Organizations and Markets

Lock-In, Path Dependence, and Efficiency: Railway Gauge Edition

13 October 2010 at 11:13 am Peter G. Klein 1 comment

| Peter Klein |

Doug Puffert’s new book on the history of railway gauge standardization apparently takes a middle position between the “lock-in always” position of Paul David and the “lock-in rarely” position of Liebowitz and Margolis. Writes reviewer Dan Bogart:

Puffert’s narrative convincingly dispels the extreme version of the Liebowitz and Margolis critique which argues that market participants had perfect foresight. On the other hand, it does suggest historical actors understood the role of positive feedbacks and tried to manipulate gauge adoption in an effort to lock-in their preferred standard. The degree to which gauge selection was efficient is a lingering question throughout the book. Puffert does not take a stand on the relative efficiency of different gauges, but an argument is made that diversity entailed large costs.

I’m not sure what Bogart means by the “extreme version” of the Liebowitz-Margolis critique; L&M have certainly never used the concept of perfect foresight in their analysis of alleged QWERTY effects. Indeed, their critique of Paul David is based mostly on comparative institutional analysis. As Peter Lewin puts it in his excellent summary of the QWERTY debate:

Somewhat paradoxically both Liebowitz and Margolis and their critics (in varying degrees) are critical of mainstream neoclassical (textbook) economics and its standards of welfare. That is to say, they are both highly critical of the kind of neoclassical economics that assumes perfect knowledge, perfect foresight, many traders, etc., the kind that derives perfect competition as a Pareto optimal efficient standard against which to judge real world outcomes. Both focus (to a greater or lesser extent) on the importance of ignorance and uncertainty (and the importance of institutions) in rendering such a standard problematic. Where they differ decisively, however, is in the policy lessons that they take away from this.

The critics argue that the ideal of perfect competition is an ideal that, for one reason or another, the free market is incapable of attaining, and that, therefore, one should look to the government to obtain by collective action or regulation, what the market, with decentralized actors, cannot. Liebowitz and Margolis have explained clearly why the endorsement of government intervention does not follow from a valid critique of neoclassical welfare economics (and, for that matter, why a defense of neoclassical welfare economics, in itself, is insufficient to establish an argument against intervention).

See here for a previous discussion on path dependence and Williamson’s “remediableness” criterion.

Entry filed under: Business/Economic History, Ephemera, Institutions, Myths and Realities, New Institutional Economics, Recommended Reading.