Reviews | How ordering a pint of Guinness could explain the economy


In a 1995 paper in The Journal of Law, Economics, & Organization, Liebowitz and Margolis argued that proponents of path addiction have failed to sufficiently distinguish between three varieties of it – two of which are plausible but have no negative implications for market efficiency, and the third which has negative implications for market efficiency, but is on the whole implausible.

In the first variety of path dependency, the result is just as good as the alternatives. In the second, the outcome is worse than the alternatives, but this could not have been seen at the time – so although this is very unfortunate, it is not evidence of market failure. In the third variety, the result is worse than the alternatives, and this fact could have been seen when society started on the wrong path. Or—another version of the third variety—even if it wasn’t clear then that society was going down the wrong path, it’s clear now; the company had better switch to another path, even considering the high switching costs, but it does not due to path dependency. The third variety would really be a case of market failure, but that almost never happens, Liebowitz and Margolis argued.

In 2000, political scientist Paul Pierson wrote in The American Political Science Review that while Liebowitz and Margolis may have been right about the ability of market systems to veer off course, political systems are more vulnerable to path dependency. because there is no profit motive for institutions to self-correct. “Politics is a much, much murkier environment,” he wrote. “Something like the price measuring rod is missing.”

This week I interviewed Liebowitz, now at the University of Texas at Dallas, about how his work with Margolis applies to Boris Johnson’s bet on weights and measures. He agreed with Pierson’s point that a politically determined system—like the weights and measures to be used—is more likely to run into a divide than a market system. “Politics doesn’t work like markets do, where the best ideas win because they make the most money,” he said.

But this strong expression of faith in the markets does not make Liebowitz an avid follower of the metric system. Whether or not the United States adopted the metric system at the same time as France did, by the end of the 18th century the costs of switching would be large and the benefits limited, he said. As for Britain, who could go back? Well, he said, that’s politics, not economics.

Regarding your newsletter on hospital errors, I have been involved as a component supplier to major computer manufacturers. When our product didn’t work properly or had a high failure rate, we admitted our problems, gave possible financial considerations, and then made sure it never happened again. Often, the aggrieved customer would become more loyal than those who had no problems!


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