Path dependence
Encyclopedia
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.
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. In common usage, the phrase implies either:
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 (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.
; Two mechanisms independent of product quality could explain how VHS
achieved dominance over Betamax
from a negligible early adoption lead:
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.
(e.g., Nelson & Winter 1982).
There are many models and empirical cases where economic processes do not progress steadily toward some pre-determined and unique equilibrium
, so that the nature of any equilibrium achieved depends partly on the process of getting there. The outcome of a path dependent process will often not converge towards a unique equilibrium but instead reach one of several equilibria (sometimes known as absorbing states).
This dynamic vision of economic evolution is very different from the neo-classical economics tradition, 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:
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-dependence 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.
analyses of the development and persistence of institutions, whether they be social, political, or cultural. There are arguably two types of path-dependent processes:
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
.
path dependence within political science is that of Paul Pierson
, partly drawing 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 give rise to, and transform institutions.
The path-dependence of emergent strategy
has been observed in behavioral experiments
with individuals and groups
.
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
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. In common usage, the phrase implies either:
- (A) that "history matters" - a broad concept, or
- (B) that predictable amplificationsAmplifierGenerally, an amplifier or simply amp, is a device for increasing the power of a signal.In popular use, the term usually describes an electronic amplifier, in which the input "signal" is usually a voltage or a current. In audio applications, amplifiers drive the loudspeakers used in PA systems to...
of small differences are a disproportionate cause of later circumstances. And, in the "strong" form, that this historical hang-over is inefficient.
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 (compare "path dependent" options in finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, where the influence of history can be non standard
Exotic option
In finance, an exotic option is a derivative which has features making it more complex than commonly traded products . These products are usually traded over-the-counter , or are embedded in structured notes....
).
It is the narrow concept, (B), that has the most explanatory force and which is covered in this article.
Illustration
Consider as an example the Videotape format warVideotape format war
The videotape format war was a period of intense competition or "format war" of incompatible models of consumer-level analog video videocassette and video cassette recorders in the late 1970s and the 1980s.- Overview :...
; Two mechanisms independent of product quality could explain how VHS
VHS
The Video Home System is a consumer-level analog recording videocassette standard developed by Victor Company of Japan ....
achieved dominance over Betamax
Betamax
Betamax was a consumer-level analog videocassette magnetic tape recording format developed by Sony, released on May 10, 1975. The cassettes contain -wide videotape in a design similar to the earlier, professional wide, U-matic format...
from a negligible early adoption lead:
- A network effectNetwork effectIn economics and business, a network effect is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service is dependent on the number of others using it.The classic example is the telephone...
: videocassette rental storesRental shopA rental shop, also known as a video library, is a business that allows a consumer to temporarily obtain a reusable good or product for a specified period of time in exchange for payment, a process known as renting...
observed more VHS rentals and stocked up on VHS tapes, leading renters to buy VHS players & rent more VHS tapes, until there was complete vendor lock-inVendor lock-inIn economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products and services, unable to use another vendor without substantial switching costs...
. - A VCR manufacturer bandwagon effectBandwagon effectThe bandwagon effect is a well documented form of groupthink in behavioral science and has many applications. The general rule is that conduct or beliefs spread among people, as fads and trends clearly do, with "the probability of any individual adopting it increasing with the proportion who have...
of switching to VHS-production because they expected it to win the standards battle.
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
Positive feedback
Positive feedback is a process in which the effects of a small disturbance on a system include an increase in the magnitude of the perturbation. That is, A produces more of B which in turn produces more of A. In contrast, a system that responds to a perturbation in a way that reduces its effect is...
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 dependency theory was originally developed by economists to explain technology adoption processes and industry evolution. The theoretical ideas have had a strong influence on evolutionary economicsEvolutionary economics
Evolutionary economics is part of mainstream economics as well as heterodox school of economic thought that is inspired by evolutionary biology...
(e.g., Nelson & Winter 1982).
There are many models and empirical cases where economic processes do not progress steadily toward some pre-determined and unique equilibrium
Economic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
, so that the nature of any equilibrium achieved depends partly on the process of getting there. The outcome of a path dependent process will often not converge towards a unique equilibrium but instead reach one of several equilibria (sometimes known as absorbing states).
This dynamic vision of economic evolution is very different from the neo-classical economics tradition, 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
Noise (economic)
Economic noise, or simply noise, describes a theory of pricing developed by Fischer Black. To Black, noise is the opposite of information. Sometimes it's hype, other times it's inaccurate ideas, other times it's inaccurate data; noise has many forms...
