History Matters

Economics is usually discussed in a vacuum devoid of any reference to history or culture. The economy is viewed as a place without a past and little distinction is made between policies implemented in Japan, Scandinavia or America. However, in reality the past shapes the future far more than we realise. The state we’re in depends hugely on the actions and events of decades or even generations earlier. Economies were not born yesterday; they are hugely shaped by what came before. In other words, history matters.

This is referred to as network effects or path dependence. This is where the past decides our current decisions and why we continue with policies that we would never implement if we were starting afresh. Sometimes this can even take the form of a trap that we cannot escape. The poverty trap is the clearest example of this. The reasons why most of the world, and Africa in particular, is poor, is because their poor. This sounds like an endless loop, but let me explain. African countries are poor so they cannot afford to educate their population, who therefore lack the skills to get good jobs and remain poor. Likewise governments cannot to build or maintain infrastructure necessary for an economy to thrive, so they cannot get the money to build or maintain infrastructure. They are essence caught in a Catch 22.

Another example is the legacy of colonialism. Now you might say this doesn’t matter, after all most colonies became independent in the 1960s. However, a crucial reason in understanding why Third World countries (and Ireland) are so messed up is by examining how colonialism works. Under colonialism, the government is a foreign imposition to which the people owe no allegiance. Politics is a game that does not fully affect people’s lives or change important issues (like independence); instead it is a scam where everyone is out for themselves and you try to get as much as possible. Nationalism is discouraged and instead there is an emphasis on localism. Now what happens when the majority of the population views politics in such cynical terms? Only schemers and the power hungry enter and when they are caught with their hands in the till, people shrug and think nothing of it. This discourages honest people from entering while making the rest feel immune to getting caught, and so the system perpetuates. This is why Irish politics is so dysfunctional.

Imagine you are walking down the street and see two Italian restaurants side by side. As they both look identical, you chose the first one and enter. A second person sees you do this and decides that you must have had a reason for choosing the first one and follows you. A third person thinks that if the first restaurant is good enough for 2, its good enough for them. A fourth person decides they are not going to enter an empty restaurant, but rather go to the popular, hip place to be. And so on. This is path dependence in action, where insignificant or random initial differences can lead to large changes after a while. Nor is it a minor effect, but rather choosing what restaurant to go out to is highly dependent on where is or is not “hot” (in other words where everyone else is going).

The most famous example is the QWERTY effect, visible on the keyboard on which I am typing at the moment. Believe it or not, this is not the most efficient way to place the letters on a keyboard. In fact the letters were deliberatively placed in order to slow down typers and prevent them from typing too fast and jamming the system. But why would it not be changed? Because all computers are built with these keyboards and no company wants to incur that expense unless they are sure that consumers will buy it. But consumers will not learn to type on the system unless companies design keyboards to have it. People who have gone to such effort as to gain proficiency at typing on the QWERTY system are unwilling to have to start again from scratch. Hence we are caught in an inefficient system that we would never chose were we designing keyboards for the first time now. (I have heard claims this story is false, but considering the QWERTY system was designed without much study, there is surely a more efficient method)

There are many other examples of inefficiencies being “locked-in”. Have you ever moaned about the nuisance of having to get different plugs whenever you went abroad and wondered why all countries couldn’t have the same system? This is because although it would be far more efficient to have one international plug system, it would be hugely expensive to redesign and replace every socket in the country. Every country would rather if all the other countries changed to their system and so no one changes. Therefore the system doesn’t change even though everyone knows what a nuisance and pain it is.

Language too is an example of path dependence. If we had a choice of what our first language was, I doubt many would choose English (apart from English people). It is a difficult and confusing language with many irregular verbs and bizarre grammar rules. For most speakers it is the language of their oppressors, who invaded and suppressed their native tongue (as an Irishman, I fall into this category). Given the choice, most Irish people would prefer if we spoke Irish. However, it would be incredibly difficult to raise a child with Irish as their first language. Everyone else speaks English and so you wouldn’t be understood without it, therefore almost all Irish people speak English no matter how they would prefer otherwise. There was a brave attempt to create a language called Esperanto without unnecessary difficult grammar rules or history of colonialism. It was designed so that the whole world could communicate on an equal level with a legacy of oppression. The grammar and vocabulary are incredibly easy and logical. However, it is hard to learn it unless other people do (I know because I’m trying at the moment), but they won’t learn it unless other people do it. So everyone keeps their own language and hopes the rest of the world makes the effort instead.

