Increasing Returns,Path Dependence,and the Study of Politics TOR Paul Pierson The American Political Science Review,Vol.94,No.2.(Jun.,2000),pp.251-267. Stable URL: http://links.jstor.org/sici?sici=0003-0554%28200006%2994%3A2%3C251%3AIRPDAT93E2.0.CO3B2-Z The American Political Science Review is currently published by American Political Science Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use,available at http://www.jstor.org/about/terms.html.JSTOR's Terms and Conditions of Use provides,in part,that unless you have obtained prior permission,you may not download an entire issue of a journal or multiple copies of articles,and you may use content in the JSTOR archive only for your personal,non-commercial use. Please contact the publisher regarding any further use of this work.Publisher contact information may be obtained at http://www.jstor.org/journals/apsa.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is an independent not-for-profit organization dedicated to creating and preserving a digital archive of scholarly journals.For more information regarding JSTOR,please contact support@jstor.org. http://www.jstor.org/ Sun Dec1013:51:422006
American Political Science Review Vol.94,No.2 June 2000 Increasing Returns,Path Dependence,and the Study of Politics PAUL PIERSON Harard University t is increasingly common for social scientists to describe political processes as "path dependent.The concept,however,is often employed without careful elaboration.This article conceptualizes path dependence as a social process grounded in a dynamic of "increasing returns."Reviewing recent literature in economics and suggesting extensions to the world of politics,the article demonstrates that increasing returs processes are likely to be prevalent,and that good analytical foundations exist for exploring their causes and consequences.The investigation of increasing returns can provide a more rigorous framework for developing some of the key claims of recent scholarship in historical institutionalism:Specific patterns of timing and sequence matter;a wide range of social outcomes may be possible;large consequences may result from relatively small or contingent events;particular courses of action,once introduced,can be almost impossible to reverse;and consequently,political development is punctuated by critical moments or junctures that shape the basic contours of social life. t is increasingly common for social scientists to that confront them.If path dependence arguments are describe political processes as "path dependent." indeed appropriate in substantial areas of political life, Claims of path dependence have figured in both they will shake many subfields of political inquiry.This classic works of comparative politics,such as Lipset essay argues that they are. and Rokkan's (1967)analysis of European party sys- The analysis begins with a general discussion of path tems,and more recent analyses on topics such as labor dependence that seeks to clarify some important am- incorporation in Latin America (Collier and Collier biguities surrounding the concept.I then outline and 1991),the outcome of state-building processes in Eu- investigate the distinctive characteristics of social pro- rope(Ertman 1996),and the comparative development cesses subject to what economists call "increasing of health care systems (Hacker 1998).The notion of returns,"which could also be described as self-reinforc- path dependence is generally used to support a few key ing or positive feedback processes.For some theorists, claims:Specific patterns of timing and sequence mat- increasing returns are the source of path dependence; ter;starting from similar conditions,a wide range of for others,they typify only one form of path depen- social outcomes may be possible;large consequences dence.The focus here is on increasing returns pro- may result from relatively "small"or contingent events; cesses,both because they are of great social signifi- particular courses of action,once introduced,can be cance and because (in contrast to broader conceptions virtually impossible to reverse;and consequently,po- of path dependence)social scientists are beginning to litical development is often punctuated by critical develop rigorous arguments about the causes and moments or junctures that shape the basic contours of consequences of increasing returns.Increasing returns social life (Collier and Collier 1991;Ikenberry 1994; dynamics capture two key elements central to most Krasner 1989).All these features stand in sharp con- analysts'intuitive sense of path dependence.First,they trast to prominent modes of argument and explanation pinpoint how the costs of switching from one alterna- in political science,which attribute "large"outcomes to tive to another will,in certain social contexts,increase "large"causes and emphasize the prevalence of markedly over time.Second,and related,they draw unique,predictable political outcomes,the irrelevance attention to issues of timing and sequence,distinguish- of timing and sequence,and the capacity of rational ing formative moments or conjunctures from the peri- actors to design and implement optimal solutions ods that reinforce divergent paths.In an increasing (given their resources and constraints)to the problems returns process,it is not only a question of what happens but also of when it happens.Issues of tempo- Paul Pierson is Professor of Government,Harvard University,Cam- rality are at the heart of the analysis bridge,MA 02138. The following section reviews the development of An carlier version of this article was presented as the Jean Monnet Visiting Professor Lecture,European University Institute (EUI), increasing returns arguments in the social science April 1997.I am very grateful to Andy Rudalevige and Jeremy discipline in which they have received the greatest Weinstein for research assistance on this project and to the German attention:economics.This review suggests the wide Marshall Foundation,Simon R.Guggenheim Poundation,and the sweep of potential applications,even in a field that Weatherhead Center for International Affairs for financial support.I might be expected to be hostile to the idea.More have received helpful comments on earlier drafts from many people including several thoughtful reviewers for the APSR.I owe particular important,these economic applications provide the thanks to Frank Baumgartner,David Collier,Pepper Culpepper, most analytically developed discussions of increasing Jeffry Frieden,Daniel Goldhagen,Jacob Hacker,Peter Hall,Alan returns.Economists not only have clarified the princi- Jacobs,Margaret Levi,Robert Mickey,Andrew Moravcsik,Gerardo pal implications of path dependence but also have Munck,Alec Stone,and Kathleen Thelen.I also benefited from discussions at the Harvard Center for European Studies,Columbia identified many of the specific aspects of a particular University,the EUL,the Centro de Investigacion y Docencia Eco- social environment that generate such processes. nomicas (CIDE),the University of California at Berkeley,the The discussion of economics prepares the way for an University of Washington,and Yale University. exploration of the distinctive characteristics of politics. 251
