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