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 or by the events that one has experienced, even though past circumstances may no longer be relevant.
In the first usage, (A), "history matters" is trivially true in many contexts; everything has causes, and sometimes different causes lead to different outcomes. In these contexts, the direct influence of earlier states may not be notable, unlike "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.
- A network effect: videocassette rental stores observed more VHS rentals and stocked up on VHS tapes, leading renters to buy VHS players and rent more VHS tapes, until there was complete vendor lock-in.
- A VCR manufacturer bandwagon effect of switching to VHS-production because they expected it to win the standards battle.
- Sony, the original developer of Betamax, was not very interested in supporting the pornographic video industry, which made nearly all pornographic motion pictures released on video to use VHS format.
An alternative analysis is that VHS was better-adapted to market demands (e.g. having a longer recording time). In this interpretation, path dependence had little to do with VHS's success, which would have occurred even if Betamax had established an early lead.
Positive feedback mechanisms, like bandwagon and network effects, are at the origin of path dependence. They lead to a reinforcing pattern, in which industries 'tip' towards one or another product design. Uncoordinated standardisation can be observed in many other situations.
Path dependence theory was originally developed by economists to explain technology adoption processes and industry evolution. The theoretical ideas have had a strong influence on evolutionary economics.
There are many models and empirical cases where economic processes do not progress steadily toward some pre-determined and unique equilibrium, but rather the nature of any equilibrium achieved depends partly on the process of getting there. Therefore, the outcome of a path-dependent process will often not converge towards a unique equilibrium, but will instead reach one of several equilibria (sometimes known as absorbing states).
This dynamic vision of economic evolution is very different from the tradition of neo-classical economics, which in its simplest form assumed that only a single outcome could possibly be reached, regardless of initial conditions or transitory events. With path dependence, both the starting point and 'accidental' events (noise) can have significant effects on the ultimate outcome. In each of the following examples it is possible to identify some random events that disrupted the ongoing course, with irreversible consequences:
- In economic development, it is said (initially by Paul David in 1985) that a standard that is first-to-market can become entrenched (like the QWERTY layout in typewriters still used in computer keyboards). He called this "path dependence", and said that inferior standards can persist simply because of the legacy they have built up. That QWERTY vs. Dvorak is an example of this phenomenon, has been re-asserted, questioned, and continues to be argued. Economic debate continues on the significance of path dependence in determining how standards form.
- Economists from Adam Smith to Paul Krugman have noted that similar businesses tend to congregate geographically ("agglomerate"); opening near-similar companies attracts workers with skills in that business, which draws in more businesses seeking experienced employees. There may have been no reason to prefer one place to another before the industry developed, but as it concentrates geographically, participants elsewhere are at a disadvantage, and will tend to move into the hub, further increasing its relative efficiency. This network effect follows a statistical power law in the idealized case, though negative feedback can occur (through rising local costs).
- Buyers often cluster around sellers, and related businesses frequently form business clusters, so a concentration of producers (initially formed by accident and agglomeration) can trigger the emergence of many dependent businesses in the same region.
- In the 1980s, the US dollar exchange rate appreciated, lowering the world price of tradable goods below the cost of production in many (previously successful) U.S. manufacturers. Some of the factories that closed as a result, could later have been operated at a (cash-flow) profit after dollar depreciation, but reopening would have been too expensive. This is an example of hysteresis, switching barriers, and irreversibility.
- If the economy follows adaptive expectations, future inflation is partly determined by past experience with inflation, since experience determines expected inflation and this is a major determinant of realized inflation.
- A transitory high rate of unemployment during a recession can lead to a permanently higher unemployment rate because of the skills loss (or skill obsolescence) by the unemployed, along with a deterioration of work attitudes. In other words, cyclical unemployment may generate structural unemployment. This structural hysteresis model of the labour market differs from the prediction of a "natural" unemployment rate or NAIRU, around which 'cyclical' unemployment is said to move without influencing the "natural" rate itself.