The world is full of network effects. Why are you on Facebook or Twitter? Because everyone else is there and these websites are only as good as other people on it. Compare it to Google+, which attempted to do what Facebook does but better. Now whether or not it is, is irrelevant. I signed up for Google+ but found none of my friends were using it so I quit and returned to Facebook. Regardless of whether or not Facebook is the best social network, people are locked in to using it. Likewise the first port of call for videos is YouTube, both in terms of viewing and uploading. A better, faster or in some way more efficient website for videos may come along but such is the dominance of YouTube that it would be extraordinarily difficult to dislodge it. It is for this reasons that the internet has become dominated by monopolies reminiscent of a century ago.

Have you ever looked at a map of a city and thought that doesn’t make any sense? Compare a map of Dublin to San Francisco. One is an awful jumble of tangled roads that are confusing to navigate, while the second is a clear, easy and logical. This is because Dublin has existed for a thousand years and little attention was given to it initially. Roads and houses were built one-by-one with no overall planning or strategy. By the time central government was formed, it was too late. To build straight roads would have required demolishing and rebuilding huge parts of the city at exorbitant cost. It was easier to just add piece meal even if this meant continuing a jumbled mess that almost seemed designed to ensure tourists get lost. San Francisco on the other hand dates back to only 150 years ago and could therefore start with a blank slate for central planning. The government therefore designed straight roads that are such ease to manoeuvre. This is a rare example of American top-down central planning proving far superior to European decentralised market driven approach. Of course, this is an example you won’t find in any textbook.

A map of Dublin with a tangle of curved roads

A map of Dublin with a tangle of curved roads

San Francisco with easy, straight roads

San Francisco with easy, straight roads

Orthodox economics teaches that if a process is more efficient then it will naturally displace its rivals and rise to the top. It is claimed that consumers will demand the best and companies respond. However, we do not start with a blank slate but are rather what came before. Tradition can become so strong that inefficient systems get dug in and hard to replace. Economies can get trapped in ways that everyone knows are flawed but the costs of changing are too high. Path dependence causes people to copy others in flawed ways. We do not get a fresh start to choose the best policies but must adapt to our historical legacy.


Filed under Economics

11 responses to “History Matters

  1. Robert, in light of this post, and in full knowledge that it’s more of less impossible outside the imagination, would you (one day) pen a post on why we can’t forgive all debt and start again… and if we could start again, say perhaps on a space colony, how should we do it.

  2. “Tradition can become so strong that inefficient systems get dug in and hard to replace. “

    We are still trying to get pass the mire that trickle down economics has caused. Libertarians and uninformed conservatives are still convinced that lower taxes on the rich will ultimately create jobs for a strong middle class.

  3. Although I do agree with much of what you said, I think that “orthodox economics” has it right in the sense that the more efficient firms will (usually) prevail in the long run. I think the dynamic that you artfully explained is more suited for the short run. [Theistic] religions, for example, were the dominant philosophies for thousands of years because “Tradition can become so strong that inefficient systems get dug in and hard to replace.”, but as you stated in some of your previous posts, it IS slowly changing and I believe religion will be almost eradicated in the developed world shortly…and replaced with more efficient philosophies.

    • I think the key point of the network effects is how it shows how inefficient processes can dominate in the long run too. For example, YouTube dominates the online video market regardless of whether or not it was the most efficient website. It is unlikely to be removed from its position.

      While I welcome the decline of religion, it took centuries to get to this point. So while the long run may be efficient, in the long run we are all dead and it is little use telling people that in 100 years time things will be more efficient. Religion is thankfully losing its grip but only in Europe and North America, it is as strong as ever in Latin America and Africa. Religions are certainly examples of network effects as the reason why any country is any particular religion has to do with an event hundreds of years in the past.

      • YouTube’s dominance in the online video market has many contributing factors. YouTube is very much so still in its infancy despite it’s massive success. There are many flaws in its design but from a social and technical standpoint it has out-shined its competitors. It will be hard to replace YT right now due to reasons you explained in the article, but that will not stop firms from trying and thus pressing YT to step up their game. YouTube looks nothing like how it did from it’s beginning, it has evolved…and has become more efficient. And 20-30 years down the line if YouTube retains its close-to monopoly standing I guarantee it will look nothing like it does now, allowing the more efficient version to prevail.

        Maybe religion IS the most efficient philosophy in some parts of the world. The places where the majority of time is spent on staying alive and farming. Religion serves as a quick sense of security and comfort without time consuming analysis. From an evolutionary standpoint, religion has not being around that long and it is on it’s way out. And yes, in the long run we are all dead, but our descendents are only just being born.

  4. It’s a bit offtopic but I really would like to ask you about your progress on learning Esperanto. Which materials you are using and such stuff.🙂

    • I got busy and ended up putting it aside for a while. But I’m now back at it and working my way through “The Esperanto Teacher”. I’m halfway there and plan to finish it in three weeks time.

      Still as keen as ever on learning it and getting involved and I even convinced my student newspaper to let me write an article on Esperanto. They loved the idea and will give me a full page.

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