Path Dependence, Increasing Returns, and the Study of Politics (PSGE 7.9, 1997), Paul Pierson

8/4/2019 Path Dependence, Increasing Returns, and the Study of Politics (PSGE 7.9, 1997), Paul Pierson

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P ro gr am fo r th e S tudy o f G ermany and EuropeW orkin g P ape r Se ries #7.'Path Dependence, Increasing Returns,

and the Study of Politics"by Paul PiersonSeptember 1, 1997Center for European Studies, Harvard University27 Kirkland Street, Cambridge MA [email protected]

AbstractIt is increasingly common for social scientists to describe political processes as "path dependent." The concept, how-ever, is often employed without careful elaboration. In fact, there are a variety of forms of path dependence. This es-say stresses the importance of investigating one particular type of path dependent process: a dynamic of "increasingreturns," which could also be described as a "self-reinforcing" or "positive feedback" process. Reviewing recent litera-ture in economics and suggesting extensions to the world of politics, I demonstrate that increasing returns processesare likely to be prevalent, and that we are developing a good foundation for understanding their causes and conse-quences. The paper concludes by suggesting that the investigation of increasing returns can provide stronger analyt-ical foundations for some of the key claims of recent scholarship in historical institutionalism: that specific patternsof timing and sequence matter; that large consequences may result from relatively small and contingent events; thatparticular courses of action, once introduced, can be virtually impossible to reverse; and that, consequently, politicaldevelopment is punctuated by critical moments or junctures that shape the basic contours of social life.A revised version of a paper presented as the Jean Monnet Visiting ProfessorLecture, European University Institute, April 1997. I amvery grateful to Andy Rudalevige for his extensive research assistance on this project, and to the German Marshall Foundation forsupport. I have received very helpful comments on earlier drafts from David Collier, Daniel Goldhagen, Alan Jacobs, Peter Hall,Andrew Moravcsik, and Alec Stone, and have benefited from discussions at the EUI, the University of California at Berkeley, andYa l e Un i v er s it y.
mailto:[email protected]:[email protected]


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"No decade in the history of politics, religion, technology, painting, poetry and what not ever contains itsown explanation. In order to understand the religious events from 1520 to 1530, or the political eventsfrom 1790 to 1800, or the developments inpainting from 1900 to 1910, you must survey a period of muchwider span. Not to do so is the hallmark of dilettantism." Jos ep h S chum peter (1946)'There simply are no logical or even methodological distinctions between the social sciences and history-- appropriately conceived." An thon y G idden s (1979, p. 230)

It is in creas in gly com mon for socia l sc ien tists to describe polit ica l processes a s "pa th depen den t."A lthough often presen ted w ithout ca reful elabora tion , the n otion of pa th dependence is genera lly used tosuppor t a few key cla im s: tha t specific pa ttern s of tim ing and sequen ce m atter ; tha t a w ide ran ge of socia loutcom es are often poss ib le; tha t la rge con sequen ces m ay resu lt from rela tiv ely sm all a nd con tingen t even ts ;tha t pa rticula r courses of action , once in troduced, can be v irtua lly im poss ib le to reverse; a nd tha tcon sequen tly , po litica l developm en t is punctua ted by critica l m om en ts or junctures w hich shape the ba s iccon tours of socia l l ife . 1 All of these fea tures stand in sha rp con tras t to prom inen t modes of a rgumen t andexplan a tion in po lit ica l sc ience, w hich a ttr ibu te "la rge" outcom es to "la rge" causes , ra ther than to sm all oracciden ta l ev en ts , an d em pha size the prev alen ce of un ique, predictable politica l outcom es , the irre lev an ce oftim ing and sequence, and the capacity of ra tion a l actors to des ign and im plem en t op tim al solu tion s (g iv entheir resources and con s tra in ts ) to the problem s tha t con fron t them . If pa th dependen ce argum en ts a re in deedappropria te in subs tan tia l a reas of politica l l ife , they w ill shake m any subfie lds of po lit ica l an a lys is . Thisessay argues tha t they are .

M y ana lys is beg in s w ith a genera l discuss ion of the concept o f pa th dependence and the dis tin ctiv echara cteris tics of one type of pa th dependence: socia l processes w hich a re subject to "in crea s ing return s ." Ifocus on in creas in g return s p rocesses , w hich cou ld a lso be described as "self-rein forcin g" or "pos itiv efeedback" processes , both because they are of grea t socia l s ign ificance and because in con tra st to other form sof pa th dependence socia l scien tis ts a re beginn ing to develop rigorous a rgum en ts about the causes and

1For useful discuss ion s see K ra sn er 1989, Collier and Collier 1991, an d Ikenberry 1994.1


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2consequences of increasing returns. While it will be immediately apparent that the characteristics ofincreasing returns processes carry considerable implications for political science, a full discussion of thoseimplications will be postponed until later in the paper. In Part II, I review the development of increasingreturns arguments in the social science discipline where they have received the greatest attention: economics.This review suggests the wide sweep of potential applications, even in a field that might be expected to behostile to the idea.' More important, these economic applications provide the most analytically-developeddiscussions of increasing returns. Economists have successfully highlighted both the aspects of a particularsocial environment that generate such processes and clarified their principal implications.

This discussion of economics prepares the way for an exploration of the distinctive characteristics ofpolitics (Part III). Rather than simply applying extant arguments in economics to political phenomena, weneed to consider the features of the political world that require modifications in the use of path dependenceclaims. From this discussion I conclude that increasing returns arguments are at least as relevant to anunderstanding of politics as they are in other areas of the social sciences. Indeed, factors such as the greaterambiguity of political processes and outcomes, the central role of formal, change-resistant institutions, andthe prominence of collective activity in politics make this a domain of social life which is especially prone toincreasing returns processes.

In the fmal section of the paper I discuss what these arguments can and cannot contribute to politicalanalysis. They provide an important caution against a too easy conclusion of the inevitability, "naturalness",or functionality of observed outcomes. Given the ubiquity of claims about efficient or functional elements inpolitics, this alone would be an important corrective. Yet increasing returns arguments can do more. Theycan direct attention toward particular variables, and generate promising hypotheses about the sources of

2Indeed, an additional reason for focusing on economics, the traditional homeland of equilibriumanalysis, is rhetorical. Because the arguments presented here raise difficulties for those drawn to modelsemphasizing unique equilibria and efficiency in social processes (e.g., many rational choice theorists),demonstrating the growing acceptance of increasing returns arguments in economics may diminish theirresistance to the analysis developed here.


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3important political phenomena. At least as significant, by stretching the temporal horizons of politicalanalysts, they can reorient both the answers given and the questions asked in ways that contribute to a richerappreciation of the sources of variation inpolitical life. Finally, they can help orient political scientists to arealistic -- which is to say modest -- set of aspirations regarding the possibilities for achieving parsimony andpredictability in the study of politics.I. Path Dependence and Increasing Returns

While many analysts now invoke the concept of "path dependence", clear definitions are rare. Inpractice, usage tends to fluctuate between a broader and narrower conception. In the broader version, pathdependence refers to the causal relevance of preceding stages in a temporal sequence. While sometimespresented with considerable rigor, this usage often entails only the loose assertion that "history matters." Inthe narrower version, path dependence refers to the manner inwhich preceding stages may radically narrowthe range of possible outcomes -- that is, to the difficulty of moving off of an established "path." Frequently,authors are not clear about which of these two meanings they intend.

To establish greater clarity, I will use the term "path dependence" to cover the first idea, followingSewell's claim that path dependence means "that what has happened at an earlier point in time will affect thepossible outcomes of a sequence of events occurring at a later point in time" (Sewell 1996, pp. 262-3). Notethat such a definition involves no suggestion that a particular path is difficult to exit. Rather, the claim is thatwe cannot understand the significance of a particular social variable without understanding "how it gotthere." To take an example offered by Andrew Abbott, the contemporary significance of a group'sorganization of 40% of its potential membership depends greatly on whether that membership used to be100% or 10% (Abbott 1983, p. 131). Previous events in a sequence influence outcomes and trajectories, butnot necessarily by inducing further movement in the same direction. Indeed, the "path" might matterprecisely because it tends to provoke a reaction in some other direction.

The second meaning of "path dependence", in which preceding steps in a particular direction induce


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4fu rth er m ov em en t in th e s am e d ir ec tio n, is b es t c ap tu re d b y th e m or e s pe cific c on ce pt o f "in cr ea sin g r etu rn s."In a n in cr ea sin g r etu rn s p ro ce ss , th e p ro ba bili ty o f fu rth er s te ps a lo ng th e s am e p ath in cre as e w ith e ac h m ov edow n tha t pa th . Put a diffe ren t w ay, the relative b en e fit s o f th e c ur re nt a ct iv it y c omp a re d w i th o th er p os si bleo ptio ns in cr ea se o ve r tim e (o r, a lte rn ativ ely , th e c os ts o f "e xit" r is e). In cr ea sin g r etu rn s p ro ce ss es c an a ls o b ed es cr ib ed a s " se lf -r ei nf or cin g " o r " po sit iv e f ee db a ck " p ro ce ss es .

D yn am ics of in crea sin g re tu rn s s hou ld b e s een a s a pa rtic ula r k in d of pa th dep en den ce. T his es sa y isb as ed on th e pres um ption tha t the id ea of p ath d epen den ce w ill b e m ore us eful if it is d is a ggreg ated a nd thed yn amic s o f d is tin ctiv e ty pe s o f p ath d ep en de nc e a re s ys te ma tic ally e xp lo re d. D iffe re nt fo rm s o f p athd ep en de nc e a re g en er ate d in d iffe re nt w a ys , w ith d iffe re nt c on se qu en ce s. I w ill fo cu s h ere o nly o n in cr ea sin gr etu rn s p ro ce ss es , fo r tw o reasons.' F ir st, I w ill a rg ue th at in cr ea sin g r etu rn s p ro ce ss es , in w h ic h e ve nts fe edo n th em s elv es a n d th e r an ge o f p os sib le o utc om e s n ar ro ws o ve r tim e, c ha ra cte riz e m a ny im p or ta nt p ar ts o fth e s oc ia l w or ld . S ec on d, s oc ia l s cie ntis ts a re d ev elo pin g a na ly tic al to ols w hic h m a ke th e in v es tig atio n o f th ec au se s a n d c on se qu en ce s o f in cr ea sin g r etu rn s a p ar tic ula rly p ro m is in g a re a o f in qu ir y.