) 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 which is first-to-market can become entrenched (like the QWERTYQWERTYQWERTY is the most common modern-day keyboard layout. The name comes from the first six letters appearing in the topleft letter row of the keyboard, read left to right: Q-W-E-R-T-Y. The QWERTY design is based on a layout created for the Sholes and Glidden typewriter and sold to Remington in the...
layout in typewriters still used in computer keyboards). He called this "path dependence", and said that inferior standards can persist simply because of the legacyLegacy systemA legacy system is an old method, technology, computer system, or application program that continues to be used, typically because it still functions for the users' needs, even though newer technology or more efficient methods of performing a task are now available...
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 SmithAdam SmithAdam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
to Paul Krugman have noted that similar businesses tend to congregate geographically ("agglomerate"Economies of agglomerationThe term economies of agglomeration is used in urban economics to describe the benefits that firms obtain when locating near each other . This concept relates to the idea of economies of scale and network effects...
); opening near similar companies attracts workersLabor mobilityLabor mobility or worker mobility is the geographical and occupational movement of workers. Worker mobility is best gauged by the lack of impediments to such mobility. Impediments to mobility are easily divided into two distinct classes with one being personal and the other being systemic. ...
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 efficiencyKnowledge spilloverKnowledge spillover is an exchange of ideas among individuals. In knowledge management economics, a knowledge spillover is a non-rival knowledge market externality that has a spillover effect of stimulating technological improvements in a neighbor through one's own innovation...
. This network effectNetwork effectIn economics and business, a network effect is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service is dependent on the number of others using it.The classic example is the telephone...
follows a statistical power lawPower lawA power law is a special kind of mathematical relationship between two quantities. When the frequency of an event varies as a power of some attribute of that event , the frequency is said to follow a power law. For instance, the number of cities having a certain population size is found to vary...
in the idealized case, though negative feedbackNegative feedbackNegative feedback occurs when the output of a system acts to oppose changes to the input of the system, with the result that the changes are attenuated. If the overall feedback of the system is negative, then the system will tend to be stable.- Overview :...
can occur (through rising local costs). - Buyers often clusterCluster effectThe cluster effect is the effect of buyers and sellers of a particular good or service congregating in a certain place and hence inducing other buyers and sellers to relocate there as well.- The Silicon Valley case :...
around sellers, and related businesses frequently form Business clusterBusiness clusterA business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally. In urban studies, the term agglomeration is used...
s, so a concentration of producers (initially formed by accident & agglomeration) can trigger the emergence of many dependent businesses in the same region. - In the 1980s, the U.S. dollar exchange rateExchange rateIn finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
appreciated, lowering the world price of tradable goods below the cost of production in many (previously successful) U.S.United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
manufacturers. Some of the factories which closed as a result could later have been operated at a (cash-flow) profit, after dollar depreciation, but re-opening was too expensive. This is an example of hysteresisHysteresisHysteresis is the dependence of a system not just on its current environment but also on its past. This dependence arises because the system can be in more than one internal state. To predict its future evolution, either its internal state or its history must be known. If a given input alternately...
, switching barriersSwitching barriersSwitching barriers or switching costs are terms used in microeconomics, strategic management, and marketing to describe any impediment to a customer's changing of suppliers....
, and irreversibility. - If the economy follows adaptive expectationsAdaptive expectationsIn economics, adaptive expectations means that people form their expectations about what will happen in the future based on what has happened in the past...
, future inflationInflationIn economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
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 unemploymentUnemploymentUnemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
during a recessionRecessionIn economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
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 unemploymentStructural unemploymentStructural unemployment is a form of unemployment resulting from a mismatch between demand in the labour market and the skills and locations of the workers seeking employment...
. This structural hysteresis model of the labour market differs from the prediction of a "natural" unemployment rate or NAIRUNAIRUIn monetarist economics, particularly the work of Milton Friedman, on which also worked Lucas Papademos and Franco Modigliani in 1975,NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment, and refers to a level of unemployment below which inflation rises.It is widely used in...
, 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
Normative economics
Normative economics is that part of economics that expresses value judgments about economic fairness or what the economy ought to be like or what goals of public policy ought to be....
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
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
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-dependence stochastic process has an asymptotic distribution
Asymptotic distribution
In mathematics and statistics, an asymptotic distribution is a hypothetical distribution that is in a sense the "limiting" distribution of a sequence of distributions...
that "evolves as a consequence (function of) the process's own history". This is also known as a "non-ergodic
Ergodic (adjective)
In mathematics, the term ergodic is used to describe a dynamical system which, broadly speaking, has the same behavior averaged over time as averaged over space. In physics the term is used to imply that a system satisfies the ergodic hypothesis of thermodynamics.-Etymology:The word ergodic is...
stochastic process
Stochastic process
In probability theory, a stochastic process , or sometimes random process, is the counterpart to a deterministic process...
".
