Path dependence
Path dependence explains how the set of decisions people face for any given circumstance is limited by the decisions they have made in the past or by the events that they experienced, even though past circumstances may no longer be relevant.
In economics and the social sciences, path dependence can refer either to outcomes at a single moment in time, or to long-run equilibria of a process. In common usage, the phrase implies either:
In the first usage,, "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, that has the most explanatory force, and which is covered in this article.
Illustration
The videotape format war is an example. Three mechanisms independent of product quality could explain how VHS achieved dominance over Betamax from a negligible early adoption lead:- 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, didn't let pornography companies license their technology for mass production, which meant that nearly all pornographic motion pictures released on video used VHS format.
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.
Economics
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.
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 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 that a standard that is first-to-market can become entrenched. 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 Alfred Marshall to Paul Krugman have noted that similar businesses tend to congregate geographically ; 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.
Buyers often cluster around sellers, and related businesses frequently form business clusters, so a concentration of producers 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 U.S. manufacturers. Some of the factories that closed as a result, could later have been operated at a 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 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 the process's own history". This is also known as a non-ergodic stochastic process.
In The Theory of the Growth of the Firm, 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.
History
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, 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, and self-reinforcement.
- 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.
Social sciences
's influential attempt 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.The path-dependence of emergent strategy has been observed in behavioral experiments with individuals and groups.
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 on organizations and organizational collectives, thus continuing to shape organizational behaviours and outcomes in the long run, even as external environmental conditions change.
Other examples
- 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 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.
- In socioeconomic systems, commercial fisheries' harvest rates and conservation consequences are found to be path dependent as predicted by the interaction between slow institutional adaptation, fast ecological dynamics, and diminishing returns.