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It seems like I have been trying to get this message posted for a month.
Here it is, one more time:
We suspect that few readers will be confused by Paul David's dismissal of
the relevance of history for our understanding of the economy.
The works of Coase and Cheung cited in The Economist article do indeed leave
the abstract theories of public goods and externality intact. The importance
of the works cited in The Economist, however, is that they demonstrate that
these theories ought to judged against real events -against history. If we
as economists can illustrate these theories only by distorting history quite
badly, then we ought to wonder whether our theories haven't left out
something important. Without embracing any particular methodological
orthodoxy, we can still hope for some connection between theory and
observable events.
Coase and Cheung contradict some economists' claims that certain markets
didn't and couldn't function. Besides providing some tests of economic
theory, their work drives home the verity that public policy debates cannot
rest on pure theory. Instead, these debates must appeal to comparisons of
real-world institutions. This point has been made not only by Coase and
Cheung but also Oliver Williamson, Harold Demsetz, Deirdre McCloskey and
others.
Indeed, most economists are not captives of "bogus anecdotal histories."
Most economists don't use examples of lighthouses and bee keeping at all,
except perhaps when they're teaching Coase and Cheung. Instead, they use
other examples. They are able to do that because there are real-world
examples of public goods and externalities.
Whether one endorses the use of the keyboard story as a 'concise
illustration' of markets gone awry, therefore, depends on one's answer to
this question: Is it appropriate to use stories that are known to be
factually incorrect in order to illustrate economic theory or teach economic
history? David's comment on the Economist article did nothing to counter
the historical case that the typewriter keyboard is not a market failure.
Nevertheless, he continues to rely on this example. This reliance suggests
that there are no very persuasive alternatives available. David's position
seems to be that theories of bandwagons and lock-ins are so satisfying that
actual histories should be ignored in favor of a story that better suits his
moral. [SM1]
Our forthcoming book [Winners, Losers, and Microsoft] reprises our earlier
work on the keyboard and examines other such 'concise illustrations' of the
lock-in failure. These histories, we show, illustrate no failure at all, but
rather the consistent selection of good products. We also examine the
histories of a number of software markets-the very kinds of markets that
Professor David alleges would exhibit this lock-in problem. We find that
market shares of software products rise and fall quite rapidly according to
whether they are the best products in their markets. There is no evidence
of, inertia, lock-in, or tipping.
Stan Liebowitz
Steve Margolis
_______________
Stan Liebowitz
Professor of Managerial Economics and Associate Dean
University of Texas at Dallas
Mail Station JO51
Richardson TX 75083
972-883-2807 fax: 972-883-2818
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