Technological Progress As Impeded By Lockout And Lockin

Notwithstanding the growth-driving mechanisms noted above, there are contrary forces. An important aspect of the technology selection process that follows a breakthrough, in practice, is that one candidate configuration is selected and 'locked in' before all (or even many) of the possible combinations have been tested. Experience suggests that the first two or three combinations that 'work' reasonably well tend to lock out the others. The economics of 'lock-in' have been described in some detail by Brian Arthur (1994). Lock-out/lock-in is another way of saying that once a technology has become established, it is extremely difficult to displace - thanks to various advantages accruing to scale, experience or network linkages - even if an alternative emerges that is intrinsically superior but not fully developed.

Favorite examples of this phenomenon include the QWERTY keyboard (David 1985), the English system of weights and measures, and the Microsoft Windows operating system for PCs. At the aggregate national level, a number of studies have indicated that, if the US economic system operated on a 'least cost' basis (that is, by assuming the most efficient solutions were utilized everywhere), energy consumption and carbon emissions would both be reduced by something like 20 percent and costs would also be lower by a similar amount (Carhart 1979; Sant 1979; Sant and Carhart 1981; Berndt et al. 1981; Lovins and Lovins 1991, 1981; Lovins et al. 1981; Morris et al. 1990; Casten and Collins 2002, 2003). In effect, the argument is that the economy has been 'locked in' to sub-optimal patterns by some combination of positive returns to scale, and inappropriate or obsolete regulations.16

For example, Casten and Collins (2002) argues that a technology known as decentralized combined heat and power (DCHP) would displace a significant fraction of the demand for centralized electric power, as well as fuel for domestic and commercial space heating and water heating, if not for regulatory restrictions. (DCHP is a system in which many small electric power plants utilizing natural or manufactured gas and small gas turbines can provide both heat and power to industrial sites and apartment buildings). To be sure, many economists deny that alternatives (like DCHP) would in fact cut costs, usually by introducing the notion of 'hidden costs' of change. But the undeniable existence of some (hidden and unquantified) costs of moving from one local minimum to another in a multi-equilibria system does not contradict the possibility that another minimum may be lower than the one we currently occupy. The basic reason this 'opportunity' has been neglected is that regulation introduced three-quarters of a century ago still favors centralized power generation. This point is important for what follows, because it weakens the argument for using so-called 'computable general equilibrium' (CGE) models, much favored by mainstream economists for forecasting purposes. We elaborate the arguments against equilibrium models subsequently.

An established technology cannot be displaced without also displacing a host of associated technologies and investments. Another name for this phenomenon is 'path-dependence'. Path-dependence has an enormous influence on technological evolution. There are several mechanisms involved in the selection and lock-in process. One is learning-by-doing, which creates specialized skills and favors the producers and/or service providers with the greatest experience. Economies of scale favor the largest producers, which are often the earliest entries ('first movers') in a new market. Returns to adoption are important in some technologies with the property that the more they are used, the more useful they are. The telephone is an obvious example of this. The internet is another example.

In fact, the qualitative pattern of conception, birth, childhood, adolescence, maturity and senility so resembles the life cycle of an organism, that the analogy has established itself in the literature of techno-economic change.17 This process is known as the life-cycle model of technology (Abernathy and Utterback 1975, 1978). The model says that when a new product moves from the 'childhood' stage (when several different configurations are competing on the basis of performance) to the 'adolescent stage' (when manufacturing costs and prices become the main basis for competition), the market leader is very hard to displace (Ayres 1987). Experience enables a manufacturer to take advantage of 'learning-by-doing' as well as economies of scale, and thus to minimize costs. The Boston Consulting Group (BCG) advised many large corporations on competitive strategy based on exploiting the experience curve (Cunningham 1980). It is well-known that Texas Instruments and several of the large Japanese electronics companies used the curve (together with Moore's Law) to plan for growth and price policy. The market leader automatically has more production experience than its smaller rivals. This gives the market leader a built-in competitive advantage in the market for a standardized product.

However, standardization is not necessarily an advantage in a market where many designs are competing freely. Needless to say, an established market leader, with much to lose, is actually less likely to innovate than a new entry with everything to gain. This makes market leaders conservative and inhibits technological change. But it also ensures that market leaders in a rapidly changing field are likely to be replaced by others on a regular basis as the technology evolves.

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