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Technology’s Lesson

In response to:

Must We Compete? from the October 20, 1994 issue

To the Editors:

In his critique of Paul Krugman’s Peddling Prosperity [NYR, October 20, 1994], Benjamin Friedman describes “path dependence” economics as “the easily understandable notion that what is possible today often depends crucially on what actually happened yesterday.” As an example, he quotes Krugman to the effect that the large US domestic demand for aircraft and the large US pool of skilled aircraft workers and engineers continue to feed on each other, thus reinforcing the strong US presence in the world aircraft industry even though the American character contains no innate trait that should make us better aircraft builders than any other people.

Both Krugman and Friedman apparently overlook the flaw in that theory. As we point out in Revolution on Wall Street: The Rise and Decline of the New York Stock Exchange (Norton, 1993), in a world characterized by constant and rapid technological change, an established or dominant position can often become more of a burden than an asset.

IBM, to cite one example, dominated the computer industry for a generation. But because it preferred to milk its highly profitable franchise in large-scale computers, IBM failed to adapt to a new, more competitive marketplace that demanded personal computers and work stations. For years it refused to abandon its investment in mainframe computers; and when it finally did turn in another direction, its new computer systems weren’t compatible with its older ones. The greatest threat to an established giant like IBM comes from a newer, smaller company like Digital Equipment, which has developed a fully integrated medium-to-small-scale computing system from scratch. And Digital in turn is challenged by the innovative work-station technology of an even newer, even smaller company like Sun Microsystems.

General Motors, similarly, once dominated the world’s automobile markets. But its commitment to big cars left GM unable to respond quickly to the competitive inroads made by the small cars of Japanese automakers. In the same fashion, the New York Stock Exchange has in the past dominated securities trading by virtue of its commanding age and size. But its very age and size have precluded it from reacting vigorously to technological innovations offered by regional exchanges, by new entrepreneurial trading systems and by foreign stock markets. As a consequence, the New York Stock Exchange has lost market share rapidly, to the point where its continued existence could be jeopardized.

Path dependence” theories to the contrary, in these and other cases, the lesson seems to be: In the age of technology, the latest bird gets the worm, and the early bird becomes outdated.

Marshall E. Blume
Jeremy J. Siegel
Dan Rottenberg
Philadelphia, Pennsylyania

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