Increasing Returns,Path Dependence,and the Study of Politics June 2000 Rather than simply apply extant arguments in econom- we cannot understand the significance of a particular ics to political phenomena,we need to consider the social variable without understanding "how it got features of the political world that require modifica- there"-the path it took.Previous events in a sequence tions in the use of path dependence claims.I will influence outcomes and trajectories but not necessarily demonstrate that increasing returns arguments are at by inducing further movement in the same direction. least as relevant to an understanding of politics as they Indeed,the path may matter precisely because it tends are in other areas of the social sciences.Indeed,factors to provoke a reaction in some other direction. such as the prominence of collective activity in politics, An alternative,narrower definition has been sug- the central role of formal,change-resistant institutions, gested by Margaret Levi (1997,28): the possibilities for employing political authority to magnify power asymmetries,and the great ambiguity of Path dependence has to mean,if it is to mean anything. many political processes and outcomes make this a that once a country or region has started down a track,the costs of reversal are very high.There will be other choice domain of social life that is especially prone to increas- points,but the entrenchments of certain institutional ing returns processes. arrangements obstruct an easy reversal of the initial The final section considers what these arguments can choice.Perhaps the better metaphor is a tree,rather than contribute to political analysis.They provide an impor- a path.From the same trunk,there are many different tant caution against a too easy conclusion of the branches and smaller branches.Although it is possible to inevitability,"naturalness,"or functionality of observed turn around or to clamber from one to the other-and outcomes.Given the ubiquity of claims about efficient essential if the chosen branch dies-the branch on which a or functional elements in politics,this alone would be climber begins is the one she tends to follow. an important corrective.More significant,increasing This conception of path dependence,in which preced returns arguments justify efforts to stretch the temporal ing steps in a particular direction induce further move- horizons of political analysis.They can redirect the questions political scientists ask,which will contribute ment in the same direction,is well captured by the idea of increasing returns.In an increasing returns process, to a richer appreciation of the centrality of historical the probability of further steps along the same path processes in generating variation in political life.They increases with each move down that path.This is can also direct attention toward particular variables because the relative benefits of the current activity and suggest promising hypotheses about the sources of compared with other possible options increase over both political stability and political change in certain time.To put it a different way,the costs of exit-of common political settings.For instance,increasing switching to some previously plausible alternative- returns arguments highlight the need to consider hy- rise.Increasing returns processes can also be described potheses based on temporal ordering--the possibility as self-reinforcing or positive feedback processes. that the particular sequencing of events or processes We face,then,a choice between a broader and a may be a key part of the explanation for divergent narrower conception of path dependence.Frequently, outcomes.Finally,grasping the implications of wide- authors are not explicit about which of these two spread path dependence can help orient political sci- meanings they intend.To establish greater clarity,this entists to a realistic,which is to say modest,set of essay employs the term in the narrower sense,that is, aspirations regarding the possibilities for achieving social processes that exhibit increasing returns.The parsimony and predictability in the study of politics. fuzziness that has marked the use of this concept in social science suggests that the greater range offered by PATH DEPENDENCE AND INCREASING the broader definition has come at a high price in RETURNS analytical clarity.Path dependence has been a victim of what Sartori(1970)called concept stretching.Different Analysts are increasingly inclined to invoke the concept of path dependence,but clear definitions are rare.In types of temporally linked sequences are generated in different ways and have different implications (Abbott practice,usage tends to fluctuate between a broader 1983,1990;Pierson n.d.b).These distinctive kinds of and narrower conception.In the broader version,path social processes,which have been bundled together, dependence refers to the causal relevance of preceding must be disentangled and systematically explored.Lim- stages in a temporal sequence.William Sewell (1996. iting the concept of path dependence to self-reinforc- 262-3),for instance,suggests path dependence means ing processes in no way precludes the investigation of "that what happened at an earlier point in time will other ways in which sequences can matter in explaining affect the possible outcomes of a sequence of events social outcomes.It does encourage clear argument occurring at a later point in time."This usage may about distinct claims.1 entail only the loose and not very helpful assertion that "history matters,"although it may also be presented with more rigor.To take an example offered by An- 1 Another strategy would be to use a broader conception of path dependence and then distinguish subtypes,exploring how these are drew Abbott (1983,131),the contemporary signifi- generated in different ways,with different consequences (Mahoney cance of a group's organization of 40%of its potential n.d.).Because path dependence is often invoked without further membership depends greatly on whether that member- clarification,however,this option seems more problematic.Ulti- ship used to be 100%or 10%.Note that Sewell's mately,such definitional disputes remain intractable.What is critical is that researchers be clear and consistent about what they mean definition involves no necessary suggestion that a par- when they employ the concept and recognize the importance of ticular path is difficult to exit.Rather,the claim is that differentiating among distinct processes. 252
