By Casper Gelderblom
In 1900, Britain’s industrial railway system, characterized by its small coal wagons, was completely outdated. Modernization would have led to enormous savings in operating costs. However, the railways’ regulating system, designed to protect wagon owners against railway companies, discouraged stakeholders from pursuing modernization. The small coal wagons that persisted in British railway traffic until the late 1940s offer a strong example of how positive feedback processes can lead to inefficiency in path dependence. At the same time, however, these processes cannot convincingly explain the eventual replacement of these small wagons.
The four features Brian Arthur identified as drivers of positive feedback help explain the persistence of the small wagon system. Firstly, replacing the outdated regulating system was discouraged by the large set-up costs associated with establishing a new system. Secondly, all stakeholders had become skilled in operating within the inefficient system. These learning effects discouraged stakeholders from replacing their wagons, which would largely render their skills useless. Thirdly, under the old system coordination effects had made small wagons the only accepted wagon type. These effects formed a coordination problem in replacing the existing system, as savings could only be realised if a large number of railway companies changed their facilities. This, however, was discouraged by the regulating system. Lastly, since coordination effects supported the existing system, stakeholders’ adaptive expectations were such that they feared ‘picking the wrong horse’ by investing in new technologies that did not match with the existing infrastructure.
Arthur’s approach implies that the old wagon system could only change if the set-up costs of a new system were lower than its prospective gains. Although this never happened, the small wagon system was eventually replaced through an institutional change instigated by a variable Arthur left out of his equation: the role of ideas. The British government that decided to nationalise the railways and so replace the outdated regulatory system, pursued “radical” leftist policies. Ideas, not prospective gains, thus led to the end of the British small coal wagons.