Lock-In

Megan writes a little post about the Blu-Ray vs. HD-DVD format war, and in it she links to this Reason piece. Tommy has strong disagreements with Megan and the Reason piece. I hope Tommy won’t mind me disagreeing with him a little bit.

First, a quick personal note. Stephen Margolis, co-author of the Reason story, was the head of the NC State econ department when I was there. He also happened to teach the first econ course I ever took–the one, incidentally, that got me to change my major from chemical engineering to economics. One of the best decisions I ever made. I can say, without a doubt, that Margolis is the kind of guy Tom would love. I can say that because the honors intro course he taught was pitched to the cocky engineering kids, and they all came in and ended up digging him and economics. Even the guys from the computer science department.

Anyway, Tom writes:

It’s not so much that I think there were dirty tricks involved (although there may have been). It’s just that it’s frustratingly obvious that the factors determining a technology’s success frequently have little to do with its capabilities, price, performance or other innate attributes. Rather, they’re the result of quirks of the business environment into which the technology is born.

The Reason article that Megan links to irks me much more than her own post, as it consistently fails to understand this. “MS-DOS wasn’t an inferior technology that succeeded because of the market landscape and consumers’ path dependence,” it says. “It’s just that the licensing environment surrounding IBM PC clones made them cheap, and once consumers started using DOS the costs involved in switching made doing so impractical. So you see, it was the superior technology after all.”

The article does this again and again, most egregiously in the case of Dvorak vs. QWERTY*, where the author desperately tries to establish that actually in all cases the market selects for the optimum technology, always and in perpetuity throughout the universe. I know, I know — if you’re a home-row typist you’re probably laughing so hard right now that your pinky fell right off the semicolon key. But the argument proceeds anyway, tirelessly pointing out that geek-favored technologies have some downsides, maligned market winners have some upsides, and the way the path-dependent public ultimately chose is proof that the winning tech trumps the former on the merits.

I understand what Tom’s saying, but I think he’s missing some key points. He wants to judge a technology in a “pure” world, outside the presence of the market conditions in which it will be sold and used, but you can’t do that. The utility of a technology is inextricably connected to the market conditions in which it will be sold and used. A Beta videotape might clearly be superior on most quality variables, but if a VHS tape is long enough to hold a full-length movie and Beta isn’t, well that’s important. Saying that length shouldn’t be as important as other variables is pointless; the market didn’t just want “Quality,” it wanted a certain quality.

The most important thing Tom says is this:

[T]he argument proceeds anyway, tirelessly pointing out that geek-favored technologies have some downsides, maligned market winners have some upsides, and the way the path-dependent public ultimately chose is proof that the winning tech trumps the former on the merits. Well, if you define “the merits” as “the sum of all factors facing the public” then yes, that’s true. But this amounts to merely asserting that we live in an at least semi-rational universe, which isn’t a very useful or original conclusion. The fact is that in many cases it would be better if those factors were weighted differently.

Emphasis mine. To this, economists will say, “Says who?” To non-economists, it sounds like we’re being very Panglossian–that whatever emerged must have been the best. That’s not true. We’re not ignorant of things like market manipulation and network externalities. We might even say that Dvorak could be better than QWERTY, just not enough better to overcome the cost of switching away from a system everyone else is using.

But the broader point is this. Tom believes that he can look at a technology and say it’s better or worse than another technology. Economists say he can’t, because Tom doesn’t actually know what the great mass of consumers wants. Neither do “the consumers” in any way we could gauge other than throwing products out there to see what happens. Certainly economists don’t know. And in general, the best way to allow the most useful products to succeed is to let the market decide. If you try to decide what’s “best” for the market, then more often than not you’ll end up making everyone worse off.

That’s the point the Reason piece is trying to make–that we need to be very careful before deciding that we KNOW that the market is screwing up and needs to be “fixed.”

Comments

  1. Dan Miller says:

    “We’re not ignorant of things like market manipulation and network externalities.”

    This may be true of you, but it’s certainly an open question as to whether this is true of the staff of Reason; in fact, it’s one of the chief complaints of non-libertarians about our minarchist friends (see e.g. this comment at Ezra Klein’s place).

  2. Justin JJ says:

    “He wants to judge a technology in a “pure” world, outside the presence of the market conditions in which it will be sold and used, but you can’t do that.”

    You’re right, you can’t separate the virtues of the product from the market conditions in which it exists. But at the other end of the spectrum from the technology purists are the Reason authors, who seem to spout little more than the circular argument that the market selects the best because the best just is what the market selects; and from that point, post hoc reasoning about the winning tech’s virtues and the losing tech’s flaws.

    The best counterexample to libertarian economics is the obviously flawed products and services that reign under monopolies, where it’s most obvious that the market’s selection is arbitrarily constrained.

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