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 recovered."

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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