Liebowitz and Margolis distinguish types of path dependence; some do not imply inefficiencies and do not challenge the policy implications of neoclassical economics. Only "third-degree" path dependence — where switching gains are high, but transition is impractical — involves such a challenge. They argue that such situations should be rare for theoretical reasons, and that no real-world cases of private locked-in inefficiencies exist. Vergne and Durand qualify this critique by specifying the conditions under which path dependence theory can be tested empirically.
Technically, a path-dependent stochastic process has an asymptotic distribution that "evolves as a consequence (function of) the process's own history". This is also known as a non-ergodic stochastic process.
In The Theory of the Growth of the Firm (1959), Edith Penrose analyzed how the growth of a firm both organically and through acquisition is strongly influenced by the experience of its managers and the history of the firm's development.
Recent methodological work in comparative politics and sociology has adapted the concept of path dependence into analyses of political and social phenomena. Path dependence has primarily been used in comparative-historical analyses of the development and persistence of institutions, whether they be social, political, or cultural. There are arguably two types of path-dependent processes:
- One is the "critical juncture" framework, most notably utilized by Ruth and David Collier in political science. In the critical juncture, antecedent conditions allow contingent choices that set a specific trajectory of institutional development and consolidation that is difficult to reverse. As in economics, the generic drivers are: lock-in, positive feedback, increasing returns (the more a choice is made, the bigger its benefits), and self-reinforcement (which creates forces sustaining the decision).
- The other path-dependent process deals with "reactive sequences" where a primary event sets off a temporally-linked and causally-tight deterministic chain of events that is nearly uninterruptible. These reactive sequences have been used to link the death of Martin Luther King, Jr. with welfare expansion and the industrial revolution in England with the development of the steam engine.
The critical juncture framework has been used to explain the development and persistence of welfare states, labor incorporation in Latin America, and the variations in economic development between countries, among other things. Scholars such as Kathleen Thelen caution that the historical determinism in path-dependent frameworks is subject to constant disruption from institutional evolution.
Paul Pierson's influential attempt[specify] to rigorously formalize path dependence within political science, draws partly on ideas from economics. Herman Schwartz has questioned those efforts, arguing that forces analogous to those identified in the economic literature are not pervasive in the political realm, where the strategic exercise of power gives rise to, and transforms, institutions.
In the social sciences, especially sociology and organizational theory, a distinct yet closely related concept to path dependence is the concept of "imprinting", which captures how initial environmental conditions leave a persistent mark (or imprint) on organizations and organizational collectives (such as industries and communities), thus continuing to shape organizational behaviours and outcomes in the long run, even as external environmental conditions change.
- A general type of path dependence is a typological vestige.
- In typography, for example, some customs persist, although the reason for their existence no longer applies; for example, the placement of the period inside a quotation in U.S. spelling. In metal type, pieces of terminal punctuation, such as the comma and period, are comparatively small and delicate (as they must be x-height for proper kerning.) Placing the full-height quotation mark on the outside protected the smaller cast metal sort from damage if the word needed to be moved around within or between lines. This would be done even if the period did not belong to the text being quoted.
- Evolution is considered by some to be path-dependent: mutations occurring in the past have had long-term effects on current life forms, some of which may no longer be adaptive to current conditions. For instance, there is a controversy about whether the panda's thumb is a leftover trait or not.
- In the computer and software markets, legacy systems indicate path dependence: customers' needs in the present market often include the ability to read data or run programs from past generations of products. Thus, for instance, a customer may need not merely the best available word processor, but rather the best available word processor that can read Microsoft Word files. Such limitations in compatibility contribute to lock-in, and more subtly, to design compromises for independently developed products, if they attempt to be compatible. Also see embrace, extend and extinguish.
- Innovation butterfly
- Network effect
- Opportunity cost
- Ratchet effect
- Imprinting (organizational theory)
- Definition from "Our Love Of Sewers: A Lesson in Path Dependence", Dave Praeger, 15 June 2008.
- Liebowitz, S.; Margolis, Stephen (2000). Encyclopedia of Law and Economics. p. 981. ISBN 978-1-85898-984-6.
Most generally, path dependence means that where we go next depends not only on where we are now, but also upon where we have been.