T he b as ic lo gic o f in cr ea sin g r etu rn s p ro ce ss es c an b e c ap tu re d in a s im ple m a th em a tic al illu str atio n. 4Im agin e a v ery la rg e urn con ta in in g tw o b alls , on e b la ck, o ne red . Y o u rem ov e o ne b all, a nd th en return it toth e u rn , a ccom pa nied b y a n a ddition al b all of the s am e co lo r. Y o u rep ea t th is proces s u ntil the urn fills up .W ha t ca n w e sa y a bout the ev en tua l d is tr ibu tion of colored ba lls in the urn ? O r a bou t a ser ies o f tr ia ls inw hich w e fill th e u rn a nd th en s ta rt ov er a ga in on e hu ndred tim es ?

-- for ea ch in div id ua l tr ia l w e h av e n o ide a w ha t th e ev en tu al ra tio of red to b la ck b alls w ill b e; itc ou ld b e 99.9% r ed , o r 0.1% re d, or a ny th in g in b etw een . If w e w ere to ru n 100 t ri al s, w e wo ul dp ro ba bly g et 100 d i ff e ren t ou tcomes .

3 Fo r u s e fu l, b ro ad er d is cu ss io ns o f t em p or al s eq ue n ce s s ee Ab b ot t (1983) a n d Ab bo tt (1990). Fora n e xc elle nt th eo re tic al a nd emp ir ic al tre atm e nt o f p ath d ep en de nc e in th e fir st s en se o ffe re d h er e, s ee C ollie ra n d Co ll ie r 1991.

"The f ol lo w in g d is cu ss io n r eli es h ea v il y o n A r th ur 1994, wh ic h co ll ec ts A r th ur 's g ro u nd -b r ea k in ge ss ay s o n in cr ea sin g r etu rn s a n d p ath d ep en de nc e. Wh en c itin g a p ar tic ula r e ss ay fr om th is c olle ctio n, I h av ep la ce d th e d ate o f o rig in a l p ub lic atio n in b ra ck ets .


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5-- o n a ny in div id ua l tr ia l, th e r atio w ill e ve ntu ally r ea ch a n e qu ilib riu m. S in ce la te r d ra w s in ap a rt ic ul ar s er ie s c on tr ib ut e o n ly m i nu te ly t o th e d is tr ib ut io n o f b a ll s i n th e urn, t he d is tr ib u ti on s e tt le sdow n on to a s ta ble pa th .-- s eq ue nc e is th us c ru cia l. E ar ly d ra w s in e ac h tr ia l, w hic h h av e a c on sid er ab le r an dom e leme nt,h av e a c ru cia l e ffe ct o n w hic h o f th e p os sib le e qu ilib ria w ill a ctu ally eme rg e.

M a th em a tic ia n s c all th is a Polya urn process. Its c ha ra cte ris tic q ua lit ie s s te m fr om th e fa ct th at a n e leme nto f c ha n ce (o r a cc id en t) is c om b in ed w ith a d ec is io n r ule lin kin g c ur re nt p ro ba bili t ie s to th e o utc om es o fp re ce din g (p ar tly ra n dom) s eq ue nc es .' It is a p ro ce ss w he re h is to ry m a tte rs .

P ol ya u rn p ro ce ss es e xh ib it increasing returns or positive feedback. E ac h s te p a lo ng a p ar tic ula r

p ath p ro du ce s c on se qu en ce s w hic h m a ke th at p ath m or e a ttr ac tiv e fo r th e n ex t r ou nd . If s uc h e ffe cts b eg in toa cc umu la te , t he y g en er at e a p ow e rf ul v ir tu ou s (o r v ic io us ) c yc le o f s el f- re in fo rc in g a ct iv ity . S uc h p ro ce ss esh av e q ui te i nt ri gu in g c ha ra ct er is ti cs , w h ic h B ri an A r th ur ( 19 94 ) h as s umma ri ze d a s f ol lo w s:

l. Unpredictability. B ec au se e ar ly e ve nts h av e a b ig im pa ct a n d a re p ar tly r an dom , m a ny o utc om esm ay b e po ss ib le . W e ca nn ot p re dict a hea d of tim e w hich o f m an y pos sib le e nd-s ta tes w ill b ereached.2. Inflexibility. T he fur th er in to the proces s w e a re, the ha rder it b ecom es to s hift fro m on e p ath toano ther . In a pp li ca ti on s t o t ec hn o lo gy , a g iv en s ub s id y t o a p ar ti cu la r t ec hn iq ue w i ll b e m o re li ke lyto s hift th e u ltim a te o utc om e if it o cc ur s e ar ly r ath er th an la te r. S uffic ie nt m ov em e nt d ow n ap a rti cu la r p a th m a y e ve n tu a lly " lo ck -i n" o n e solution."3. Non-ergodicity. T his m o uth fu l m ea n s th at in div id ua l, a cc id en ta l e ve nts d o n ot c an ce l o ut. T he yc an n ot b e tr ea te d (w hic h is to s ay , ig no re d) a s "n ois e." In ste ad th ey a re fe d b ac k in to fu tu re c ho ic es .Sm a ll e v en ts a re r em embe re d.4. Potential Path-Inefficiency. T he o utc om e th at b ec om es lo ck ed -in m a y n ot in fa ct g en er ate h ig he rp ay -o ffs th an a fo re go ne a lte rn a tiv e o ve r th e lo ng r un . In th is c as e, th e p ro ce ss m a y b e c alle d p ath -inefficien t .

T o this on e c an a dd a g en era l po in t, w hich is tha t th es e a re proc es ses w here s equen cin g m ay b e critica l. E ar ly

"Ih is c as e d ep ic ts a s pe cific ty pe o f in cre as in g r etu rn s p ro ce ss , w he re th e p ro ba bili ty o f a p ar tic ula r" dr aw " p re ci se ly e qu al s t he r ati o b et w ee n t he tw o a lt er na ti ve s in th e e xis tin g p op ula tio n. A rth ur (1 99 4) h ass how n tha t m an y of the fea tures of th is c as e ha ve a grea ter ra nge of a pplic ation , b ut n ot a ll of th em ."Ihis emerging stability r ep re se n ts a c rit ic al d is ti nc ti on b et w ee n i nc re as in g r et ur ns p ro ce ss es a n d

c ha ot ic p ro ce ss es wh ic h m a y g en er at e no s ta ble e qu ilib riu m a nd in ste ad c on sta n tly c ha ng e a nd e vo lv e. F ora n i n te r e s t i n g d is c u s si o n o f t h is q u it e d i f fe re n t f ra m e w o rk , with a p p l i c a ti o n s t o p o li t i c s , s e e F e a ro n 1 9 9 6 .


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6e ven ts , in clu din g "n ois e", m a tte r m uc h m or e tha n la ter o nes . D iffer en t s eq ue nc es a re lik ely to p ro du ced if fe r en t ou tcomes .

If the se ch ar ac ter is tic s a re c omm on in p olitics , th ey c arr y m a jo r im plic atio ns fo r b oth th e k in ds o fques tion s w e s hould a sk a bout politics , a nd the kin ds of a ns wers w e should expect to fm d. M os t im porta nt,they suggest the n eed to think o f s oc ia l p ro ce ss es a s fu nd am en ta lly h is to ric al in n atur e. P olitic s o cc urs inti me , a n d p oli ti ca l o utc om e s a re t he r es ult o f t em p or al p ro ce ss es . In s ea rc hin g fo r ex pla na tio n, w e n ee d toth in k a bo ut ca us es a nd e ffe cts th at a re o fte n s ep ar ate d in tim e, r ath er th an fo cu sin g e xclu siv ely o n s yn ch ro nice xpla na tio ns (H ar sa ny i 1 96 0; S tin ch comb e 1 96 8; S ko cp oI1 99 2; P ier so n 1 99 6). T o e xp lo re th es eimp lic ati on s, I b eg in b y r ev iew in g r ec en t a pp li ca tio ns o f in cr ea si ng r et ur ns a rg um e nts i n e co nom ic s.II. Increasing Returns Arguments in Economics.'

E con om ic s ha s tra ditio na lly fo cu se d o n th e s ea rc h fo r u niq ue e qu ilib ria . T he g oa l w a s a ttr ac tiv e,b ec au se it s ugg es te d a w or ld o f p oten tia l pr ed ic ta bili ty a nd e ffic ie ncy . G iv en a k no wle dg e o f e xis tin g fa cto re nd owm en ts a nd p refe re nc es , eq uilib riu m a na ly sis w ou ld p oin t to a s in gle o ptim a l o utco me. M or eo ve r,b ec au se e co nom is ts a s sum ed a c on te xt o f d ec re as in g m a rg in a l r etu rn s, th is g oa l w a s p ote nti all y a ch ie va bl e.W i th d ec re as in g r etu rn s, e co nom ic a ct io ns w ill e ng en de r n eg ati ve fe ed ba ck , l ea di ng to a p re di ct ab lee qu ilib riu m. A s ha rp r is e in o il p ric es p ro mp ts in cre as ed c on ser va tion , e xplo ra tio n, a nd ex ploita tio n o f o th ers ources of en ergy, lea din g to a fa ll in oil pr ices . E ach s tep a wa y from equilibr ium is m ore difficult tha n theo ne b efo re . A s A rth ur (1 99 4 [1 99 0], p .l) s un un ar iz es , n eg ativ e "fe ed ba ck ten ds to s ta biliz e th e ec on om yb ec au se a ny m a jo r c ha ng es w ill b e o ffs et b y the v er y r ea ctio ns th ey ge ne ra te .... th e e qu ilib riu m m a rk s the

'S om e s oc ia l s ci en tis ts a ls o h av e b ee n d raw n t o a rg um e nt s a b ou t p at h d ep en de nc e, c ri ti ca l ju nc tu re s,a n d p un ct ua te d e qu ili br ia i n e vo lu tio na ry b io lo gy , e sp ec ia ll y t he wo rk o f S te ph en J. Goul d ( se e e sp ec ia l lyK ra sn er 1989; S pruyt 1994). W ithout den yin g the relev an ce of th is litera ture, I fin d it a les s useful poin t ofd ep ar tu re th an th e ec on om is ts ' fo cus o n in cr ea sin g re tur ns . M os t a spe cts o f p olit ic s la ck a ny th in g lik e th em e ch an ism o f n a tu ra l s ele cti on wh ic h d riv es D a rw in ia n th eo ry ( in te rn a ti on a l r ela tio ns , a n d c er ta inc ha r ac te ri st ic s o f e le ct or a l s ys tem s con s ti tu te impo rt an t e xc ep ti on s ). F u rt he rmo re , s o ci al ly -c re a te d c on s tr uc tso f n orm s a nd fo rm a l in stitu tio ns ha ve n o re al a na lo g in ev olu tion ar y th eo ry . N orms a nd fo rm a l in stitu tio ns ,h ow ev er, a re c ru cia l fea tu re s o f p olit ic s a nd , a s w e s ha ll s ee , a re a c ritic al e le me nt in s oc ia l p ro ce ss es s ub je ctt o i nc re a si ng r et ur n s.