American Political Science Review Vol.94,No.2 However such issues of concept formation are ulti- be possible.We cannot predict ahead of time which mately resolved,there are two compelling reasons for of these possible end-states will be reached. focusing special attention on processes that exhibit 2.Inflexibiliry.The farther into the process we are,the increasing returns.First,such processes characterize harder it becomes to shift from one path to another. many important parts of the social world.Second, In applications to technology,a given subsidy to a social scientists are developing theory that makes the particular technique will be more likely to shift the investigation of the causes and consequences of in- ultimate outcome if it occurs early rather than late. creasing returns a particularly promising area of in- Sufficient movement down a particular path may quiry.These two reasons are developed in later sec- eventually lock in one solution.4 tions of this essay. 3.Nonergodicity.Accidental events early in a sequence The basic logic of increasing returns processes can do not cancel out.They cannot be treated (which is be captured in a simple mathematical illustration.? to say,ignored)as "noise,"because they feed back Imagine a very large urn containing two balls,one into future choices.Small events are remembered. black,one red.Remove one ball,and then return it to 4.Potential path inefficiency.In the long-run,the out- the urn,accompanied by an additional ball of the same come that becomes locked in may generate lower color.Repeat this process until the urn fills up.What pay-offs than a forgone alternative would have. can we say about the eventual distribution of colored balls in the urn?Or about a series of trials in which we To this one can add a general point of particular fill the urn and then start over again one hundred interest to social scientists:These are processes in times? which sequencing is critical.Earlier events matter much more than later ones,and hence different se- In each individual trial we have no idea what the quences may produce different outcomes.In these eventual ratio of red to black balls will be;it could be processes,history matters. 99.9%red,or 0.01%red,or anything in between.If If these characteristics are common in politics,then we were to run 100 trials,we would probably get 100 they carry major implications,both for the kinds of different outcomes. questions we should ask and the kinds of answers we In any particular trial,the ratio will eventually reach should expect to find.Most important,they suggest the an equilibrium.Later draws in a series contribute need to focus on the temporal dimensions of social only minutely to the distribution of balls in the urn. processes.In searching for explanation,we need to Thus,the distribution settles down onto a stable think about causes and effects that are often separated outcome. in time,rather than focus exclusively on synchronic Sequence is thus crucial.Early draws in each trial, explanations (Harsanyi 1960;Stinchcombe 1968).Ex- which have a considerable random element,have a ploring these implications requires a review of recent powerful effect on which of the possible equilibria work on increasing returns in economics. will actually emerge. Mathematicians call this a Polya urn process.Its char- INCREASING RETURNS ARGUMENTS IN acteristic qualities stem from the fact that an element ECONOMICS of chance (or accident)is combined with a decision rule that links current probabilities to the outcomes of Economics has traditionally focused on the search for preceding (partly random)sequences.3 Polya urn pro- unique equilibria.5 The goal is attractive because it cesses exhibit increasing returns or positive feedback. suggests a world of potential predictability and effi- Each step along a particular path produces conse- ciency.Given knowledge of existing factor endowments quences which make that path more attractive for the and preferences,equilibrium analysis will point to a next round.As such effects begin to accumulate,they single optimal outcome.Moreover,because econo- generate a powerful virtuous (or vicious)cycle of mists assume a context of decreasing marginal returns, self-reinforcing activity. this goal is potentially achievable.With decreasing Increasing returns processes have quite intriguing returns,economic actions will engender negative feed- characteristics,which Arthur (1994,112-3)has sum- marized as follows 4 This emerging stability represents a critical distinction between increasing returns processes and chaotic processes,which may gen 1.Unpredictability.Because early events have a large erate no equilibrium.For an interesting discussion of this quite effect and are partly random,many outcomes may different framework,with applications to politics,see Fearon 1996. s Some social scientists,such as Stephen I.Gould,also have been drawn to arguments about path dependence,critical junctures,and 2 The following discussion relics heavily on Arthur 1994,a collection punctuated equilibria in evolutionary biology (see especially krasner of his ground-breaking essays on increasing returns and path depen- 1989;Spruyt 1994).Without denying the relevance of this literature, dence. I find it a less useful point of departure than the economists'focus on 3 This case depicts a specific type of increasing returns process,in increasing returns.Most aspects of politics lack anything like the which the probability of a particular draw precisely equals the ratio mechanism of natural selection that drives Darwinian theory (inter- between the two alternatives in the existing population.Arthur national relations and certain characteristics of electoral systems (1994)shows that many of the features of this case have a greater constitute important exceptions).Furthermore,socially created con- range of application,but not all of them.It is easy to model path structs of norms and formal institutions have no real analog in dependent processes with only two equilibria (e.g.,Hill 1997),which evolutionary theory.These constructs,however,are crucial features probably comes closer to capturing the essence of many path of politics and,as we shall see,are a critical element in social dependent processes in the social world. processes subject to increasing returns. 253
Increasing Returns,Path Dependence,and the Study of Politics June 2000 back,which will lead to a predictable equilibrium.A is essential,as we shall see,because analytically similar sharp rise in oil prices prompts increased conservation, circumstances occur frequently in the world of politics. exploration,and exploitation of other sources of en- Arthur's characteristics provide a foundation for devel- ergy,which will lead to a fall in oil prices.Each step oping hypotheses about when increasing returns pro- away from equilibrium is more difficult than the one cesses are likely to operate in the social world. before.As Arthur (1994,1)summarizes,negative Arthur (1994,112)argues that four features of a "feedback tends to stabilize the economy because any technology and its social context generate increasing major changes will be offset by the very reactions they returns. generate....The equilibrium marks the best'outcome possible under the circumstances:the most efficient use 1.Large set-up or fixed costs.These create a high and allocation of resources." pay-off for further investments in a given technol- During the past fifteen years,however,this decreas- ogy.With large production runs,fixed costs can be ing returns tradition has faced a mounting challenge spread over more output,which will lead to lower Economists have exhibited a growing interest in the unit costs.When set-up or fixed costs are high, idea of increasing returns.On a wide range of sub- individuals and organizations have a strong incen- jects-including the spatial location of production,the tive to identify and stick with a single option. development of international trade,the causes of eco- 2.Leaning effects.Knowledge gained in the operation nomic growth,and the emergence of new technolo- of complex systems also leads to higher returns from gies-path dependence arguments have become prev- continuing use.With repetition,individuals learn alent.The ideas developed in this research are not how to use products more effectively,and their entirely new,but they have been embraced and devel- experiences are likely to spur further innovations in oped by prominent mainstream economists.This work the product or in related activities. has received considerable attention in leading journals. 