilian power use;
the other two offer significantly fewer chances of a meltdown. But almost
all nuclear power plants today feature light-water reactors because of
an accident of history. The first organization to use nuclear power was
the U.S. Navy. In 1949, then-Captain Hyman Rickover chose light-water reactors
for his submarines, because they were smaller and they had the most research
and development behind them, meaning they could be fielded the fastest
to meet the Soviet threat. Unfortunately, neither of these considerations
was important in the design of civilian nuclear power plants. But because
General Electric and Westinghouse had experience with light-water reactors
-- not to mention the production lines already in existence -- they became
the natural choice.
Another example of path dependency is the VHS video player. Laser disk
videos have much higher quality, but the market is already locked into
the old format. Why? Because video stores rent videos that use the VHS
system -- although manufacturers produce the VHS system because stores
mostly rent VHS videos. The process is highly circular.
Path dependency also occurs in cities. Around the turn of the century,
several filmmakers in Hollywood produced some high-quality silent films.
Soon ambitious filmmakers were flocking to Hollywood because it made good
movies; but it made good movies because filmmakers were flocking to Hollywood.
To attempt to make movies anywhere else is difficult, due to a shortage
of supporting services, experience and talent. The same thing is true of
making airplanes in Seattle, autos in Detroit, and book-publishing in New York.
Path dependency also occurs with factories. An owner may build a factory
in the countryside, only to have a city grow around it as workers and supporting
businesses move in. Soon the factory is in center of a congested city,
which is a bad location for a number of reasons. But moving would incur
huge and sudden costs; therefore, it's easier to keep the factory in the
current, less-than-optimum locale.
Path dependency is strong proof that markets are not always magical,
and certainly do not always act for the best. To break free from path dependency
requires group action that involves a high level of agreement, commitment
and energy. The natural candidate in these situations is government. For
example, the U.S. Navy actually switched from the QWERTY to the DSK system
during World War II; it retrained all its typists and redesigned all its
typewriters. It took about 10 days to recover all the costs of the switch.
But it took an organization like the Navy to institute such far-reaching
and beneficial change.
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