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7'bes t' outcom e poss ib le un der the circum stan ces: the m ost efficien t use an d a llocation of resources ."

D urin g the pa st deca de, how ev er, th is decrea sin g return s tra dition ha s fa ced a m oun tin g cha llen ge.Econ om ists have exhibited a grow in g in teres t in the idea of in crea s in g return s . On a w ide ran ge of subjects ,in cludin g the spatia l loca tion of production , the dev elopm en t of in tern ation al tra de, the ca uses of econ om icgrow th a nd the em ergen ce of n ew techn ologies , pa th depen den ce a rgum en ts ha ve becom e in creas in glyprevalent .

M an y of the idea s developed in this resea rch a re n ot en tirely n ew . The con cept of in creas in g return sreceived a tten tion in the work of Adam Sm ith and (especia lly) A lfred M arsha ll. In the 20th cen tury, anun dergroun d of "in stitu tion alis t" schola rsh ip , in cludin g figures such a s K aldor, M yrda ll, a nd V eblen ,con tinued to exp lore these is sues . Y et in the past few yea rs , prom in en t m ain stream econ om ists hav eem braced these idea s . Their work has receiv ed con siderab le a tten tion in leading jow na ls . Dougla ss N orth ,who places grea t emphasis on such a rgum en ts in his an a lys is of the dev elopmen t of modem capita lism , w asrecen tly aw arded the N obel Prize for econ om ics .

In vestiga tion s of techn ology ha ve prov ided the m os t fertile groun d for explorin g the con dition sconducive to increa s ing return s . A s Brian Arthur and Paul Dav id hav e argued, under certa in condition s as ingle technology m ay achieve a decis ive advan tage over com petitors , even though it is n ot n ecessa rily them ost efficien t on e in the lon g-run (A rthur 1994; Dav id 1985). Once an in itia l adv an tage is ga in ed, however ,feedb ack effects m ay lo ck in this techn olo gy , exclud in g o th er a ltern ativ es .

Figure 1, derived from Arthur 's work , sum marizes the process . Each techn ology im prov es(gen era tes h igher payoffs) as it becom es in creas in gly prev alen t. In other w ords, these techn ologies a resubject to in crea sin g return s. Beca use techn ology B sta rts w ith low er pa yoffs , how ev er, ea rly users grav ita teto techn ology A . This m ovem en t activ a tes the increa s ing return s process , im prov in g the perform ance oftechnology A , inducing m ore new users to adopt it, w hich w iden s the perform ance gap betw een technology Aan d B, en couraging yet m ore users to grav ita te to technology A . Even tua lly techn ology A becom es locked in ,


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8even though technology B would have generated higher pay-offs if it had been the first to reach a criticalthreshold of usage (in this instance, 30 users).

[FIG URE I ABOUT HERE]The essential idea here is that of increasing returns. If a new technology is subject to increasing

returns, being the fastest out of the gate (if only for reasons of historical accident) becomes critical. Withincreasing returns, actors have strong incentives to focus on a single alternative, and to continue movingdown a specific path once initial steps are taken in that direction.

Crucially, Arthur has addressed not only the characteristics of such processes, but the conditionswhich are likely to give rise to them. Not all technologies are prone to increasing returns. Arthur offers ashort list of circumstances which generate such dynamics. Understanding these conditions is essential for thebroader concerns of this paper, because as we shall see in Section III, analytically similar circumstances occurfrequently in the world of politics. Arthur's characteristics thus provide the foundation for developinghypotheses about when increasing returns processes are likely to operate in the social world.

Arthur argues that four features of a technology and its social context generate increasing returns:(1) Large set-up or fixed costs. These create a high pay-off for further investments in a giventechnology. By moving to larger production runs, fixed costs can be spread over more output,leading to lower unit costs. When set-up or fixed costs are high, individuals and organizations have astrong incentive to identify and stick with a single option.(2) Learning effects. Knowledge gained in the operation of complex systems also leads to higherreturns from continuing use. With repetition, individuals learn how to use products more effectively,and their experiences are likely to spur further innovations in the product or in related activities.(3) Coordination effects. These occur when the the benefits an individual receives from a particularactivity increase as others adopt the same option. If technologies embody positive networkexternalities, a technology will become more attractive as more people use it. This enhanced appealattracts more users, reinforcing the existing advantage. Coordination effects are especiallysignificant when a technology has to be compatible with a linked infrastructure (e.g., software withhardware, automobiles with an infrastructure of repair facilities and gas stations).(4) Adaptive expectations. If options that fail towin broad acceptance will have drawbacks later on,individuals may feel a need to "pick the right horse." Although the dynamic here is related tocoordination effects, it derives from the self-fulfilling character of expectations. Projections about


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9future aggregate use patterns lead individuals to adapt their actions in ways that help to make thoseexpectations come true.It is a useful exercise at this stage to take a step back from the discussion of technology and

recognize the broad applicability of the qualities just presented. Many social interactions share some or all ofthese features. New social initiatives -- such as the creation of organizations or institutions -- usually entailconsiderable start-up costs; individuals, and organizations, learn by doing; the benefits of our individualactivities or those of an organization are often enhanced if they are coordinated or "fit" with the activities ofother actors or organizations; it is frequently important to bet on the right horse, and therefore we adapt our

actions in light of our expectations about the actions of others. Indeed, the following discussion oftechnology is important primarily because it clarifies a set of relationships characteristic of many socialinteractions.

A nwnber of economists argue that the conditions which Arthur outlines have been relevant in thedevelopment of new technologies, especially those in complex, knowledge-intensive industries. Theincreasing returns variant of path dependence arguments has been applied to the development of the

"QWERTY" typewriter keyboard, the triwnph of the light-water nuclear reactor in the United States, thebattles between Betamax and VHS video recorders and DOS-based and Macintosh computers, earlyautomobile designs, and competing standards for electric current.8

While increasing returns arguments about technology are probably the best known, economists applysimilar analyses to other contexts as well. In fact, the wide range of such applications is striking. BothKrugman (1991) and Arthur (1994 [1990]) point to the role of increasing returns in the spatial location of

production. Given the importance of physical proximity inmany aspects of economic life, agglomerationeffects are widespread. Initial centers of economic activity may act like a magnet, influencing the locational

8Many of these examples have been contested in turn by critics who deny the empirical claim thatsuperior technologies lost out. Since these criticisms raise broader issues about the usefulness of increasingr e tu r n s a rg u m e n ts , I w i ll p o s t p o n e d is cu s s io n u n ti l t h e e n d o f t h i s s e c ti o n .


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10decisions and investments of other economic actors. Established firms attract suppliers, skilled labor,specialized fmancial and legal services, and appropriate physical infrastructure, which make the particularlocation attractive to other firms making similar products. So do social networks, which allow for easyexchange of information and expertise. Increasing returns arguments help explain the prevalence of pocketsof specialized economic activity, from Silicon Valley to the high-end textile manufacturers of Northern Italy.As Krugman has concluded, "[i]f there is one single area of economics in which path dependence isunmistakable, it is in economic geography -- the location of production in space. The long shadow cast byhistory over location is apparent at all scales, from the smallest to the largest -- from the cluster of costumejewelry firms in Providence to the concentration of 60 million people in the Northeast Corridor (Krugman1991, p. 80). '>9

These claims closely parallel a set of arguments about international trade, where arguments aboutincreasing returns have gained wide acceptance. Researchers began by focusing on economic trends whichappeared anomalous from the perspective of traditional trade theory -- most notably, the explosion of intra-industry international trade after World War II (Krugman 1994) . If comparative advantage results from"natural" features of different countries, one would expect most trade to occur between quite differentcountries -- e.g., North-South trade of manufactured goods for raw materials. Most international trade,however, is North-North. Developed economies trade primarily with other developed countries, includingextensive exchanges within particular industries. This pattern suggests a puzzling result: broadly similarcountries appear to have developed highly specialized "niche" comparative advantages.

Increasing returns provided an answer to this puzzle. Knowledge-intensive sectors will be prone topositive feedback. Countries which gain a lead in a particular field, for whatever reason, are likely to

. 9Spatial concentration of production does not by itself demonstrate that one region was able toconsolidate its position because of historical accident. Often geographic advantages (location near crucialnatural resources, or transportation networks like the Great Lakes) may playa key role. In many cases, both"natural" advantages and historical accidents playa part.


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11consolidate that lead over time. The result is a high degree of specialization. Even countries with similarinitial endowments develop divergent areas of economic strength. Comparative advantage is not simplygiven, it is often created through a sequence of events over time.

It is worth noting that this research on trade has been used to derive some controversial policyimplications. If first-mover advantages are significant, free trade may not be an optimal policy for a countrycompeting with countries willing to subsidize emerging sectors. Under certain (restricted) conditions, apolicy of "picking winners" may make considerable economic sense (Krugman 1994; Tyson 1991). Thereremains considerable dispute about the significance of such opportunities for strategic intervention.Krugman, for instance, maintains that they will appear relatively infrequently -- not so much because pathdependence is rare, but because of a government's inability to Identify winners ex ante. Whatever theappropriate policy implications of increasing returns in comparative advantage may be, however, its existenceis now widely recognized in mainstream economics."

Economists have also applied increasing returns arguments to economic change more broadly. Themost prominent development in recent discussions of economic growth has centered on "endogenous growth"theory (Romer 1986). Economists in the 1980s became puzzled by the existence of growth rates (notably indeveloped countries during the post-World War II period) that seemed far greater than what measuredincreases in inputs of capital and labor could explain. Romer and others argued that increasing returnsassociated with economic applications of knowledge could help account for the anomaly. Unlike capital andlabor, many aspects of knowledge are non-rival-- their use in one firm does not prevent their use inanother.Thus, a single gain in knowledge can be applied in many settings, and can lead to dramatic improvements inproductivity. Economic growth generates the kind of positive feedback that defmes increasing returnsprocesses.

10As Krugman (1996, pp. 110-11) notes, in the American Economic Association's classificationsystem for journal articles one will now fmd "models of trade with increasing returns and imperfectc o m p e t i t i o n " a lo n g s i d e t h e c a t e g o ry f o r " c o n v e n t i o n a l t r ad e m o d e ls ."


