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June 13, 2009

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Path-Dependence, Increasing Returns, and Technological Competition

I think anyone interested in technological change ought to read W. Brian Arthur’s legendary paper on path-dependence (PDF) :

Modern, complex technologies often display increasing returns to adoption in that the more they are adopted, the more experience is gained with them, and the more they are improved. When two or more increasing-return technologies “compete” then, for a “market” of potential adopters, insignificant events may by chance give one of them an initial advantage in adoptions. This technology may then improve more than the others, so it may appeal to a wider proportion of potential adopters. It may therefore become further adopted and further improved. Thus it may happen that a technology that by chance gains an early lead in adoption may eventually “corner the market” of potential adopters, with the other technologies becoming locked out. Of course, under different “small events”—unexpected successes in the performance of prototypes, whims of early developers, political circumstances — a different technology might achieve sufficient adoption and improvement to come to dominate. Competitions between technolologies may have multiple potential outcomes

The argument of this paper suggests that the interpretation of economic history should be different in different returns regimes. Under constant and diminishing returns, the evolution of the market reflects only a-priori endowments, preferences, and transformation possibilities; small events cannot sway the outcome. But while this is comforting, it reduces history to the status of mere carrier—the deliverer of the inevitable. Under increasing returns, by contrast many outcomes are possible. Insignificant circumstances become magnified by positive feedbacks to “tip” the system into the actual outcome “selected”. The small events of history become important. Where we observe the predominance of one technology or one economic outcome over its competitors we should thus be cautious of any exercise that seeks the means by which the winner’s innate “superiority” came to be translated into adoption…

Under increasing returns, competition between economic objects—in this case technologies—takes on an evolutionary character, with a “founder effect” mechanism akin to that in genetics. “History” becomes important. To the degree that the technological development of the economy depends upon small events beneath the resolution of an observer’s model, it may become impossible to predict market shares with any degree of certainty. This suggests that there may be theoretical limits, as well as practical ones, to the predictability of the economic future. (all emphases mine)

Here Arthur uses the examples of nuclear reactors and steam-vs-petrol car engines — other classic examples are the QWERTY keyboard and the Microsoft OS, both cases where learning effects and coordination costs might lock-in an inferior (or at least quirky) product. (I’m also rereading Henry Petroski’s The Evolution of Useful Things, which takes a similar historical-accident-over-essential-function approach to design history.)

Posted June 13, 2009 at 11:39 | Comments (2) | Permasnark
File under: Design, Object Culture, Technosnark


I think I need someone to blockquote your blockquotes.


Har har. Hey, YOU try excerpting an economics article for blogreading. I didn't even major in it!

Anyways, I bolded some of the important bits just to shake it up.

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