Gates: .... What is path dependence, and what are network effects?
Arthur: In high tech there are three very particular mechanisms that make for increasing returns. One is up-front costs....there are often very large up-front R&D costs....
Another effect is what I call customer groove-in. Sometimes it's just called learning effects. ....the more I type on the QWERTY typewriter keyboard, the better I get at that. It's harder for me to switch over to some alternative keyboard. .... because it's hard to learn a high tech product. So the more I use Microsoft Word... the more locked in I am or grooved-in to Microsoft.
[Then there are] network effects [where the more people use a network, the more valuable being part of the network and using its product becomes]....
Gates: And path dependence?
Arthur: ....When you have increasing returns, at the outset markets are unstable and lurch back and forth according to different small events, and then lock in to one of many possible outcomes. What locks in is a function of what happened in history. The outcome in increasing returns markets depends on small events along the way. The shorthand for that is "path dependence." Meaning that small events along the way decide the outcome.As we said in an earlier post, these ideas were used to launch an anti-trust case against Microsoft (and are now threatening the same fate for Google). Brian Arthur took some pride in that in this Pretext interview;
Arthur: In 1990 I published an article called "Positive Feedbacks in the Economy" in Scientific American, which was noticed by many people. One of them was Gary Reback [the lead lawyer representing several of Microsoft's corporate rivals, including Netscape and Sun]. When certain companies in Silicon Valley were filing a white paper against the acquisition of Intuit by Microsoft--I think in the fall of 1995--Reback contacted me and asked me to take part in that. Actually, by then, I thought the case had a lot of merit. I was happy to be part of that.
And it seems further that that early paper of mine in Scientific American, and some of my other early papers, appear to have influenced people at the Justice Department--notably Joel Klein....All true, the misbegotten U.S. v. Microsoft was undoubtedly the result of Brian Arthur (and his Stanford colleague Paul David) misunderstanding, misapplying, or deliberately inflating the consequences of the idea of increasing returns. Which errors still bedevil the economics profession to this day. However, in this interview Dominic Gates was a bit better prepared than Arthur had bargained for;
Gates: Let's talk about some of your critics. Stan Leibowitz [sic; 'i before e, except after c'] and Stephen Margolis have written a critique.... They claim to debunk the historical basis of path dependence theory, specifically the famous QWERTY story [that the familiar QWERTY arrangement of the keys on a typewriter was deliberately designed in the 19th century to slow typists down, because early manual typewriters tended to jam. Once typewriter manufacturers were locked into QWERTY, an alternative design that allowed faster typing failed to supplant it.] Leibowitz and Margolis call this story a "fable" and the Wall Street Journal refers to it as an "urban legend."Arthur became un-grooved;
Arthur: It is perfectly demonstrable that we are indeed locked into a single QWERTY keyboard. There are legions of examples of lock-in. I'm not sure even Margolis or Leibowitz would deny that.In fact, they most certainly do deny that, for the simple reason that there not only are not 'legions of examples', there isn't even one example from those proffered thus far (15 years after this interview was conducted) that can withstand scrutiny. Arthur's (and David's) theory has absolutely no empirical support at all. The interviewer presses on;
Gates: Right. But what they were saying was that it wasn't an inferior technology that locked in, and that the historical story which claimed it to be so was simply not true.At this point, any intellectually honest person would admit to having been wrong. Instead Arthur sets out on a voyage on that Egyptian river, Denial;
Arthur: It's absurd to think that any theories of increasing returns hinge upon whether QWERTY is better or worse. That is nonsense.Well, that's not exactly what is at issue--'theories of increasing returns', say Alfred Marshall's from the 19th century--is it. What is at issue is Arthur's theory of path dependence by lock-in due to network effects. And for that theory QWERTY is supposedly the paradigmatic example. Not 'nonsense'. Back to Arthur, now back peddling furiously:
If you shine the appropriate light on it, you could demonstrate that under certain circumstances something that locked in -- like QWERTY -- wasn't so bad after all. I don't know anybody who is saying QWERTY is wonderful, but it's not clear to me that QWERTY is that great.Who ever said anything about it being 'great'? The question is whether it meets the needs of typists as well as any other arrangement of the keyboard. It's only if it does not, that there is a better system available, but for some reason consumers can't access it--because they're locked-in to an inferior system--that the QWERTY example makes any sense in support of the theory of path dependence. Arthur and David have been peddling a story of themselves as revolutionaries in economics, not doddering old fogies. More from the Pretext interview;
Arthur: One can take anything that locks in and at the time it locks in, normally it's better; that's why people are buying it. It's more convenient, or it's out there, or it's what you run across. But the point is that there could have been something else that might have locked in that, in the long run, may well have been better.Of course Arthur's story had been that it was historical accident--depends on small events along the way, he'd told Gates earlier--that people bought it, not because it's better. That consumers buy products that meet their needs is hardly revolutionary or even news. Skipping ahead in the interview we finally come to complete surrender by Arthur. As the old adage had it, when you're being run out of town on a rail try to make it look as though you're leading a parade;
Gates: But isn't an important part of your contribution your pointing out that things that get locked in aren't necessarily the best? It's not just to demonstrate lock-in, but to demonstrate lock-in of something that wasn't good for consumers.
