Like a modern horror movie villain who keeps coming back from the dead, a false story can take on a life of its own: Eskimos have hundreds of words for snow, Millard Fillmore ordered the first bathtub for the White House, that sort of thing. Even after they are shown to be false, some stories are repeated, embellished, and occasionally built into entire belief systems. These fictions may ordinarily be little more than curiosities or mere affronts to our concern for the truth. But our concern here is with one such story that is put forward as part of a case against the effectiveness of free markets and individual choice. This story has consequences.
Our story concerns the history of the standard typewriter keyboard, commonly known as QWERTY, and its more recent rival, the Dvorak keyboard. Pick up the February 19 edition of Newsweek and there is Steve Wozniak, the engineering wunderkind largely responsible for Apple's early success, explaining that Apple's recent failures were just another example of a better product losing out to an inferior alternative: "Like the Dvorak keyboard, Apple's superior operating system lost the market-share war." Ignoring for the moment the fact that just about all computer users now use sleek graphical operating systems much like the Mac's graphical interface (itself taken from Xerox), Wozniak cannot be blamed for repeating the keyboard story. It is commonly reported as fact in newspapers, magazines, and academic journals. An article in the January 1996 Harvard Law Review, for example, invokes the typewriter keyboard as support for a thesis that pure luck is responsible for winners and losers, and that our expectation of survival of the fittest should be replaced by survival of the luckiest.
But this is just the tip of the iceberg. In the Los Angeles Times, Steve Steinburg writes, regarding the adoption of an Internet standard, "[I]t's all too likely to be the wrong standard. From Qwerty vs. Dvorak keyboards, to Beta vs. VHS cassettes, history shows that market share and technical superiority are rarely related." In The Independent, Hamish McRae discusses the likelihood of "lock-in" to inferior standards. He notes the Beta and VHS competition as well as some others, then adds, "Another example is MS-DOS, but perhaps the best of all is the QWERTY keyboard. This was designed to slow down typists...." In Fortune, Tim Smith repeats the claim that QWERTY was intended to slow down typists, and then notes, "Perhaps the stern test of the marketplace produces results more capricious than we like to think."
In a feature series, Steven Pearlstein of The Washington Post presents at great length the argument that modern markets, particularly those linked to networks, are likely to be dominated by just a few firms. After introducing readers to Brian Arthur, one of the leading academic advocates of the view that lock-in is a problem, he states, "The Arthurian discussion of networks usually begins at the typewriter keyboard." Other prominent appearances of the QWERTY story are found in TheNew York Times, The Sunday Observer, The Boston Globe, and broadcast on PBS's News Hour with Jim Lehrer. It can even be found in the Encyclopaedia Britannica as evidence of how human inertia can result in the choice of an inferior product. The story can be found in two very successful economics books written for laymen: Robert Frank and Philip Cook's The Winner-Take-All Society and Paul Krugman's Peddling Prosperity, where an entire chapter is devoted to the "economics of QWERTY."
Why is the keyboard story receiving so much attention from such a variety of sources? The answer is that it is the centerpiece of a theory that argues that market winners will only by the sheerest of coincidences be the best of the available alternatives. By this theory, the first technology that attracts development, the first standard that attracts adopters, or the first product that attracts consumers will tend to have an insurmountable advantage, even over superior rivals that happen to come along later. Because first on the scene is not necessarily the best, a logical conclusion would seem to be that market choices aren't necessarily good ones. So, for example, proponents of this view argue that although the Beta video recording format was better than VHS, Beta lost out because of bad luck and quirks of history that had nothing much to do with the products themselves. (Some readers who recall that Beta was actually first on the scene will immediately recognize a problem with this example.)
These ideas come to us from an academic literature concerned with "path dependence." The doctrine of path dependence starts with the observation that the past influences the future. This conclusion is hard to quibble with, although it also seems to lack much novelty. It simply recognizes that some things are durable. But path dependence is transformed into a far more dramatic theory by the additional claim that the past so strongly influences the future that we become "locked in" to choices that are no longer appropriate. This is the juicy version of the theory, and the version that implies that markets cannot be trusted. Stanford University economic historian Paul David, in the article that introduced the QWERTY story to the economics literature, offers this example of the strong claim: "Competition in the absence of perfect futures markets drove the industry prematurely into standardization on the wrong system where decentralized decision making subsequently has sufficed to hold it."