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12A s om ew ha t d iffe re nt a n aly sis o f g ro wth b as ed o n in cr ea sin g r etu rn s h as em ph as iz ed th e im po rta n ce

o f c om pleme nta ritie s (M ilg ro m, Q uia n a nd R ob er ts 1 99 1). V a rio us e co nomic a ctiv itie s (e .g ., in in fo rm a tio nte ch no lo gy ) a re o fte n c om pleme nta ry to o th er r ela te d a ctiv itie s. lm pr ov em e nts in a c or e a ctiv ity c an th us s pillo ve r b y im pr ov in g r ela te d p arts o f th e e co nomy (lo we rin g c os ts o r in cr ea sin g p ro du ctiv ity ). T he seim p ro veme nts in tu rn m a y in cr ea se th e a ttr ac tiv en es s o f th e c or e a ctiv ity . F ro m th eir fo rm a l a n aly sis o f s uc ha d yn am ic , M ilg ro m, G uia n a nd R ob er ts d eriv e w ha t th ey c all th e "mome ntu m th eo rem" : " ...o nc e th e s ys temb egin s a lon g a pa th of g row th o f the core v ar ia ble s, it w ill con tin ue forev er a lo ng tha t pa th or , m orer ea lis tic ally , u ntil u nm o de le d fo rc es d is tu rb th e s ys tem" (M ilg ro m, Q uia n a nd R ob er ts , 1 99 1, p . 8 5).

W h ile e co nomis ts a re n ow a pp ly in g in cr ea sin g r etu rn s a rg um e nts to a w id e r an ge o f im po rta nte co nomic p he nom en a, it is D ou gla ss N or th 's a pp lic atio n to is su es o f in stitu tio na l eme rg en ce a nd c ha n ge th atis p er ha ps m o st im po rta n t fo r s tu de nts o f p olit ic s (N or th 1 99 0a ). N orth a rg ue s th at a ll th e fe atu re s w hic hA r th ur i de nt if ie d in i nv es ti ga ti on s o f in c re as in g r et ur n s in te ch no lo gy c an b e a p pl ie d t o in s ti tu ti on s . Inc on te xt s o f c omp le x s oc ia l i nt er de pe n de nc e, n ew in s ti tu tio n s o fte n e nt ai l h ig h f ix ed o r s ta rt -u p c os ts , a n di n vo lv e c on s id e ra b le l ea r n in g e ff ec ts , c oo rd in a ti on e ff ec ts , a n d ad apt iv e e x pe ct a ti on s . E s ta b li sh e din s ti tu ti on s g en e ra te p ow e rf ul in d uc em e nt s t ha t r ein fo rc e t he ir ow n s ta b ili ty a n d f ur th er d ev el opm en t. "Ins ho rt" , N o rt h c on c lu de s, " th e i nt er de pe n de nt w e b o f a n i ns ti tu tio n al m a tr ix p ro du ce s m a s si ve i nc re a sin gr etu rn s" (N orth 1 99 0a , p . 9 5).

T his a rg um en t p ro vid es th e c or e to N or th 's s we ep in g r ein te rp re ta tio n o f e co nomic h is to ry . T hec en tr al p uz zle m o tiv a ti ng N o rt h's i nq uir y i s t he l im i te d c on v er ge nc e o f e co n om i c p er fo rm a n ce a cr os sc ou n tr ie s. N e o- cl as si ca l t he or y s ug ge st s t ha t la g ga rd c ou nt ri es s ho uld e as ily a d op t t he p ra ct ic es o f h ig hp er fo rm er s, a n d th er efo re fa irly r ap id c on ve rg en ce am on g e co nomie s s ho uld o cc ur. B ut it d oe s n ot.A cc or din g to N or th , in stitu tio ns , w hic h h e d efm es b ro ad ly to in clu de " th e r ule s o f th e g am e in a s oc ie ty o r,m o re f orm al ly , '" t he h um a n ly d ev is ed c on s tr ai nt s t ha t s ha p e h um a n i nt er ac ti on " (p. 3 ), e xp la in th e a n om a lyo f c on t in u ed d iv e rg e nc e in e co nomic p er fo rm a nc e am on g c ou ntr ie s o ve r tim e . O n ce in p la ce in stitu tio ns a re


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13h ard to c ha ng e, a nd th ey h av e a tr em en do us im pa ct o n th e p os sib ilit ie s fo r g en era tin g s us ta in ed e co nomicg row th . I nd iv id ua ls a n d o rg an iz ati on s a da pt t o e xi st in g i ns ti tu tio n s. If th e i ns ti tu tio n al m a tr ix c re at esi nc en tiv e s f or p ir ac y, N o rt h o bs er v es , p eo pl e w i ll i nv e st i n b ec om i ng g oo d p ir at es . T hu s, w h er e in s ti tu ti on sf ai l t o p ro v id e i nc en tiv e s t o b e e co n om i ca lly p ro du cti ve , th er e i s u nl ik el y to b e mu ch e co nom ic g row th .

F or p ol it ic al s ci en ti sts , N o rt h's i ns ig ht i s c ru cia l f or tw o r ea s on s . F ir st, h e h ig hli gh ts t he p ar al le lsb e twe e n cha r a ct er is ti cs o f t ec h no lo gy a n d c er ta i n c ha r a ct er is ti cs o f s o ci a l i n te ra c ti on s . In th is c on te xt, i t isw or th n otin g th at A rth ur 's a rg um en ts a bo ut te ch no lo gy a re n ot re ally a bo ut th e te ch no lo gy its elf b ut a bo ut th ec ha r a ct er is ti cs o f a t ec h no lo gy in interaction with c er ta in q ua lit ie s o f r ela te d s oc ia l a ctiv ity . T his is aprom is in g lin e of th ough t w hich I w ill d ev elop fur ther in the n ext s ectio n. M y v iew is tha t N orth ha s focu sedo n s om e o f th e m os t im p or ta nt p ar alle ls , b ut th er e a re o th er s ig nific an t o ne s.

S ec on d, N o rt h r ig ht ly em ph as iz es th a t i ns ti tu tio n al d ev e lo pm e nt i s s ub je ct t o in c re as in g r etu rn s .I nd ee d, i t i s th ro ug h t he ir r ol e i n p at te rn s o f i ns ti tu tio n al em er ge n ce , p er si st en ce , a n d c ha n ge t ha t in c re as in gre tu rn s p ro ce ss es m a y b e m os t s ig nific an t in s oc ia l life . G iv en th e p ro m in en t r ole in stitu tio ns h av e p la ye d inr ec en t p ol it ic al s cie n ce th eo ri zi ng , t he p os si bl e im p li ca ti on s o f t hi s i ns ig ht s ho ul d b e e v id en t, b ut I w il ld is cu ss th em in m or e d eta il la te r in th is e ss ay .

T he d ia lo gu e in e co nomic s s ur ro un din g in cr ea sin g r etu rn s is th e im p as sio ne d d is co ur se o f a nem erg in g pa ra digm . E con om is ts ta lk of "n ew " gro wth the ory , "n ew " tra de th eory , a nd s o on -- a ll b as ed o na rg um e n ts i nv o lv in g i nc re as in g r et ur ns . Y e t d es pi te t he p re va le n ce o f s uc h a rg um e nt s a n d t he i nt ell ec tu a le xc ite me nt a ss oc ia te d w ith th em , th ere is g oo d re as on to b elie ve th at th e ra n ge o f a pp lic atio n s ho uld b e a tlea st a s w ide in po lit ics a s it is in econ om ics . T o un ders ta nd w hy, it is h elp fu l to con sider the m ajoro bje cti on s t o i nc re a sin g r etu rn s a rg um e nt s th a t h av e r ec en tl y s ur fa ce d i n e co n om i cs .

In a fo rc efu l c rit iq ue , L ie bo witz a nd M a rg olis (1 99 5) h av e r ais ed s om e to ug h q ue stio ns a bo ut th isn ew . lite ra tu re o n in cr ea sin g r etu rn s. T he y a rg ue th at th ere is li tt le r ea so n to b elie ve th at a cc id en ts m a tte rm uc h, o r th at e co nomic s ys tems a re v er y lik ely to g et lo ck ed o nto c ou rs es o f s ub -o ptim a l p er fo rm a nc e. T w o


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14aspects of their critique are relevant here. J J They emphasize that only "remediable" path dependence is reallyof theoretical significance. They also claim that market mechanisms insure that remediable path dependenceIS rare. I will take up each point in turn. J 2

Following Williamson (1993), Liebowitz and Margolis distinguish remediable and non-remediablepath dependence. They note two kinds of path dependence ("first degree" and "second degree") that are non-remediable, by which they mean that there are nofeasible improvements in the path, either now or in the past.First degree path dependence "is a simple assertion of an intertemporal relationship, with no implied claim ofinefficiency" (p. 207). Everyone accepts that current events depend on prior ones, in the minimal sense thatthese prior events create the stock (e.g, of factors of production) which current actors must work with. It isnot clear that the claim that "history matters" in this sense gets us anywhere.

Second-degree path dependence "stipulates that intertemporal effects propagate error." Withhindsight, we wish that some other alternative had been chosen. Yet Liebowitz and Margolis questionwhether second degree path dependence has profound implications. If we acted as best we could with theinformation available at the time, the mistake was unavoidable, and we cannot reasonably describe theoutcome as inefficient.

Liebowitz and Margolis argue that the only kind of path dependence with major ramifications is pathdependence that is potentially remediable: "third-degree path dependence, ... /which/ supposes the feasibility,inprinciple, of improvements in the path ... is the only form of path dependence that conflicts with theneoclassical model of relentlessly rational behavior leading to efficient, and therefore predictable, outcomes"(ibid). This distinction between remediable and unremediable path dependence is crucial to their argument,

11Liebowitz and Margolis also develop an empirical critique of an alleged case of path dependence:VHS vs. Betamax. Elsewhere they have criticized other favored examples, such as the QWERTY keyboard(Liebowitz and Margolis 1990).

l~ote that the MargolislLiebowtiz critique depends on both parts of their argument being true. Thesignificance of path dependence for social scientists can be sustained if either the relevance of non-remediable path dependence or the prevalence of remediable path dependence Carl be sustained.


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15because Liebowitz and Margolis believe that instances of the more theoretically troubling, remediable kindoccur very infrequently.

Is their dismissal of non-remediable path dependence convincing? As Williamson notes, for policypurposes remediability is likely to be an appropriate standard. Recognizing the existence of path dependencemay not help policymakers much if they do not know how to identify it ex ante" But if our purpose isinstead to understand -- perhaps expost -- why aspects of societies move in particular directions and theconsequences of such movements, this objection loses much of its force. Indeed, since it will often beimpossible in principle to demonstrate that an alternative course of action would have been superior (eitherbecause the meaning of superiority itself is subject to dispute, or because we cannot know whatimprovements in an alternative technology would have occurred if another path had been followed), theremediability test seems more like a debater's point. By insisting on an impossible burden of proof,suggestions that the actual path chosen may have been problematic are simply ruled out of court by fiat.

