Path dependence

According to Wikipedia: Path dependence explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant.^[1]

In economics and the social sciences path dependence can refer to either outcomes at a single moment in time or to long run equilibria of a process (Page 2006). In common usage, the phrase implies either:

• (A) that “history matters” – a broad concept,^[2] or
• (B) that predictable amplifications of small differences are a disproportionate cause of later circumstances. And, in the “strong” form, that this historical hang-over is inefficient.^[3]

The first usage, (A): “history matters” is trivially true in the explanatory context; everything has causes. And, in these fields, the direct influence of earlier states isn’t notable^[4] (compare “path dependent” options in finance, where the influence of history can be non standard).

It is the narrow concept, (B), that has the most explanatory force and which is covered in this article.

Path Dependence at Larger Levels

Geography and trade

The examples thus far all treat path dependence in the selection of alternative products or techniques. Krugman (1991, 1994) and Arthur (1994) have also pointed to a role for contingent events and positive feedbacks in economic geography, including in the establishment of Silicon Valley and other concentrations of economic activity. Some of these locations, they showed, are the result not of systematic advantages but rather of accidental origins reinforced by “agglomeration” economies that lead new firms to locate in the vicinity of similar established firms. Krugman (1994) also discussed how these same effects produce path dependence in patterns of international trade. Geographic patterns of economic activity, some of which arise as a result of contingent historical events, determine the patterns of comparative advantage that in turn determine patterns of trade.

Institutional Development

Path dependence also arises in the development of institutions — a term that economists use to refer to the “rules of the game” for an economy. Eichengreen (1996) showed, for example, that the emergence of international monetary systems, such as the classical gold standard of the late nineteenth century, was path dependent. This path dependence has been based on the benefits to different countries of adopting a common monetary system. Eichengreen noted that these benefits take the form of network externalities. Puffert (2003) has argued that path dependence in institutions is likely to be similar to path dependence in technology, as both are based on the value of adopting a common practice — some technique or rule — that becomes costly to change.

Thus path dependence can affect not only individual features of the economy but also larger patterns of economic activity and development. Indeed, some teachers of economic history interpret major regional and national patterns of industrialization and growth as partly the result of contingent events reinforced by positive feedbacks — that is, as path dependent. Some suggest, as well, that the institutions responsible for economic development in some parts of the world and those responsible for backwardness in others are, at least in part, path dependent. In the coming years we may expect these ideas to be included in a growing literature on path dependence.

Book about Path Dependence at Amazon.com

Book Name: Increasing Returns and Path Dependence in the Economy

It’s a collection of Professor Brian Arthur and his first articles on increasing returns, a non-orthodox economics view at the time.
It’s very specific and at times repetitive. But it does give a full comprehension on the evolution of his thoughts and most the mathematical proof of his theories.

Long overdue, modernized view of increasing returns specifically in Knowledge-based (as opposed to resources i.e., coal) economy. In short, often random and difficult to predict whether “best” technologies or services win and come to predominate in a Knowledge economy of increasing returns and having seen and lived this in the IT industry (over and over) this tome is proving to be unexpectedly relevant and accurate.