According to this body of theory, if, for example, DOS is the first operating system, then improvements such as the Macintosh will fail because consumers are so locked in to DOS that they will not make the switch to the better system (Rush Limbaugh falls for this one). The success of Intel-based computers, in this view, is a tragic piece of bad luck. To accept this view, of course, we need to ignore the fact that DOS was not the first operating system, that consumers did switch away from DOS when they moved to Windows, that the DOS system was an appropriate choice for many users given the hardware of the time, and that the Mac was far more expensive. Also, a switch to Mac required that we throw out a lot of DOS hardware, where the switch to Windows did not, something that is not an irrelevant social concern.
A featured result of these theories is that merely knowing what path would be best would not help you to predict where the market will move. In this view of the world, we will too often get stuck, or locked in, on a wrong path. Luck rules, not efficiency.
Most advocates of this random-selection view do not claim that everything has been pure chance, since that would be so easy to disprove. After all, how likely would it be that consecutive random draws would have increased our standard of living for so long with so few interruptions? Instead, we are told that luck plays a larger role in the success of high-technology products than for older products. A clear example of this argument is a 1990 Brian Arthur article in Scientific American. Arthur there distinguishes between a new economics of "knowledge based" technologies, which are supposedly fraught with increasing returns, and the old economics of "resource based" technologies (for example, farming, mining, building), which supposedly were not. "Increasing returns" (or "scale economies") means that conducting an activity on a larger scale may allow lower costs, or better products, or both.
Traditional concepts of scale economies applied to production--the more steel you made, the more cheaply you could make each additional ton, because fixed costs can be spread. Much of the path-dependence literature is concerned with economies of consumption, where a good becomes cheaper or more valuable to the consumer as more other people also have it; if lots of people have DOS computers, then more software will be available for such machines, for instance, which makes DOS computers better for consumers. This sort of "network externality" is even more important when literal networks are involved, as with phones or fax machines, where the value of the good depends in part on how many other people you can connect to.
What Arthur and others assert is that path dependence is an affliction associated with technologies that exhibit increasing returns--that once a product has an established network it is almost impossible for a new product to displace it. Thus, as society gets more advanced technologically, luck will play a larger and larger role. The logical chain is that new technologies exhibit increasing returns, and technologies with increasing returns exhibit path dependence. Of the last link in that chain, Arthur notes: "[O]nce random economic events select a particular path, the choice may become locked-in regardless of the advantages of the alternatives."
This pessimism about the effectiveness of markets suggests a relative optimism about the potential for government action. It would be only reasonable to expect, for example, that panels of experts would do better at choosing products than would random chance. Similarly, to address the kinds of concerns raised in Frank and Cook's Winner-Take-All Society, the inequalities in incomes that arise in these new-technology markets could be removed harmlessly, since inequalities arise only as a matter of luck in the first place. It does not seem an unimaginable stretch to the conclusion that if the government specifies, in advance, the race and sex of market winners, no harm would be done since the winners in the market would have been a randomly chosen outcome anyway.
Theories of path dependence and their supporting mythology have begun to exert an influence on policy. Last summer, an amicus brief on the Microsoft consent decree used lock-in arguments, including the QWERTY story, and apparently prompted Judge Stanley Sporkin to refuse to ratify the decree. (He was later overturned.) Arguments against Microsoft's ill-fated attempt to acquire Intuit also relied on allegations of lock-in. Carl Shapiro, one of the leading contributors to this literature, recently took a senior position in the antitrust division of the Justice Department. These arguments have even surfaced in presidential politics, when President Clinton began referring to a "winner-take-all society."
Stanford University economist Paul Krugman offered the central claim of this literature boldly and with admirable simplicity: "In QWERTY worlds, markets can't be trusted." The reason that he uses "QWERTY worlds," and not DOS worlds, or VHS worlds, is that the DOS and VHS examples are not very compelling. Almost no one uses DOS anymore, and many video recorder purchasers thought VHS was better than Beta (as it was, in terms of recording time, as we have discussed at length elsewhere).
The theories of path dependence that percolate through the academic literature show the possibility of this form of market ineptitude within the context of highly stylized theoretical models. But before these theories are translated into public policy, there really had better be some good supporting examples. After all, these theories fly in the face of hundreds of years of rapid technological progress. Recently we have seen PCs replace mainframes, computers replace typewriters, fax machines replace the mails for many purposes, DOS replace CP/M, Windows replace DOS, and on and on.