The second part of the Margolis/Liebowitz analysis is the claim that remediable path dependence israre. Here, their argument is straightforward. If one of two options is superior in the long-run but not in theshort-run, market arrangements will generally assure the adoption of the superior path. The ability of privateactors to capture the returns from long-term investments prevents bad choices. Institutions of property rights,provisions for patents, etc. facilitate the internalization of possible externalities, and market arrangementssuch as a plentiful supply of venture capital mean that options with low short-run pay-offs will nonethelessreceive the support that they deserve. Economic actors, in short, calculate in the shadow of the future, and arethus unlikely to indulge in myopic, short-term maximizing behavior at their own long-term expense.

This argument clearly has some force." How much, however, depends on the strength of these

13As noted before, it is precisely for this reason that Krugman questions those making broad claimsabo\lt the implications of increasing returns arguments for trade policy.

"Indeed, Arthur explicitly recognized this possibility, although as far as I know he did nots y s t e m a t i c a l l y p u r s u e t h e im p l i c a ti o n s . S e e A r t h u r 1 9 9 4 , p . 2 8 , f n 1 1 .


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16mec ha n is m s fo r o ve r-c om in g s ho rt-te rm th in kin g o r fr ee -r id in g. In m y v ie w, L ie bo witz a nd M a rg olis a rem or e th an a lit tle c om pla ce nt a bo ut th e c ap ac ity o f s uc h m ec ha nis m s to fu lly in te rn a liz e th e c on sid er ab lee xte rn a lit ie s th at a re c en tr al to in cr ea sin g r etu rn s a rg um en ts . I th in k it w is e to le av e th is m a tte r toeconomis t s , however.P F or c ur re nt p ur po se s th er e is a m or e fu nd am en ta l o bje ctio n. E ve n if L ie bo witz a n dM a r go li s a re r ig ht r eg ar di ng e co n om i cs , t he ir a rg um e nt s s ti ll h a ve v er y li m ite d r el ev a nc e f or p ol it ic als cie ntis ts . H ow ev er s tro ng m a rk et m ec ha nis m s fo r " fa r-s ig hte dn es s" m a y b e, th ey a re a lm os t c er ta in ly fa rw ea ker in p olit ics . I ex pla in w hy in S ectio n III.III. Moving From Economics to Politics: The Applicability of Increasing Returns Arguments

T he a pp lic atio n o f e co nom ic m eth od s to th e s tu dy o f p olit ic s h as b ee n fr uitfu l. In a rea s such a s thes tu dy o f p ar ty c om pe titio n (D ow n s), th e fo rm a tio n o f in te re st g ro up s a n d s oc ia l m ov em e nts (O ls on ) a n dv otin g a n d le gis la tiv e b eh av io r (A rr ow ), im p or ts fr om e co nom ic s h av e illw n in a te d im po rta nt fe atu re s o f th ep olitic al la n ds ca pe . T he v alu e o f e co nomis ts ' a ca demic e xp or ts is g re atly e nh an ce d, h ow ev er , if th e p olitic als ci en ce im po rte rs t ak e c ar ef ul a cc ou nt o f th e c li sti nc ti ve f e at ur es o f t he " lo ca l" e nv ir onm en t (M oe 1 99 0) .A rg um en ts d ra w n fro m e co nomic s m us t b e s en sitiv e to th e q uite d iffe re nt n a tu re o f th e p olit ic al world."

T his is a s true for a rg um en ts a bout pa th depe nden ce a nd in crea sin g return s a s it h as prov en to b e forother kinds of a na lys is . Po lit ic s d iffers fro m eco nom ics in m an y w ays . T he key is to id en tify thos e a spe cts ofth e p olitic al e nv ir on m en t w hic h a re m os t r ele va nt to a n in ve stig atio n o f th e s ou rc es a nd c on se qu en ce s o f p ath

I SE xc ep t f or o n e o bs er va tio n . T he L ie bow itz lM a r go lis c ri ti qu e fo cu se s o n c ho ic e o f t ec hn o lo gi es o rpro ducts . A s n oted ea rlier , th is is b ut on e of the m an y w ays tha t in cre as in g return s a rgum en ts a re in va din geco nom ics . H ow w ell cou ld their a rgum en t b e exten ded to other in crea sin g return s p roces ses ? A s I w ill m ak ec le ar in th e n ex t s ec tio n, it h as lit t le r ele va nc e to th e d ev elo pm en t o f in stitu tio ns , w hic h a re a ls o s ub je ct toi n cr ea s in g r et ur n s. In th is re ga rd it is r ev ea lin g th at th e L ie bo witz iM a rg olis e ss ay d oe s n ot e ve n c ite N or th 'sw or k. A s N orth h as a rg ue d, p ath d ep en de nt p ro ce ss es o f in stitu tio na liz atio n a re c ru cia l to th e d ev elo pm en t o fp ar tic ula r m a rk et e co nom ie s. H er e fa r-s ig hte d fm a nc ia l m a rk ets a re g en er ally o f lim ite d h elp . T hu s th ea rg um e n t d ev el op ed in S ec ti on illa b ou t i nc re as in g r et ur ns p ro ce ss es i n p oli ti cs i s r el ev a n t fo r e co n om i st s a sw ell. F ea tu re s o f th e p olity -- w hic h m a y th em s elv es b e p ath d ep en de nt -- d ete rm in e w he th er th e m ec ha nis m su po n w h ic h th e L ie bo witz iM a rg olis a rg um en t re lie s w ill in fa ct b e p re se nt.

1 6Th ef ol low in g d is c us s io n i s p a rt ic u la r ly i n de b te d to L in dblom 1977, M oe 1984, M oe 1990, a ndN or th 1 99 0b .


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17dependence. I divide this discussion into two parts. First, I consider three prominent aspects of politicswhich make it conducive to increasing returns processes: (1) the extremely high density of institutions; (2) thecentral role of collective action; and (3) the intrinsic complexity and opacity of politics. After brieflyexplicating each of these characteristics, I discuss their relevance to the current discussion. Each of thesefeatures makes increasing returns processes prevalent inpolitics.

Second, I explain why the ameliorative mechanisms which Liebowitz and Margolis identify ineconomic systems are often less effective in correcting path dependence in politics. In particular, I emphasizethree characteristics of politics: the weakness or absence of efficiency-enhancing mechanisms of competitionand learning; the shorter time horizons of political actors; and the greater "stickiness" of political institutions.Each of these features makes increasing returns processes in politics particularly intense. They increasethe difficulty of moving off a path once actors have started down it.

Thus having shown in Part II that increasing returns processes are now seen as central to economics,I wish to argue here that these dynamics will be at least as prevalent and often more intense in politics. Ibegin by discussing the reasons for expecting increasing returns processes to occur frequently in politics,before turning to the reasons to expect these processes to place particularly powerful constraints on thecourse of political development.

The Institutional Density of Politics. The central features of political systems are compulsory ratherthan voluntary. Legally binding rules are not just a foundation for political activity (like property rights in theeconomy). They are instead the very essence of politics (Lindblom 1977; Moe 1990). Politics involvesstruggles over the authority to establish, enforce, and change rules governing social action in a particularterritory. Both formal institutions (such as constitutional arrangements) and public policies place extensive,legally-binding constraints on behavior.

Although unorthodox, the inclusion of public policies as well as formal institutions in thisformulation is important (Pierson 1993). While policies are generally more easily altered than the


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18c on s ti tu ti ve r ul es o f f orm al i ns ti tu ti on s , t he y a re n e ve rt he le ss e xt rem el y p rom in en t c on s tr ai ni ng f ea tu re s o fth e p olit ic al e nv ir on m en t. P olic ie s, g ro un de d in la w a n d b ac ke d b y th e c oe rc iv e p ow er o f th e s ta te , s ig na l toa ctors w ha t h as to b e do ne, w ha t ca nn ot b e do ne, a nd es ta blis h m an y o f the rew ards a nd pen alties a ss ocia tedw ith p ar tic ula r a ctiv itie s. M o st o f th es e p olic ie s a re a ls o r em a rk ab ly d ur ab le (R os e 1 99 0). E sp ec ia lly inm o dem s oc ie ti es , e xt en s iv e p ol ic y a rr an gem en ts fu n dam en ta ll y s ha p e t he i nc en ti ve s a n d r es ou rc es o f p oli ti ca lactors .

M u ch o f p olit ic s, in o th er w or ds , is b as ed o n a uth or ity r ath er th an e xc ha ng e. E sta blis he d c on stra in tsa pply to a ll-- those w ho do n ot a pp rov e a s w ell a s those w ho do -- a nd they a re b acked up, ultim ately , byfo rc e. T he " ex it" o ptio n, w hile c en tr al to th e w or kin gs o f th e m a rk et, is o fte n u na v aila ble (o r p ro hib itiv elyc os tl y) t o a ct or s w h o f ee l p oo rl y s er ve d b y e xi st in g p oli ti ca l a rr an g em e nt s. I n p ol it ic s, i ns tit ut io na lc o ns tr a in t s a r e u b iq ui to us .

S uc h in s ti tu ti on s a re g en er al ly s ub je ct t o i nc re a sin g r etu rn s . N o rt h's a n a ly sis h ig hl ig hts h owin s ti tu ti on s i nd uc e s el f- re in fo rc in g p ro ce ss es th a t m a ke r ev er sa ls o f c ou rs e i nc re as in g ly u n at tr ac ti ve o ve rti m e. I n c on te xt s o f c omp le x s oc ia l i nt er de pe n de nc e, n ew i ns ti tu tio n s a n d p oli ci es o fte n g en e ra te h ig h f ix edc os ts , le a rn in g e ff ec ts , c oo rd in a ti on e ff ec ts , a n d a da p tiv e e xp ec ta ti on s . I ns ti tu tio n s a n d p ol ic ie s m a ye nc ou ra ge i nd iv id ua ls a n d o rg a ni za ti on s to d ev e lo p s pe ci al iz ed s ki lls , m a k e c er ta in i nv e stm e n ts , p ur ch a sep ar ti cu la r g oo ds , o r c on tr ib ut e t im e , m o n ey , a n d a s en s e o f i de nt if ic a ti on to cer tain organizations." Thesea c ti v it ie s i n cr ea s e t he a t tr a ct iv e n es s o f e xi st in g i n st it ut io n a l a r ra n g emen ts r el a ti v e t o h y po th e ti ca la lte rn a tiv e s. In i ns ti tu tio n al ly -d en s e e nv ir onm e nt s, i ni ti al a ct io ns p us h i nd iv id ua l b eh av io r o n to p a th s th a ta re h ar d to r ev er se . A s s oc ia l a cto rs m a ke c omm itm en ts b as ed o n e xis tin g in stitu tio ns a nd p olic ie s, th e c os t

!7 It h as b ec om e c omm on to r efe r to s uc h c on se qu en ce s a s " su nk c os ts ." Wh ile in tu itiv e, th iste rm in olo gy is u nfo rtu na te . W h en e co nomis ts r efe r to s un k c os ts th ey m e an c os ts th at c an n ot b e r ec ov er eda nd s hou ld b e rega rd ed a s ir relev an t to curren t cho ic es a mon g option s. B y co ntra st, the w hole poin t of pa thd ep en de nc e is t ha t t he se p re vi ou s c ho ic es a re re le va nt to c ur re nt a ctio n. In c as es o f in cr ea sin g r etu rn s, s oc ia la da pta tio ns r ep re se nt in v es tm en ts w hic h p ro vid e c on tin uin g b en efits . A cto rs m a y b e lo ck ed -in to a c ur re nto pt io n b ec au se m a s si ve n ew i nv e stm e n ts w o ul d b e r eq ui re d b ef or e s om e t he or eti ca ll y s up er io r a lt er na tiv eg en er ate d th e s am e o r a h ig he r s tr eam o f b e ne fits .