3.Coordination effects.These occur when the benefits Douglass North,who places great emphasis on such an individual receives from a particular activity arguments in his analysis of the development of mod- increase as others adopt the same option.If tech- ern capitalism,was awarded the Nobel Prize for eco- nologies embody positive network externalities nomics. then a given technology will become more attractive The study of technology has provided the most as more people use it.Coordination effects are fertile ground for arguments based on increasing re- especially significant when a technology has to be turns.As Arthur (1994)and David (1985)have compatible with a linked infrastructure (e.g.,soft- ware with hardware;automobiles with an infrastruc- stressed,under conditions often present in complex. knowledge-intensive sectors,a particular technology ture of roads,repair facilities,and fueling stations) may achieve a decisive advantage over competitors, Increased use of a technology encourages invest- although it is not necessarily the most efficient alterna- ments in the linked infrastructure,which in turn tive in the long run.This occurs because each technol- attracts still more users to the technology. ogy generates higher payoffs for each user as it be- 4.Adaptive expectations.If options that fail to win comes more prevalent.When a new technology is broad acceptance will have drawbacks later on,then subject to increasing returns,being the fastest out of individuals may feel a need to "pick the right horse. the gate (if only for reasons of historical accident) Although the dynamic here is related to coordina becomes critical.With increasing returns,actors have tion effects,it derives from the self-fulfilling charac- strong incentives to focus on a single alternative and to ter of expectations.Projections about future aggre- continue down a specific path once initial steps are gate use patterns lead individuals to adapt their taken in that direction.Once an initial advantage is actions in ways that help make those expectations gained,positive feedback effects may lock in this come true. technology,and competitors are excluded.Path depen- This discussion of technology is important primarily dence arguments have been applied to the develop- because it clarifies a set of relationships characteristic ment of the“QWERTY”typewriter keyboard,.the of many social interactions.New social initiatives- triumph of the light-water nuclear reactor in the such as the creation of organizations or institutions- United States,the battles between Betamax and VHS usually entail considerable start-up costs;individuals, video recorders and between DOS-based and Macin- as well as organizations,learn by doing;the benefits of tosh computers,early automobile designs,and compet- our individual activities or those of an organization are ing standards for electric current.6 often enhanced if they are coordinated or"fit"with the Not all technologies,however,are prone to increas- activities of other actors or organizations;it is fre- ing returns.Arthur (1994)addresses not only the quently important to bet on the right horse,so we characteristics of such processes but also the conditions adapt our actions in light of our expectations about the that give rise to them.Understanding these conditions actions of others. Although arguments about technology are probably the best known,economists have applied similar anal 6 Many of these examples have been contested by critics who deny the empirical claim that superior technologies lost out.Since these yses of increasing returns processes in a striking range criticisms raise broader issues about the usefulness of increasing of economic contexts.Both Krugman (1991)and returns arguments,I will postpone discussion until the end of this Arthur (1994,49-67)point to the role of increasing section. returns in the spatial location of production.Given the 254
American Political Science Review Vol.94,No.2 importance of physical proximity in many aspects of may be,however,the relevance of increasing returns economic life,agglomeration effects are widespread. processes to the economics of trade is now widely That is,initial centers of economic activity may act like accepted.7 a magnet and influence the locational decisions and Economists also have applied increasing returns investments of other economic actors.Established arguments to economic change more broadly.The firms attract suppliers,skilled labor,specialized finan- most prominent development in recent discussions of cial and legal services,and appropriate physical infra- economic growth centers on "endogenous growth" structure.The concentration of these factors may in theory (Romer 1986,1990).Economists in the 1980s turn make the particular location attractive to other became puzzled by growth rates (notably in developed firms that produce similar goods.So do social net- countries after World War II)far greater than could be works,which allow for easy exchange of information explained by measured increases in inputs of capital and expertise.Increasing returns arguments help ex- and labor.Romer and others argue that increasing plain the prevalence of pockets of specialized eco- returns associated with economic applications of nomic activity,from Silicon Valley to the high-end knowledge help account for the anomaly.Unlike cap- textile manufacturers of northern Italy.Krugman ital and labor,many aspects of knowledge are nonri- (1991,80)concludes:"If there is one single area of val-their use in one firm does not prevent their use in economics in which path dependence is unmistakable, another.A single gain in knowledge can be applied in it is in economic geography-the location of production many settings and can lead to dramatic improvements in space.The long shadow cast by history over location in productivity.Economic growth generates the posi- is apparent at all scales,from the smallest to the tive feedback that defines increasing returns processes. largest-from the cluster of costume jewelry firms in A somewhat different analysis of growth based on Providence to the concentration of 60 million people in increasing returns emphasizes the importance of the Northeast Corridor." complementarities (Milgrom and Roberts 1990).Var- These claims closely parallel recent analyses of in- ious economic activities (e.g.,in information technol- ternational trade,an area in which arguments about ogy)are complementary to other related activities increasing returns have gained wide acceptance.Re- Improvements in a core activity can spill over by searchers began