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