Arthur: Well, again, you only get excited about that if you belong to the right wing of American ideology.
This notion that the market is always wonderful and perfect is a right-wing ideological idea. ....
The theory doesn't say that what locks in has to be inferior. The theory says that it's not necessarily superior.Of course that is not at all true of the theory. As Arthur's colleague Paul David put it in his most famous paper, Clio and the Economics of QWERTY in the American Economic Review in 1985, marketplace competition resulted in standardization on the wrong system (emphasis in David's paper). As Arthur himself stated in his Scientific American paper, of which he is so proud; Increasing returns mechanisms can also cause economies—even successful ones such as the US and Japan—to become locked into inferior technology-development paths .... (emphasis by HSIB)
That was the whole idea--an inferior path taken--behind Arthur's Scientific American prescription;
Steering an economy with positive feedbacks so that is chooses the best of its many possible equilibrium states requires good fortune and good timing—a feel for the moments at which beneficial change from one pattern to another is most possible. Theory can help us identify these states and times. And it can guide us in applying the right amount of effort (not too little but not too much) to dislodge locked-in structures.Ignore where Arthur thinks he's going to find someone wise and farsighted enough to know what is the best path to be taken, much less how much of what remedy is, not too little but not too much. Why is he promoting the need for a helmsman to do so if the marketplace selects that best path, or one equally good, on its own? Finally the interviewer asks the $64 million question;
Gates: ....Do you have a smoking gun for increasing returns?
Arthur: I find I'm puzzled by all of this because it's a bit like debating evolution with creationists: "But if you believe in evolution, the inference is that angels must have evolved their wings, and that would upset all of theology." For me it's moot. The onus isn't on me or anyone else, to show that we're locked in to any inferior thing. The onus is on the opinion page of the Wall Street Journal and the libertarians to show that all things that we're using in the economy are not just the best they could have been at the time, but are the best that could possibly have emerged. Nobody in computer science believes that about DOS. As for the QWERTY keyboard, if Margolis and Liebowitz can prove it's the best, my hat is off to them.As Steve Margolis recently pointed out, while he and his partner Stan never claimed it was the best keyboard, Neil Kay has apparently done just that in Rerun the tape of history and QWERTY always wins: We find that QWERTY developed a degree of format/device compatibility that was near-optimal....
However that is beside the point, in the above paragraph from Arthur, he has it completely backwards. Science requires that a theory be supported with evidence, if it is to be taken seriously. Just asserting something, and saying it's up to everyone else to prove I'm wrong, is risible. Not to mention that no one--from Adam Smith to Milton Friedman--has ever claimed, as Arthur puts it, that all things that we're using in the economy are the best that could possibly have emerged.
Yet Arthur is happily peddling his theory still, at the Santa Fe Institute. And being allowed to influence young, unformed minds. Is this...well...scholarly?
[Update] We forgot to mention that (as of November 2012) Brian Arthur was still in denial over his beloved theory, in this comment on the above mentioned Neil Kay's Rerun the tape of history...
David’s claim was that with QWERTY, “markets drove the industry prematurely into standardization on the wrong system” [David’s italics]. The onus is not on Paul David to show that QWERTY was inferior to one possible keyboard, Dvorak. The onus is on his critics to show that QWERTY is superior to all other possible keyboards. I calculate that there are 2,658,271,574,788, 448,768,043,625,811,014,615,890,319,638,527,999, 999,999 of these, an admittedly large number (some 1054). So even if someone finally and convincingly proves Dvorak inferior to QWERTY, this only goes part way toward proving QWERTY’s superiority, the critics still have all the other cases before them.How someone who had the intellectual ability to earn a doctorate, can misread the logic of his colleague's claim so completely is astonishing.