by focusing on economic trends that improving related parts of the economy(lowering costs appeared anomalous from the perspective of tradi- or increasing productivity).These improvements in tional trade theory-most notably,the explosion of turn may increase the attractiveness of the core activity. intraindustry trade after World War II (Krugman Economists are now applying increasing returns ar- 1996).If comparative advantage results from"natural" guments to a wide range of important economic phe- features of different countries,then one would expect nomena,but Douglass North's application to issues of most trade to occur between quite different countries, institutional emergence and change is perhaps most such as North-South trade of manufactured goods for important for students of politics.North (1990a,95) raw materials.Yet,most trade is North-North,includ- argues that all the features identified by Arthur in ing extensive exchanges within particular industries. investigations of increasing returns in technology can This pattern suggests a puzzle:Why have broadly be applied to institutions.In contexts of complex social similar countries developed highly specialized niche interdependence,new institutions often entail high comparative advantages? fixed or start-up costs,and they involve considerable Increasing returns provide an answer.Knowledge- learning effects,coordination effects,and adaptive ex- intensive sectors are prone to positive feedback.Coun- pectations.Established institutions generate powerful tries that gain a lead in a particular field,for whatever inducements that reinforce their own stability and reason,are likely to consolidate that lead over time. further development. The result is a high degree of specialization.Even North emphasizes that not just single institutions are countries with similar initial endowments develop di- subject to increasing returns.Institutional arrange- vergent areas of economic strength.Comparative ad- ments induce complementary organizational forms, vantage is not simply given,it is often created through which in turn may generate new complementary insti- a sequence of events over time. tutions.For social scientists interested in paths of It is worth noting that this research on trade has development,the key issue is often what North calls been used to derive some controversial policy implica- "the interdependent web of an institutional matrix." tions.If first-mover advantages are significant,then This matrix,he emphasizes,"produces massive increas- free trade may not be an optimal policy for a country ing returns"(North 1990a,95).Path dependent pro- whose trade partners are willing to subsidize emerging cesses will often be most powerful not at the level of sectors.Under certain (restricted)conditions,a policy individual organizations or institutions but at a more of picking winners may make economic sense (Krug- macro level that involves complementary configura- man 1996;Tyson 1993).There remains considerable tions of organizations and institutions (Hall and Sosk- dispute about the significance of such opportunities for ice 2000:Katznelson 1997). strategic intervention.Krugman,for instance,main- tains that they will appear relatively infrequently,not so much because path dependence is rare,but because 7 As Krugman (1996,109-10)notes,in the American Economic Association's classification system for journal articles,one now finds governments will not be able to identify winners ex "models of trade with increasing returns and imperfect competition" ante.Whatever the appropriate policy implications alongside the category for "conventional trade models." 255
Increasing Returns,Path Dependence,and the Study of Politics June 2000 This argument provides the core to North's sweeping Margolis (1995)distinguish remediable and nonreme- reinterpretation of economic history.The central puz- diable path dependence.The latter occurs if there are zle motivating North's inquiry is the limited conver- no feasible improvements in the path,either now or in gence of economic performance across countries over the past.Nonremediable path dependence "stipulates time.Neoclassical theory suggests that laggard coun- that intertemporal effects propagate error"(p.207). tries should readily adopt the practices of high per- With hindsight,we wish that some other alternative formers,which would induce fairly rapid convergence, had been chosen.Yet,Liebowitz and Margolis ques- but this does not happen.According to North,path tion whether this type of path dependence has pro- dependent development of institutional matrices ex- found implications.If we acted as best we could with plains the anomaly of continued divergence in eco- the information available at the time,then the mistake nomic performance.Once in place,institutions are was unavoidable,and we cannot reasonably describe hard to change,and they have a tremendous effect on the outcome as inefficient.Liebowitz and Margolis the possibilities for generating sustained economic argue that the only kind of path dependence with growth.Individuals and organizations adapt to existing major ramifications is path dependence that is poten- institutions.If the institutional matrix creates incen- tially remediable. tives for piracy,North observes,then people will invest Is their dismissal of nonremediable path dependence in becoming good pirates.When institutions fail to convincing?As Williamson (1993)notes,for policy provide incentives to be economically productive,there purposes remediability is likely to be an appropriate is unlikely to be much economic growth. standard.Recognizing the existence of path depen- For political scientists,North's insight is crucial for dence may not help policymakers much if they do not two reasons.First,he highlights the parallels between know how to identify it ex ante.s But this objection characteristics of technology and certain characteristics loses its force if our purpose is instead to understand- of social interactions.In this context,it is worth noting perhaps ex post-why aspects of societies move in that Arthur's arguments about technology are not particular directions and the consequences of such really about the technology itself but about the char- movements.And,of course,it is precisely these ques- acteristics of a technology in interaction with certain tions about causality that are the central preoccupation qualities of related social activity.Second,North rightly of most social scientists. emphasizes that institutional development is subject to The second part of the Liebowitz and Margolis increasing returns.Indeed,it is the role of path depen- analysis is the claim that remediable path dependence dence in explaining patterns of institutional emer- is rare.Their argument is straightforward.If one of two gence,persistence,and change that may be of greatest options is superior in the long run but not in the short significance for political scientists. run,then market arrangements will generally assure The dialogue surrounding increasing returns in eco- the adoption of the superior path.The ability of private nomics is the impassioned discourse of an emerging actors to capture the returns from long-term invest- paradigm.Economists