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19o f e xi t f rom e xi sti ng a rr an gem en ts g en er all y r is es d ram a ti ca lly (P ie rs on 1 99 6) .

N ow this is tr ue o f ec on om ic in stitu tio ns a s w ell a s p olitic al on es . Institutional density, h owe ve r, iss im ply g rea ter in p olitics th an in e co nomic s. S ets o f m a nd ato ry co ns tr ain ts a re m or e ce ntra l to w ha t po lit ic sis a b ou t.The Collective Nature of Politics. S uppose you a re w orkin g for a firm w ith a n a nn oyin g b oss a nd b ad pa y.Y ou ha ve a clea r option : a ctin g on your ow n, you ca n s eek w ork els ew here, either a t on e of a la rge n um ber ofother firms or by settin g up busin ess on your ow n. Y our a bili ty to m ove depends on the s ta te of the la borm a rk et, b ut th e e xis te nce o f c om pe titiv e o ptio ns s ets c le ar lim its o n h ow a nn oy in g y ou r b os s ca n a ffo rd to b e,and how bad the pay can get."

O r s uppos e you in ven t a grea t n ew product. A ssum in g tha t you ca n get fm an cia l b ackin g (w hich yous hould b e a ble to do -- it is a grea t idea , a nd the m arket gen era tes a rea dy supply of v en ture ca pita lis ts), yourprospects a re good. N othin g s tops you from goin g in to b us in es s, or sellin g the idea to som eon e w ho w ill.E ith er w a y, th e n ew , s up er io r p ro du ct g ets to s ee th e lig ht o f d ay , a nd y ou re ap c on sid er ab le b en efits fr omyou r i nn o v at io n .

T he s et ti ng o f c on s um e rs is s im il ar ly a tom is ti c. In th e te xtb oo k e co nomic s c as e, m y d ec is io ns a s ac on sume r a re ta ke n to b e e ss en tia lly in de pen de nt o f m y ex pe cta tio ns r eg ar din g th e c ho ic es o f o th erconsumers." T he re is n o n eed fo r e xp lic it a ttem pts to c oor din ate b eh av io r; th e m a rk et s im ply a gg re ga te s th ei so la te d d ec is io n s o f i nd iv id ua ls .

181am n ot try in g to g lo rify th e la bo r m a rk et h er e, b ut m er ely p oin tin g o ut a c ru cia l d iffe ren ce b etw ee np ol it ic s a n d e co n om i cs in th e n a tu re o f " ex it" o pti on s.

19A lth ou gh th is r ep re se nt s a c rit ic al d if fe re nc e b etw e en e co nom ic s a n d p oli tic s, o ne wo ul d n ee d tom a ke a n um be r o f im po rta nt qu alific atio ns . T he d ecis io ns o f o th er c on sumer s c lea rly d o a ffe ct th e p ric e,s up ply , a nd q ua lity o f th e g ood s a va ila ble to m e. F ur th erm ore , m uc h e co nom ic a ctiv ity , b oth o n th ep ro du cti on a n d c on sumpt io n s id e, in v olv es s ig nif ic an t e xt er na li ti es , w h ic h m a ke t he im p li ca tio ns o fc on s ump tio n in te rd ep en de nt. A s n ote d in S ec ti on I I, t he se c on di ti on s o f i nd ep en de nt c on s ump ti on o fte n d on ot a pp ly to h ig h-te ch p ro du cts , w hic h fr eq ue ntly in vo lv e n etw ork e xte rn alit ie s. F or a g oo d dis cu ss io n o fsome of these complications see Hirsch 1977.


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20These highly stylized examples illustrate the flexibility, fluidity, and atomization of economic

markets. Political "markets" are different. They are far from being flexible and fluid. In politics, my actionsare highly dependent upon the actions of others. What I get depends not just on what I do, but (mostly) onwhat others do. Following Olson's ground-breaking work, students of politics have long recognized the"logic of collective action." Most of the "goods" produced in politics are public goods; it is difficult to limittheir conswnption to those who helped provide them. As a result, individuals will have a strong tendency tofree-ride. Coordinating the activity of many people -- creating conditions favorable to collective action -- is aprincipal issue in political life.

There is another reason why political action frequently requires coordination. Many of the goalswhich political actors pursue have a "lumpy" or "winner-take-all" quality to them (politicians, coup plotters,and lobbyists either win or lose; legislation either passes or is rejected). Unlike economic markets, wherethere is usually room for many firms, finishing second often does not count for much in politics. Indeed -- theMenshiviks in 1917 come to mind -- it can be extremely problematic. Here too, the effectiveness of myactions depends heavily on the actions of others. This is less true of some aspects of politics -- such asanswering an opinion poll question or voting -- than others. Even in voting, however, the lwnpiness ofelection outcomes (in the absence of a pure system of proportional representation) means that if a person doesnot want to "waste" her vote, her actions may well turn on what she expects others to do.

Under these circwnstances, actors must constantly adjust their behavior in the light of expectationsof how others are likely to act. Whether I put energy into developing a new party, or provide resources to aninterest group, may depend to a considerable degree on my confidence that a large nwnber of other peoplewill do the same. To take a more dramatic example, a protestor's willingness to join a demonstration againstan oppressive regime under the watchful eyes of the security police depends heavily on her confidence thatshe will be joined by many others (Kuran 1991; Lohmann 1994). In short, issues of collective action aboundin politics.


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21Collective action represents the second core feature of politics that is subject to massive increasing

returns. Like institutional development, the dynamics of collective action are highly path dependent, sincethey involve many of the qualities conducive to positive feedback: high set-up or fixed costs, coordinationeffects, and a prominent role for adaptive expectations." Thus, the kinds of incremental, micro-leveladaptations that drive competitive adjustments towards efficient outcomes in the marketplace (e.g.,consumers "voting with their dollars" by shifting from one product to another, or workers switching firms insearch of higher wages) are likely to playa less prominent role in politics.

Because individual adjustments in the absence of coordinated action are often ineffective in politics,change will be muted unless a "critical mass" can be generated. Creating such a critical massive generallyrequires some kind of coordination. Adaptive expectations are likely to be crucial. If this critical massoccurs, however, collective behavior is likely to exhibit increasing returns and major disruptions may takeplace (Baumgartner and Jones 1993). Collective action is therefore prone to unpredictability. Small eventsfeed back into the possibilities for further activity. It is a process where history matters.The Complexity and Opacity of Politics. Economics is built in large part around the useful and plausibleassumption that economic actors seek to optimize and are relatively good at it. Firms operate to maximizeprofits. The metric for good performance is relatively simple and transparent. Various features of theeconomic environment can be analyzed in terms of how they contribute to or detract from firm performance.Observable, unambiguous, and often quantifiable indicators exist for many of these features. Workers caneasily obtain fairly good information on the wages and working conditions on offer from different firms.Consumers, too, are reasonably adept at navigating most aspects of the economic world. Links betweenchoices and outcomes are generally clear: I take a new job and my income rises; I buy a car and my checking

20Although "threshold" models of collective action are now prevalent (see Granovetter 1979; Chong1991), I am not aware of anyone systematically applying the core elements of increasing returns arguments tocollective action problems. Arguments inMancur Olson's The Rise and Decline ofNations (Olson 1981),h o w e v e r , c o n ta in c o n si d e ra b le s im i l a r i t i e s a n d c o u ld b e r e c a s t in t h e s e t e rm s .


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22

a cc ou nt b ala nc e s hr in ks . P ric es s en d s tr on g s ig na ls w hic h fa cilita te c om pa ris on s. T he q ua lity o f g oo ds isg en era lly e vid en t in r ela tiv ely s ho rt o rd er , a n d re pe ate d p ur ch as es a llo w c on sume rs to s am p le a lte rn ativ es . O fcou rs e, on e co uld a dd m an y co mplica tion s to th is s im ple picture o f the econ om ic rea lm . M y cla im is n ot tha te co nomic s is c om ple te ly tr an sp ar en t. R a th er , I w is h to h ig hlig ht th at th e ro le o f p ric es , th e p re va le nc e o fre pe ate d in te ra ctio ns , a n d th e p re se nc e o f r ela tiv ely s ho rt c au sa l c ha in s b etw ee n c ho ic es a nd r es ults m a ke itr ela tiv ely e as y fo r e co nom ic a cto rs to c or re ct m is ta ke s o ve r tim e. In o th er w or ds , th es e fe atu re s im pr ov e th ep ro sp ec ts f or l ea rn in g .

P olit ic s is a fa r, fa r m u rk ie r e nv ir on m en t. It la ck s a ny th in g lik e th e m ea su rin g r od o f p ric e, d es pites om e re du ctio nis t e ffo rts to m a ke th e s ea rc h fo r v ote s th e e qu iv ale nt o f th e s ea rc h fo r d olla rs . P olit ic al a cto rsfr eq ue ntly p urs ue a r an ge o f g oa ls . W h ile p olit ic ia n s o fte n w ill b e fo cu se d o n r ee le ctio n, o th er s (e .g .,b ure au cr ats , in te re st g ro up s) h av e d iffe re nt am bitio ns . T hu s, it is d iffic ult to s ay w ha t a n "e ffe ctiv e" p olit ic als ys te m w ou ld lo ok lik e ~ ~w ha t it w ou ld o ptim iz e -- e ve n in th eo ry .