- Liebowitz, S.; Margolis, S. (September 2000). Bouckaert, Boudewijn; De Geest, Gerrit (eds.). Encyclopedia of Law and Economics, Volume I. The History and Methodology of Law and Economics (PDF). Cheltenham: Edward Elgar. p. 985. ISBN 978-1-85898-984-6. Retrieved 2010-05-20.
path dependence can be weak (the efficiency of the chosen path is tied with some alternatives), semi-strong, (the chosen path is not the best but not worth fixing, or strong (the chosen path is highly inefficient, but we are unable to correct it).
- Bellaïche, Joël (2009). "On the path-dependence of economic growth" (PDF). Journal of Mathematical Economics. 46 (2): 178. doi:10.1016/j.jmateco.2009.11.002. Archived from the original (PDF) on 2010-06-24. The standard economic growth rate measurements are path-dependent, and "the phenomenon of dependence of history might be ignored for short period of time (10 years, 20 years), but is not negligible for secular comparisons."
- Liebowitz, Stan (2002). Re-thinking the Network Economy. p. 41. ISBN 978-0-8144-0649-6.
It was the inferior playing time that led to the demise of the Betamax, not the fact that it was first or second or third.
- Nelson, R; Winter, S (1982). An evolutionary theory of economic change. Harvard University Press.
- Stack, Martin; Gartland, Myles (2003). "Path Creation, Path Dependency, and Alternative Theories of the Firm". Journal of Economic Issues. 37 (2): 487. doi:10.1080/00213624.2003.11506597.
Paul David and Brian Arthur published several papers that are now regarded as the foundation of path dependency (David 1985; Arthur 1989, 1990).
- Paul David (May 1985). "Clio and the Economics of QWERTY". American Economic Review. 75 (2): 332–337. JSTOR 1805621.
In such circumstances "historical accidents" can neither be ignored, nor neatly quarantined for the purpose of economic analysisDirect PDF link
- Diamond, Jared (April 1997). "The Curse of QWERTY". Discover Magazine.
- Liebowitz, S. J.; Margolis, S. E. (April 1990). "The Fable of the Keys". Journal of Law and Economics. 30: 1–26. doi:10.1086/467198. SSRN 1069950.
we conclude that QWERTY is about as good a design as any alternative
- David, Paul A. (5–12 September 1999). At Last, a Remedy for Chronic QWERTY-skepticism!. European Summer School in Industrial Dynamics (ESSID). l'Institute d'Etudes Scientifique de Cargèse (Corse), France.
- Puffert, Douglas (2008-02-10). "Path Dependence". Retrieved 20 May 2010.
- D'Souza, Raissa M.; et al. (2007). "Emergence of Tempered Preferential Attachment from Optimization". Proc. Natl. Acad. Sci. USA. 104 (15): 6112–6117. doi:10.1073/pnas.0606779104. PMC 1839059. PMID 17395721.
- Jennen, M.; Verwijmeren, P. (2009). "Agglomeration Effects and Financial Performance". Urban Studies. 47 (12): 2683–2703. doi:10.1177/0042098010363495. ssrn 1009226.
- Jen Nelles, Allison Bramwell and David Wolfe (2005). Global Networks and Local Linkages: The Paradox of Cluster Development in an Open Economy (PDF). Montreal and Kingston: McGill-Queens University Press for Queen's School of Policy Studies. p. 230. ISBN 978-1-55339-047-3. Retrieved 2010-05-20.
- Stephen E. Margolis; S. J. Liebowitz. "Path Dependence 4. Evidence for Third-Degree Path Dependence". Retrieved 20 May 2010.
Our reading of the evidence is that there are as yet no proven examples of third degree path dependence in markets.
- Vergne, J. P.; Durand, R. (2010). "The Missing Link Between the Theory and Empirics of Path Dependence: Conceptual Clarification, Testability Issue, and Methodological Implications". Journal of Management Studies. 47 (4): 736. doi:10.1111/j.1467-6486.2009.00913.x.
In particular, we suggest moving away from historical case studies of supposedly path-dependent processes to focus on more controlled research designs[,] such as simulations, experiments, and counterfactual investigation."