talk of "new"growth theory, ments prevents bad choices.Institutions of property new"trade theory,and so on-all based on arguments rights,provisions for patents,and extensive capital involving increasing returns.Yet,despite the preva- markets mean that options with low short-run pay-offs lence of such arguments and the intellectual excite- will nonetheless receive the support they deserve ment associated with them,there are excellent reasons Economic actors,in short,calculate in the shadow of to believe that the range of application should be at the future and are,thus unlikely to indulge in myopic, least as wide in politics as in economics.To understand short-term maximizing behavior at their own long-term why,it is helpful to consider the major objections to experse. increasing returns arguments that have recently sur- This argument has considerable merit,10 but how faced in economics.The discussion will clarify the much merit depends on the strength of these mecha- sources of path dependence and identify social mech- nisms for overcoming short-term thinking or free- anisms that might offset such processes.This clarifica- riding.Although Liebowitz and Margolis are more tion provides a useful analytical bridge to an investiga- than a little complacent about the capacity of these tion of path dependent processes in politics various market mechanisms,it is wise to leave those In a forceful critique,Liebowitz and Margolis (1995) issues to economists.Two objections,however,are raise some tough questions about the literature on critically important.First,arguments about the far- increasing returns.Two aspects of their argument are sightedness of markets seem to apply to only some relevant here.They emphasize that only "remediable" types of path dependence in the economy.The Liebow- path dependence is really of theoretical significance, itz and Margolis critique focuses on the decisions of and market mechanisms ensure that remediable path firms to invest in particular technologies or products. dependence is rare.I will take up each argument in In most of the illustrations discussed earlier (e.g., turn.s Following Williamson (1993),Liebowitz and spatial agglomorations,trade specialization,endoge- As noted before,precisely for this reason Krugman and others s Note that the Liebowtiz and Margolis critique depends on both question those who make broad claims about the implications of parts of the argument being truc.The significance of path depen- increasing returns arguments for trade policy. dence for social scientists can be sustained if either the relevance of 10 Indeed,Arthur(1994,28,fn 11)explicitly recognizes this possibil- nonremediable path dependence or the prevalence of remediable ity,although as far as I know he does not systematically pursue the path dependence can be sustained. implications. 256
American Political Science Review Vol.94,No.2 nous growth),however,many of the benefits of increas- the high density of institutions;(3)the possibilities for ing returns are external to individual firms and cannot using political authority to enhance asymmetries of be fully captured by individual investors and entrepre- power;and (4)its intrinsic complexity and opacity. neurs.Thus,the mechanisms identified by Liebowitz After briefly explicating each,I will discuss their rele- and Margolis are unlikely to ensure that the best vance to path dependence.Each of these features makes long-term outcome will be selected. increasing retumns processes prevalent in politics. Perhaps more important,the Leibowitz and Margo- Second,I explain why the ameliorative mechanisms lis (1995)argument has little relevance to the develop- that Liebowitz and Margolis identify in economic sys- ment of institutions,which are also subject to increas- tems are often ineffective in offsetting path dependence ing returns.Private actors cannot obtain patents or in politics.Three characteristics of politics change the venture capital to capture the long-term economic picture considerably:the absence or weakness of effi- gains from constructing key economic institutions.In- ciency-enhancing mechanisms of competition and deed,the Leibowitz and Margolis argument simply learning;the shorter time horizons of political actors; assumes the presence of institutions that support mar- and the strong status quo bias generally built into ket mechanisms.Also,their argument does not seem to political institutions.Each of these features makes in- have much relevance for North's argument about the creasing returns processes in politics particularly intense. presence in particular polities of networks or matrices They increase the difficulty of reversing the course of institutions and organizations.The fact that they do down which actors have started.Increasing returns not even cite North's work is telling.North maintains processes are now central to economic theory and the that path dependent processes of institutional develop- argument here is that these dynamics will be very ment are crucial to the evolution of particular market widespread and often more difficult to reverse in economies.Far-sighted financial markets are of limited politics. help in triggering such institutional development;to a For my purposes,the fundamental feature of poli- large extent,they are its product. tics is its preoccupation with the provision of public The failure of Leibowitz and Margolis to address goods.11 Such goods are distinguished by jointness of issues of institutional development in economies points supply (the production costs for the good are unaf- to a more fundamental objection.Even if one accepts fected or only modestly affected by the number of those their analysis regarding the economic sphere,their consuming it)and nonexcludability (it is very costly or arguments still have limited relevance for political impossible to limit consumption to those who have scientists.However strong market mechanisms for paid for a good).These features,which are extremely "far-sightedness"may be,they are almost certainly far widespread in modern life,make public goods-from weaker in politics.I explain why in the next section. national defense to environmental protection-diffi- cult to provide through markets.Nonexcludability cre- MOVING FROM ECONOMICS TO POLITICS: ates free-riding incentives,since individuals will receive THE APPLICABILITY OF INCREASING the benefits of a public good whether or not they RETURNS ARGUMENTS contribute to its production.Jointness of supply means that private markets will underproduce the good in Microeconomic theory illuminates important features question,since private actors tend to consider only the of the political landscape in fields ranging from the benefits to themselves. study of party competition,to the formation of interest These characteristics of public goods help explain groups and social movements,to voting and legislative why the central features of political systems are com- behavior.The value of economists'theoretical exports pulsory rather than voluntary.The exercise of author- is greatly enhanced,however,if the political science ity,generally combined with a complex array of com- importers take careful account of the distinctive