It is e ve n h ar de r to a ctu ally id en tify o bs er va ble a sp ec ts o f p olit ic al p er fo rm a nc e. A n d, if w e b elie veth at a s ys te m is n ot p er fo rm in g w ell, i t is s ti l l m or e d iffic ult to d ete rm in e w hic h e leme nts in t he s e h ig h lyc om p le x s ys tems a re r es po ns ib le a nd w ha t a dju stm en ts w o uld le ad to b ette r re su lts . T he c om ple xity o f th eg oa ls o f p olit ic s, a nd th e lo os e a nd d iffu se lin ks b etw ee n a ctio ns a nd o utc om es , r en de r p olitic s in he re ntlya mb igu ous . A s N orth ha s a rgu ed, "polit ica l m arkets a re fa r m ore pron e [th an econ om ic m arkets ] toin effic ie nc y. T he r ea so n is s tr aig htfo rw a rd . It is e xtr ao rd in a rily d iffic ult to m ea su re w h at is b ein g e xc ha ng edin p olit ic al m a rk ets a n d in c on s eq ue n ce to e n fo rc e a gr eem en ts " (No rt h 1 99 0b , p . 3 62 ).

It is im po rta n t to n ote th at N or th is n ot s im ply a rg uin g th at p olit ic al d ec is io n-m a kin g is p ro ne tog re ate r in effic ie nc y. It is n ot ju st, o r e ve n p rim a rily , th at p olit ic s d ea ls w ith th e s am e is su es a s e co nom ic s b utd oe s s o le ss e ffic ie ntly b ec au se o f th e w a y th at p olit ic al d ec is io ns a re m a de . R a th er , p olit ic s g ets s tu ck w ithth e m o re d iffic ult p ro blems . Wh er e tr an sa ctio n c os ts a re lo w, m a rk et m ec ha n is m s a re lik ely to b e e ffe ctiv e,b ut they ten d to b rea k d ow n w hen tra ns action cos ts a re v ery high. T hus , it is co mplex a nd a mb igu ous is sues


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23and problems that gravitate toward the public sphere.

Even if mistakes or failures in politics are apparent, improvement through "trial-and-error" processesis difficult. Most participants in politics (voters, members of interest group) engage in activities onlysporadically. Their tools of action are often crude, such as the blunt instrument of the vote, and their actionshave consequences only when aggregated. There are often long lags and complex causal chains connectingthese political actions to political outcomes. The result is that mistaken understandings often do not getcorrected.

Instead, understandings of the political world should themselves be seen as prone to pathdependence. As North (drawing on work in both cognitive psychology and organizational theory) has argued,actors operating in a social context of high complexity and opacity are heavily biased in the way they filterinformation into existing "mental maps" (North 1990; Denzau and North 1994). Confirming informationtends to be incorporated, while disconfmning information is filtered out. Social interpretations of complexenvironments like politics are subject to positive feedback. The development of basic social understandingsinvolve high start-up costs and learning effects; they are frequently shared with other social actors in wayswhich create network effects and adaptive expectations. Mental maps induce increasing returns.

North's work here converges with long-standing views of those studying political culture as well asthe recent contributions of cognitive science. Once established, basic outlooks on politics, ranging fromideologies to understandings of particular aspects of governments or orientations towards political groups orparties, are generally tenacious. They are path dependent.21

21Indeed, as Madison Avenue knows well, such path dependent cognitive effects are evident even inthe less ambiguous world of consumption. This is why advertisers covet the attention of youngsters whohave yet to make defmitive (and resilient) choices. A telling recent example is the new marketing effort of theNational Football League, which is alarmed by indications that youngsters are increasingly drawn tobasketball and soccer. These marketers speak the language of increasing returns. A former MTV executivenow working on special events says "it's all about getting a football ... into a kid's hands as soon as you can.Six years old, if possible. You want to get a football in their hands before someone puts a basketball in theirhands, or a hockey stick or a tennis racquet or a golf club" (Seabrook 1997, p. 47).


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24

T he re a re , th en , c om p ellin g re as on s to b elie ve th at p olit ic s w ill b e u nu su ally p ro ne to th e in cr ea sin gr etu rn s v a ria n t o f p ath d ep en de nc e. In cr ea sin g r etu rn s a re c ha ra cte ris tic o f th re e o f th e m os t p ro min en tfe a tu re s o f p ol it ic al e nv ir onm en ts : p ro ce ss es o f i ns ti tu tio n al d ev e lo pm e nt , p ro ce ss es o f c ol le ct iv e a ct io n , a n dp ro ce ss es o f s oc ia l in te rp re ta tio n. T his c on clu sio n s ho uld b e u nd er lin ed . B y its elf, i t s ug ge sts w hy in cr ea sin greturn s is a cr itica l con cept for thos e w ho s eek to un de rs ta nd the s ou rc es of p olit ica l s ta bility a nd ch an ge . If ar ec og n iti on o f th e s ig n ifi ca n ce o f s elf -r ei nf or ci ng p ro ce ss es i s s ha ki ng u p e co n om i cs , p ol it ic a l s cie n tis ts h av ea t lea st a s grea t a n eed to con sider its im plica tion s.

Y e t th er e is a ls o re as on to b elie ve th at th es e e ffe cts in p olit ic s a re o fte n p ar tic ula rly in te ns e. In th er em a in de r o f th is s ec tio n I c on sid er w hy it is fr eq ue ntly m o re d iffic ult to m ov e o ff a n e xis tin g p ath in p olit ic sth an it w ou ld b e in e co nomic s. E co nomis ts h av e r ar ely w o rr ie d a bo ut th e p os sib ilit ie s o f in effic ie nto ut com es , b ec a us e t he y b eli ev e t he m a rk et p ro v id es t wo p owe rf ul m e ch a ni sm s f or r es to ri ng e ff ic ie n cy :c om p etitio n a n d le ar nin g. C om p etitiv e p re ss ure s in a m a rk et s oc ie ty m ea n th at n ew o rg an iz atio ns w ith m o ree ff ic ie n t s tr uc tu re s w il l d ev el op , e ve n tu a lly r ep la ci ng s ub op tim al o rg an iz at io ns (Al eh ia n 1 95 0). L ea rn in gp ro ce ss es w ith in fir ms c an a ls o le ad to c or re ctio n. A cc or din g to W illia m so n (1 99 3), o ne c an re ly o n

th e " fa r-s ig hte d p ro pe ns ity " o r " ra tio na l s pir it" th at e co nomic s a sc rib es to e co nomic a cto rs .. . O n cet he u n an ti ci pa te d c on s eq ue nc es a re u n de rs to od , t he se e ff ec ts w il l t he re af te r b e a n ti cip a te d a n d th er am ific atio ns c an b e fo ld ed b ac k in to th e o rg an iz atio na l d es ig n. U n w a nte d c os ts w ill th en b em i ti ga te d a n d u n an ti ci pa te d b en ef it s w il l b e e n ha n ce d. B ett er e co nom ic p er fo rm a n ce w i ll o rd in a ri lyr es ul t. ( pp . 1 16 -1 7)It is w o rth emp ha siz in g th at n eith er o f th es e m ec ha nis m s r ep re se nts a g ua ra n te ed c or re ctiv e in th e

in c re as in g r et ur n s c on te xts e xp lo re d b y A r th ur , N o rt h a n d o th er s, b ec a us e i nf er io r o pt io ns p os se ss in g i ni ti ala d va n ta ge s w i ll o ft en r ei nf or ce th em s el ve s o ve r t im e . M o re f un d am e nt al ly , b ot h t he se c or re cti ve m e ch a ni sm sa re e ve n le ss e ffe ctiv e w he n o ne s hifts fr om fir ms in p riv ate m a rk ets to th e w or ld o f p olit ic al in sti tu tio ns(M o e 1 98 4, 1 99 0). T his is c le ar es t fo r m ec ha nis m s o f c om pe titio n. P olit ic al in stitu tio ns r ar ely c on fr on t ad en s e e nv ir onm e nt o f c omp et in g in s ti tu ti on s t ha t w il l i ns ta n tl y c ap it al iz e o n i ne ff ic ie n t p er fo rm a n ce ,s woop in g in to ca rry o ff a n in stitu tion 's "cu sto mers " a nd driv e it in to b an kru ptcy . W hile m od els of


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25competition may be helpful for understanding some important aspects of politics (such as internationalrelations and party systems), there can be little doubt that political environments are typically more"permissive" than economic ones (Krasner 1989).

As just discussed, the complexity and ambiguity of politics creates serious problems for learningarguments. It may be appropriate in some circumstances to argue that politics involves learning processes, inwhich responses to public problems proceed in a trial-and-error fashion (Lindblom 1959; Heclo 1974; Hall1993). There is little reason, however, to think that this acts as a selection mechanism with anything like theefficiency-enhancing properties of market competition in economics or Darwinian natural selection inbiology. Because political reality is so complex and the tasks of evaluating public performance anddetermining which options would be superior are so formidable, such self-correction is often limited. Thedevelopment of what North calls our "subjective models" of the political world is itself path dependent -- wetend to feed back in information that confirms pre-existing views, rather than correcting them.

Even where learning does occur, it faces additional hurdles: inWilliamson's words, learning muststill be "folded back into the organizational design." Here, all the barriers to change in systems subject toincreasing returns become relevant: long movement down a particular path will have increased its desirabilityrelative to possible alternatives. Furthermore, in politics the pursuit of such change faces two additionalobstacles: the short time-horizons of political actors and the strong status quo bias ("stickiness") associatedwith the decision rules governing most political institutions. These factors will often make lock-in effectsparticularly intense in politics.

Time Horizons. A statement attributed to David Stockman, budget director during the Reaganadministration, is unusual among political decision makers only for its candor. Asked by an adviser in 1981to consider pension reforms to combat Social Security's severe long-term fmancing problems, Stockmandismissed the idea out of hand, exclaiming that he had no interest in wasting "a lot of political capital onsome other guy's problem in [the year] 2010" (quoted in Greider 1982, p. 43).


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Man y o f t he imp lic ati on s o f p ol iti ca l d ec is io ns -- e sp ec ia ll y c omple x p ol ic y in te rv en ti on s o r m a jo rin stitu tio na l r efo rm s -- o nly p la y o ut in the lon g r un . Y e t po lit ica l a cto rs , es pec ia lly p olitic ia ns , a re o fte nm os t in te res te d in the s ho rt-ter m c on seq ue nc es o f the ir a ctio ns ; lo ng-ter m e ffe cts ten d to b e h ea vilyctis cou nte d. T he p rin cipa l r ea son is th e lo gic of electora l po litics . K eyn es o nc e n oted th at in th e lon g r un , w ea re a ll de ad ; fo r p oliticia ns in demo cr atic po lit ies , ele ctora l de ath ca n com e m uch fa ster . B eca us e thed ec is io ns o f v ot er s, w h ic h d ete rm in e p oliti ca l s uc ce ss , a re t ak en in th e s ho rt -r un , e le cte d o ffi cia ls emp lo y ahigh dis co un t ra te. T hey gen er ally w ill p ay a tten tio n to lo ng-ter m co ns equ en ce s on ly if th es e b ec om ep olit ic ally s al ie nt, o r w he n th ey h av e li ttl e r ea so n t o fe ar s ho rt-t erm e le cto ra l r etr ib utio n.

