In a 1995 article in the Journal of Law, Economics, & Organization, Liebowitz and Margolis argued that proponents of path dependency had failed to sufficiently distinguish between three variants of it – two of which are plausible but have no negative impact on the path dependency have market efficiency, and the third, while having negative implications for market efficiency, is by and large implausible.
With the first variant of path dependency, the result is just as good as the alternatives. In the second case, the result is worse than the alternatives, but that could not be seen at the time – although it is very unfortunate, it is not evidence of a market malfunction. In the third variant, the result is worse than the alternatives, and this fact could have been seen at the time when society went down the wrong path. Or – another version of the third variant – although it was not clear then that the Society was going down the wrong path, it is clear now; Society would be better off switching to a different path, even considering the high cost of switching, but it does not do so because of path dependency. The third option would really be a case of market failure, but that rarely happens, argued Liebowitz and Margolis.
In 2000, political scientist Paul Pierson wrote in The American Political Science Review that Liebowitz and Margolis may be right about market systems’ ability to deviate from bad paths, but political systems are more prone to path dependency because there is no profit motive for self-correcting institutions . “Politics is a much, much grimmer environment,” he wrote. “It lacks something like the scale of price.”
This week I interviewed Liebowitz, now at the University of Texas at Dallas, about how his work with Margolis relates to Boris Johnson’s weights and measures move. He agreed with Pierson’s argument that a politically determined system – such as what weights and measures are used – is more likely to fail than a market system. “Politics don’t work like markets, where the best ideas win because they bring in the most money,” he said.
But this strong expression of confidence in the markets does not make Liebowitz an ardent supporter of the metric system. Whether or not the United States should have adopted the metric system at the same time as France did in the late 18th century, the cost of switching would now be high and the benefits few, he said. As for the UK potentially switching back? Well, he said, this is politics, not economics.
The readers write
Regarding your newsletter on hospital bugs, I used to be a component supplier for major computer manufacturers. When our product didn’t work properly or had a high failure rate, we acknowledged our problems, identified potential financial considerations, and then made sure it never happened again. Often the aggrieved customer becomes more loyal than the one without problems!
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