fea- plementary institutions designed to circumscribe and tures of the "local"environment.As Terry Moe (1990, legitimate that authority,is necessary to generate col- 119)states in a related context:"The real problem is to lective provision.Legally binding rules are not just a try to identify those essential features of politics that foundation for political activity(like property rights in might serve as a foundation for theory,a foundation the economy).They are instead the very essence of that can take advantage of the new economics without politics (Lindblom 1977;Moe 1990).This key quality of being overwhelmed or misdirected by it."Arguments politics has a number of repercussions for the character drawn from economics must be sensitive to the quite of political life,each of which is relevant for an different nature of the political world (Lindblom 1977; assessment of tendencies toward path dependence. Moe1984,1990:North1990b) Politics differs from economics in many ways.The key is to specify which aspects are most relevant to an The Collective Nature of Politics investigation of the sources and consequences of path A quick contrast with economic markets can highlight dependence.Following a brief summary of the distinc- the prevalence of collective action in politics.Suppose tive tasks of the political arena,this discussion is divided into two parts.The first considers four promi- nent and interconnected aspects of politics that make it In most cases,the goods in question are not "pure"public goods-a fact that complicates the analysis but does not alter my this realm of social life conducive to increasing returns basic claims.For discussions,see Mueller 1989,chap.2,and Cornes processes:(1)the central role of collective action;(2) and Sandler 1996. 257
Increasing Returns,Path Dependence,and the Study of Politics June 2000 you work for a firm with an annoying boss and bad pay. depends heavily on the actions of others.This is less You have a clear option:Seek work elsewhere,either true of some aspects of politics-such as answering an at one of a large number of other firms or by setting up opinion poll question or voting-than others.Even in business on your own.Your ability to move depends on voting,however,the lumpiness of election outcomes the state of the labor market,but the existence of (in the absence of a pure system of proportional competitive options sets clear limits on how annoying representation)means that the actions of a person who your boss can afford to be and on how bad the pay can does not want to "waste"her vote may well turn on get. what she expects others to do Or suppose you invent a great new product.Assum- A crucial feature of most collective action in politics ing that you can get financial backing (which you is the absence of a linear relationship between effort should be able to do-it is a great idea,and the market and effect.Instead,collective action frequently involves generates a ready supply of venture capitalists),your many of the qualities conducive to positive feedback prospects are good.Nothing stops you from going into (Marwell and Oliver 1993).A central reason is the business or selling the idea to someone.Either way,the prevalence of adaptive expectations.When picking the new,superior product gets to see the light of day,and wrong horse may have very high costs,actors must you reap considerable benefits from your innovation. constantly adjust their behavior in the light of how they The setting of consumers,at least in the textbook expect others to act.Whether you put energy into case,is similarly atomistic.My decisions are essentially developing a new party,or join a potential coalition,or independent of my expectations regarding the choices provide resources to an interest group may depend to of other consumers.12 There is no need for explicit a considerable degree on your confidence that a large attempts to coordinate behavior;the market simply number of other people will do the same.In addition, aggregates the isolated decisions of individuals. many types of collective action involve high start-up These highly stylized examples illustrate the flexibil- costs,which reflects the fact that considerable re- ity,fluidity,and atomization of economic markets.In sources (material or cultural)need to be expended on contrast,political "markets"are generally far from organizing before the group becomes self-financing. flexible and fluid.In politics,the consequences of my That collective action processes in politics are very actions are highly dependent upon the actions of often subject to increasing returns explains why social others.What I get depends not just on what I do,but scientists are often struck by the considerable stability (mostly)on what others do.Following Olson's (1965) of patterns of political mobilization.over time.Lipset path-breaking work,students of politics have long and Rokkan's (1967)work on political parties in Eu- recognized the "logic of collective action."Most of the rope exemplifies this dynamic:Key historical junctures "goods"produced in politics are public goods;it is produced major political cleavages.These political difficult to limit their consumption to those who helped divisions became organized into political parties.Once provide them.As a result,individuals will have a strong they have surmounted initial start-up costs and fueled tendency to free-ride.Creating conditions favorable to processes of adaptive expectations,these parties are collective action is a principal issue in political life. reproduced through time,which generates "frozen" The problem is not limited to the fact that the public party systems. sector produces public goods.Given the reliance of Recent work by Skocpol (1999)on extensive volun- politics on mechanisms of collective decision backed by tary associations in the United States provides addi- authority,laws themselves have the character of public tional strong evidence of the organizational persistence goods for those who benefit from them.In the words of that can result from positive feedback.Skocpol identi- Marwell and Oliver (1993,42),"influencing govern- fied all such organizations that had ever enrolled more ment policy almost always has very high jointness of than 1%of the American population (or half that supply."These circumstances generate major collective amount for single-gender groups)and tracked them action problems. over time.The results,which cover 58 groups since the There is another reason political action frequently 1830s,reveal striking organizational continuities.Al- requires coordination.Many of the goals pursued by though some crossed the 1%threshold only for a political actors have a“lumpy'or“winner-take-all” relatively short period,26 remain above it today.Of quality (politicians seeking reelection,coup plotters, these,16 had reached the 1%mark by the 1940s,and a and lobbyists either win or lose;legislation either number of them stretch back much farther.A large passes or is rejected).Unlike economic markets,in number have fallen from the list,but they managed to which there usually is room for many firms,in politics stay on it for many decades.Among the 40 organiza- finishing second may not count for much.Indeed-the tions founded before 1900,19 stayed above the 1% Menshiviks in 1917 come to mind-it can be extremely mark for at least five decades.Ten of the 40 are still problematic.Again,the effectiveness of my actions above that threshold,a century or more after their founding.13 In short,despite massive social,economic, This represents a critical difference between economics and poli- tics,but a number of important qualifications need to be made.For instance,consumption often involves significant externalities,which 1 It should be emphasized that this evidence understates organiza make consumer choices interdependent.As already noted,condi- tional persistence,since many groups that fall below the demanding tions of independent consumption often do not apply to high-tech 1%threshold nonetheless continue to have a very large membership. products,which frequently involve network externalities.For a good Also,they may have existed as quite large organizations for long discussion of some of these complications,see Hirsch 1977. periods before initially crossing the threshold. 258