P oliti ca l s cie nti sts h av e p aid lim it ed a tte ntio n to th e i ss ue o f tim e h or iz on s. An i n t eres ti ng l it e ra tu reis de velop in g on "cr ed ib le c omm itm en ts " -- th e a ttem pt o f p olitic al a ctors to cr ea te a rra ng em en ts th atfa cilita te c oo pe ra tion b y len gthen in g tim e ho riz on s. Y e t w e kn ow re la tiv ely little a bo ut th e tim e ho riz on s ofd if fe re nt p olit ic al a ct or s, o r a bo ut th e i ns titu tio na l a rr an gem en ts th at a re c on du civ e to lowe rin g th eir d is co un tr ate s (i .e ., in cr ea sin g th e p olit ic al r el ev a nc e o f th e future)." Rece nt r es ea r ch s ug ge st s t ha t p a rt ic ul arin sti tu tio na l d es ig ns ( su ch a s i nd ep en de nt c en tr al b an ks ), em powe rin g p ar tic ul ar k in ds o f p olit ic al a cto rs(e.g., b an ke rs ) m ay s uc ce ed in le ng the nin g tim e h orizon s in po lit ics .

In ge ne ra l, ho we ve r, s uch m ec ha nis ms a re les s effec tiv e in po lit ics tha n in ec on om ic s. A s n oted inP ar t II, th e m ar ketpla ce po ss es ses s om e s tro ng m ech an is ms fo r len gth en in g tim e h orizo ns -- es pe cia lly theba sic con tin uity of firm s ov er tim e a nd the pres en ce of ca pita l m arkets . Such m echa nism s in polit ics a reg en er ally f ar w ea ke r. I t i s d iffi cu lt to m on ito r p oli tic al b eh av io r o ve r ti me b ec au se in dic ato rs o f p er fo rm a nc ea re ty pica lly s o lim ited . It is n o a ccid en t tha t m uc h o f the g en er ally op tim is tic ra tion al ch oice d is cus sio n o f" cr ed ib le c omm itme nt s" in p oliti cs h as fo cu ss ed o n r el ativ el y transparentjinancial i ss ue s ( e. g. , b ud ge td ef ic its , m o ne ta ry p ol ic y). In th es e in sta n ce s, p er fo rm a nc e i nd ic ato rs a re c le ar a n d b eh av io r r ela tiv ely e as y to

2 2F or a n in trod uc tio n to the lite ra ture on cr edib le comm itm en t s ee N orth a nd Wein ga st (19 89 ) a ndShep s le (1991) .


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27monitor. While these issues are clearly important, it must be stressed that for reasons already noted they arefundamentally atypical of the kinds of matters dealt with in politics. Not only is monitoring oftenexceptionally difficult in politics, but it is also hard to hold actors accountable, because of the relatively rapidturnover of critical positions. Politics, in short, lacks the characteristic property rights that facilitate thelinkage of actors' decisions over time in the economic sphere. Inmany cases, the long term is essentiallybeyond the political horizon. A statesman, Bismarck said, is a politician who thinks about his grandchildren.

The different natures of time horizons in politics and in economics matter a lot. This can be seen byrevisiting the critique of path dependence presented in Section II. Liebowitz and Margolis properly point tothe mechanisms of fmancial markets as a protection against "Type III" path dependence. If it is known thatlong-term benefits, applying a market discount rate and allowing for uncertainty, will be greater using optionB, then investors should gravitate toward that option even if in the short-term it will perform more poorlythan option A. Thus, they argue that market mechanisms should allow the more efficient outcome (B) inFigure 1.

Inpolitics, however, the outcome may well be different. Asswne that the crucial decision-maker is apolitician up for re-election in two years. Inthis context, effects after the election cycle do not count formuch." A politician focusing on the short term pay-off would choose Option A. This has profoundconsequences. If political decision-makers face many decisions like those outlined in Figure 1, and iftheirtime-horizons tend to be short, we can expect movements onto less-than-optimal paths to be common.Crucially, we can also expect that once on such a path political actors will generally have powerful incentivesto stay on it. The costs of change are borne in the short-run, while the benefits will generally only accrue inthe long run -- that is, to someone else.

23These long-term effects will count if an actor with longer time-horizons (such as an interest group)is able to make them relevant to politicians -- e.g., through campaign contributions or votes. The question iswhether such mechanisms are anywhere near as effective as the capital markets operative in the economicsphere. Inmy view, there are strong reasons to be skeptical of this, but it is clearly an issue deservingconsiderable at tent ion.


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Institutional "Stickiness" in Politics. Political arrangements are unusually hard to change. An individualwith a new idea for a product need only secure the finance to put it on the market. If enough conswners(choosing independently) find it sufficiently appealing, the product will be a success. Change can beengineered through competition against existing products. Similarly, those with property rights over a firmare generally in a strong position to remake their organizations as they choose. Lines of authority are clear,and the relevant decision makers are likely to share the same broad goal of maximizing profits.

By contrast, key features of political life, both public policies and (especially) formal institutions arechange-resistant. Policies and institutions are often designed to be difficult to overturn. There are two broadreasons why. First, those who design institutions and policies may wish to bind their successors. Moe termsthis the problem of "political uncertainty." Unlike economic actors, political actors must anticipate that theirpolitical rivals may soon control the reins of government. To protect themselves, these actors therefore createrules that make pre-existing arrangements hard to reverse. As Moe (1990, p. 125) puts it, designers

do not want 'their' agencies to fall under the control of opponents. And given the way publicauthority is allocated and exercised in a democracy, they often can only shut out their opponents byshutting themselves out too. Inmany cases, then, they purposely create structures that even theycannot control.Political actors do not only wish to bind their successors, however. Inmany cases, they are also

compelled to bind themselves. The key insight of the "credible commitments" literature is that actors canoften do better if they remove certain alternatives from their future menu of options. The economy of acountry will grow faster, for instance, if a monarch can credibly commit himself to refrain from expropriatingan excessive amount of the hard-earned wealth of his subjects (North and Weingast 1989). This can be doneifhe accedes to Parliamentary control over the power to tax. Like Ulysses preparing for the Sirens, politicalactors often bind themselves, restricting their own freedom in order to achieve some greater goal. Toconstrain themselves and others, designers create institutions that are sticky. Stickiness is built into thedesign of political institutions to reduce uncertainty and enhance stability, facilitating forms of cooperation


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a nd e xc ha n ge w hic h w ou ld o th erw is e b e im po ss ib le . O fte n, th e b ar rie rs to re fo rm a re e xtr em ely h ig h: e .g .,u na n im i ty r eq ui rem en ts i n t he E ur op ea n U n i on , m u lt ip le s up en n a jo ri ti es to a lte r t he Ame ri ca n c on s tit ut io n .

T he r el ev a n t p oin t f or th e c ur re nt d is cu ss io n i s t ha t t hi s i ns ti tu tio n al s ti ck in e ss c ha ra ct er is ti c o fp oli ti ca l s ys tem s r ein fo rc es t he a lr ea dy c on s id er ab le o bs ta cl es t o m o v em e n t o ff o f a n e st ab li sh ed p a th .C om b in ed w ith th e la ck o f c om p etitiv e m ec ha n is m s, th e w ea kn es s o f le ar nin g p ro ce ss es , a nd th e s ho rt tim eh or iz on s c ha ra ct er is ti c o f p ol iti cs , i t s ug ge st s t ha t in c re as in g r et ur ns te n de nc ie s in p ol iti ca l d ev el opm en t a reo ft en p a rt ic ul a rl y i n te n s e.

It s ho uld b e a ck no wle dg ed th at th er e is a n im p or ta nt c ha ra cte ris tic in p olit ic al s ys te ms w hic h r un sc ou nte r to th is lin e o f a rg um en t. B ec au se p olit ic s is a n e ffe ctiv e s ys te m fo r m ob iliz in g c oe rc iv e p ow er ,g ov ern m en ts m ay a t tim es b e in a po sition to orch es tra te a "jum p" from on e pa th to a nother . G ov ern men ts ,b y s an ctio nin g n on -p artic ip an ts , c an c oo rd in ate a dju stm en ts in a w a y th at m a rk ets m ig ht n ev er b e a ble toa chiev e. F or in sta nc e, the B ritis h g ov ern m en t w as a ble to en act a s hift to the m etr ic s ys tem th at w ould ha veb ee n d iffic ult o r im po ss ib le to e ng in ee r th ro ug h th e m or e a to mis tic m ec ha n is m s o f th e market." Andg ov er nm e nts a re c le ar ly c ap ab le o n o cc as io n o f m o biliz in g r es ou rc es fo r m or e d ram atic c ha ng es in c ou rs e.S uc h p os sib il iti es , h ow e v er , s ho ul d n o t b e e xa g ge ra te d. T he m e tr ic e xampl e r ep re se nt s a r ela ti ve ly m o de stin sta n ce o f r ev er sin g p ath d ep en de nc e. C os ts o f a dju stm en t w er e lo w ; t he p ro blem w a s e ss en tia lly o ne o fc oo rd in atio n -- in du cin g e ve ry on e to m a ke th e s w itc h a t th e s am e tim e. F or th is ta sk , th e a uth or ita tiv e r ule -s ettin g c ap ac itie s o f g ov er nm en t a re o f g re at a ss is ta nc e. F or r ea so ns a lre ad y d is cu ss ed , it is m u ch le sse vid en t th at g ov er nm en ts w ill g en er ally b e w illin g o r a ble to e ng in ee r s hifts to a d iffe re nt p ath w he na dju stm en t c os ts a re h ig h. C a se s o f f un dam en ta l o r r ev ol ut io na ry r ef orm i n w e ll -i ns ti tu tio n al iz ed p oli tic a ls ys te ms a ttr ac t o ur a tte ntio n p re cis ely b ec au se th ey a re s o r ar e.

P olit ic s d iffe rs fro m e co nom ic s in m a ny w a ys . A pp ly in g to ols o f e co nom ic a na ly sis to p olit ic s ist re ac he ro us , u n le ss t he se d if fe re nc es a re s ys tem a ti ca ll y ta k en i nt o a cc ou nt . In t hi s i ns ta n ce , a tt en ti on to t he

2 4T ha nk s to A la n Ja co bs fo r h is s ug ge stio n o f th is e xam ple a n d d is cu ss io ns o f th e b ro ad er is su e.


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Path Dependence, Increasing Returns, and the Study of Politics (PSGE 7.9, 1997), Paul Pierson

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Transcript of Path Dependence, Increasing Returns, and the Study of Politics (PSGE 7.9, 1997), Paul Pierson