- David, Paul (2005). Evolution and path dependence in economic ideas: past and present. Edward Elgar. p. 19. ISBN 978-1-84064-081-6.
as generally is the case for branching processes [in Path dependence, its critics and the quest for 'historical economics']
- Page, Scott E. (January 2006). "Path dependence". Quarterly Journal of Political Science. 1 (1): 88. doi:10.1561/100.00000006. Pdf.
- Egidi, Massimo; Narduzzo, Alessandro (October 1997). "The emergence of path-dependent behaviors in cooperative contexts". International Journal of Industrial Organization. 15 (6): 677–709. doi:10.1016/S0167-7187(97)00007-6.
[Some test subjects] adopted a strategy once and for all[,] and insisted on using it[,] even when the configurations could not be efficiently played with the strategy adopted.
- Marquis, Christopher; Tilcsik, András (2013). "Imprinting: Toward A Multilevel Theory". Academy of Management Annals: 193–243. SSRN 2198954.
- Arrow, Kenneth J. (1963), 2nd ed. Social Choice and Individual Values. Yale University Press, New Haven, pp. 119–120 (constitutional transitivity as alternative to path dependence on the status quo).
- Arthur, W. Brian (1994), Increasing Returns and Path Dependence in the Economy, Ann Arbor, Michigan: University of Michigan Press.
- Boas, Taylor C (2007). "Conceptualizing Continuity and Change: The Composite-Standard Model of Path Dependence" (PDF). Journal of Theoretical Politics. 19 (1): 33–54. CiteSeerX 10.1.1.466.8147. doi:10.1177/0951629807071016.
- Collier, Ruth Berins; Collier, David (1991). Shaping the Political Arena: Critical Junctures, the Labor Movement, and Regime Dynamics in Latin America. Princeton: Princeton University Press. ISBN 9780268077105. Retrieved 6 July 2018.
- David, Paul A. (June 2000). "Path dependence, its critics and the quest for 'historical economics'" (PDF). Archived from the original (PDF) on 2014-03-24., in P. Garrouste and S. Ioannides (eds), Evolution and Path Dependence in Economic Ideas: Past and Present, Edward Elgar Publishing, Cheltenham, England.
- Hargreaves Heap, Shawn (1980), "Choosing the Wrong 'Natural' Rate: Accelerating Inflation or Decelerating Employment and Growth?" Economic Journal 90(359) (Sept): 611–20 (ISSN 0013-0133)
- Mahoney, James (2000). "Path Dependence in Historical Sociology". Theory and Society. 29 (4): 507–548. doi:10.1023/A:1007113830879.
- Stephen E. Margolis and S.J. Liebowitz (2000), "Path Dependence, Lock-In, and History"
- Nelson, R. and S. Winter (1982), An evolutionary theory of economic change, Harvard University Press.
- Page, Scott E. (January 2006). "Path dependence". Quarterly Journal of Political Science. 1 (1): 88. doi:10.1561/100.00000006. Pdf.
- Penrose, E. T., (1959), The Theory of the Growth of the Firm, New York: Wiley.
- Pierson, Paul (2000). "Increasing Returns, Path Dependence, and the Study of Politics". American Political Science Review, June.
- _____ (2004), Politics in Time: Politics in Time: History, Institutions, and Social Analysis, Princeton University Press.
- Puffert, Douglas J. (1999), "Path Dependence in Economic History" (based on the entry "Pfadabhängigkeit in der Wirtschaftsgeschichte", in the Handbuch zur evolutorischen Ökonomik)
- _____ (2001), "Path Dependence in Spatial Networks: The Standardization of Railway Track Gauge"
- _____ (2009), Tracks across continents, paths through history: the economic dynamics of standardization in railway gauge, University of Chicago Press.
- Schwartz, Herman. "Down the Wrong Path: Path Dependence, Increasing Returns, and Historical Institutionalism"., undated mimeo
- Shalizi, Cosma (2001), "QWERTY, Lock-in, and Path Dependence", unpublished website, with extensive references
- Vergne, J. P. and R. Durand (2010), "The missing link between the theory and empirics of path dependence", Journal of Management Studies, 47(4):736–59, with extensive references