American Political Science Review Vol.94,No.2 and political changes over time,self-reinforcing dy- the attractiveness of existing institutional arrangements namics associated with collective action processes relative to hypothetical alternatives.As social actors mean that organizations have a strong tendency to make commitments based on existing institutions and persist once they are institutionalized. policies,their cost of exit from established arrange- ments generally rises dramatically. The Institutional Density of Politics As much recent work in political science stresses, Political Authority and Power Asymmetries efforts to coordinate actors in the pursuit of public In the famous community power debate of the 1960s goods often require the construction of formal institu- and 1970s.Bachrach and Baratz (1962)and Lukes tions.Once established,these institutional constraints (1974)argued persuasively that power asymmetries are can apply to all-those who do not approve as well as often hidden from view;where power is most unequal, those who do-and they are backed up,ultimately,by it often does not need to be employed openly.Pluralist force.The exit option,so central to the workings of the critics essentially countered that a systematic evalua- market,is often unavailable (or prohibitively costly)to tion of such claims was impossible (Polsby 1963; actors who feel poorly served by existing political Wolfinger 1971).Although he does not frame the issue arrangements.In politics,institutional constraints are quite this way,Gaventa (1980)demonstrates that ubiquitous.Politics involves struggles over the author- power asymmetries can reflect the operation of positive ity to establish,enforce,and change the rules governing feedback processes over substantial periods.Increasing social action in a particular territory.In short,much of returns processes can transform a situation of relatively politics is based on authority rather than exchange. balanced conflict,in which one set of actors must Both formal institutions (such as constitutional ar- openly impose its preferences on another set ("the first rangements)and public policies place extensive,legally face of power"),into one in which power relations binding constraints on behavior. become so uneven that anticipated reactions ("the Although unorthodox,the inclusion of public poli- second face of power")and ideological manipulation cies as well as formal institutions in this formulation is ("the third face")make open political conflict unnec- important (Pierson 1993).Policies are generally more essary.Thus,positive feedback over time simulta- easily altered than the constitutive rules of formal neously increases power asymmetries and renders institutions,but they are nevertheless extremely prom- power relations less visible. inent constraining features of the political environ- The allocation of political authority to particular ment.Policies,grounded in law and backed by the actors is a key source of this kind of positive feedback coercive power of the state,signal to actors what has to Indeed,this represents a source of path dependence be done and what cannot be done,and they establish quite distinct from those discussed by Arthur and many of the rewards and penalties associated with North.When certain actors are in a position to impose particular activities.Most policies are remarkably du- rules on others,the employment of power may be rable (Rose 1990).Especially in modern societies, self-reinforcing (Mahoney 1999).Actors may use po- extensive policy arrangements fundamentally shape the litical authority to generate changes in the rules of the incentives and resources of political actors. game (both formal institutions and various public That such institutions are prone to increasing returns policies)designed to enhance their power.Relatively is implicit in much recent research on institutions. small disparities in political resources among contend- Scholars emphasize how institutions can help actors ing groups may widen dramatically over time as posi- overcome various dilemmas arising from collective tive feedback sets in. choice situations-especially the need to coordinate their behavior by disciplining expectations about the behavior of others.What is absent or downplayed, The Complexity and Opacity of Politics however,is a recognition that these characteristics Economic theory is built in large part around the useful render processes of institutional development path and plausible assumption that actors seek to optimize dependent. and are relatively good at it.Firms operate to maximize As already discussed,North highlights how institu- profits.The metric for good performance is relatively tions induce self-reinforcing processes that make rever- simple and transparent.Prices send strong signals that sals of course increasingly unattractive over time.In facilitate the analysis of how various features of the contexts of complex social interdependence,new insti- economic environment affect firm performance.Ob- tutions and policies are costly to create and often servable,unambiguous,and often quantifiable indica- generate learning effects,coordination effects,and tors exist for many of these features.Workers can adaptive expectations.Institutions and policies may encourage individuals and organizations to invest in to mean previous outlays that cannot be recovered and should be specialized skills,deepen relationships with other indi- regarded as irrelevant to current choices among options.The whole viduals and organizations,and develop particular po- point of path dependence,however,is that these previous choices litical and social identities.14 These activities increase often are relevant to current action.In cases of increasing returns, social adaptations represent investments that yield continuing bene- fits.Actors may be locked into a current option because massive new 14 It is common to refer to such consequences as sunk costs. investments may be required before some theoretically superior Although intuitive,this terminology is unfortunate.Economists use it alternative generates a higher stream of benefits. 259