In The Theory of the Growth of the Firm (1959), Edith Penrose
Edith Penrose
Edith Elura Tilton Penrose was an American-born British economist whose best known work is The Theory of the Growth of the Firm, which describes the ways which firms grow and how fast they do. Writing in The Independent the economist Sir Alec Cairncross, stated that the book brought Dr...
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-historicalHistorical comparative research
Historical comparative research is the study of past events and questions using methods in sociology and other social scientific research to inform the possible outcomes and answers to current events and questions. Beginning in the late 1950s, the discipline of history became more linked with...
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 sciencePolitical sciencePolitical Science is a social science discipline concerned with the study of the state, government and politics. Aristotle defined it as the study of the state. It deals extensively with the theory and practice of politics, and the analysis of political systems and political behavior...
. In the critical juncture, antecedentAntecedentAn antecedent is a preceding event, condition, cause, phrase, or word. It may refer to:* Antecedent moisture, a hydrologic term describing the relative wetness condition of a sewershed.* Antecedent , the first half of a hypothetical proposition....
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 feedbackPositive feedbackPositive feedback is a process in which the effects of a small disturbance on a system include an increase in the magnitude of the perturbation. That is, A produces more of B which in turn produces more of A. In contrast, a system that responds to a perturbation in a way that reduces its effect is...
, 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.Martin Luther King, Jr.Martin Luther King, Jr. was an American clergyman, activist, and prominent leader in the African-American Civil Rights Movement. He is best known for being an iconic figure in the advancement of civil rights in the United States and around the world, using nonviolent methods following the...
with welfare expansion and the industrial revolutionIndustrial RevolutionThe Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
in EnglandEnglandEngland is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
with the development of the steam engineSteam engineA steam engine is a heat engine that performs mechanical work using steam as its working fluid.Steam engines are external combustion engines, where the working fluid is separate from the combustion products. Non-combustion heat sources such as solar power, nuclear power or geothermal energy may be...
.
The critical juncture framework has been used to explain the development and persistence of welfare states, labor incorporation in Latin America
Latin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
, and the variations in economic development
Economic development
Economic development generally refers to the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area...
between countries, among other things. Scholars such as Kathleen Thelen caution that the historical determinism
Historical determinism
Historical determinism is the stance in explaining history or advocating a political position that events are historically predetermined by various forces. Since such explanation is the norm, it may be better understood in contrast to its negation, i.e...
in path-dependent frameworks is subject to constant disruption from institutional evolution
Institutional economics
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the...
.
Social sciences
An influential attempt to rigorously formalizeValidity
In logic, argument is valid if and only if its conclusion is entailed by its premises, a formula is valid if and only if it is true under every interpretation, and an argument form is valid if and only if every argument of that logical form is valid....
path dependence within political science is that of Paul Pierson
Paul Pierson
Paul Pierson is a professor of political science and holder of the Avice Saint Chair of Public Policy at the University of California, Berkeley. From 2007-2010 he served at UC Berkeley as Chair of the Department of Political Science...
, partly drawing 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 give rise to, and transform institutions.
The path-dependence of emergent strategy
Strategy
Strategy, a word of military origin, refers to a plan of action designed to achieve a particular goal. In military usage strategy is distinct from tactics, which are concerned with the conduct of an engagement, while strategy is concerned with how different engagements are linked...
has been observed in behavioral experiments
Experimental economics
Experimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic experiments usually use cash to motivate subjects, in...
with individuals and groups
Institutional memory
Institutional memory is a collective set of facts, concepts, experiences and know-how held by a group of people. As it transcends the individual, it requires the ongoing transmission of these memories between members of this group...
.
Other examples
- A general type of path dependence is a typological vestige.
- In typographyTypographyTypography is the art and technique of arranging type in order to make language visible. The arrangement of type involves the selection of typefaces, point size, line length, leading , adjusting the spaces between groups of letters and adjusting the space between pairs of letters...
, 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 typography
- EvolutionEvolutionEvolution is any change across successive generations in the heritable characteristics of biological populations. Evolutionary processes give rise to diversity at every level of biological organisation, including species, individual organisms and molecules such as DNA and proteins.Life on Earth...
is considered by some to be path-dependent: random 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 computerComputerA computer is a programmable machine designed to sequentially and automatically carry out a sequence of arithmetic or logical operations. The particular sequence of operations can be changed readily, allowing the computer to solve more than one kind of problem...
and software markets, legacy systemLegacy systemA legacy system is an old method, technology, computer system, or application program that continues to be used, typically because it still functions for the users' needs, even though newer technology or more efficient methods of performing a task are now available...
s 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 processorWord processorA word processor is a computer application used for the production of any sort of printable material....
but rather the best available word processor that can read Microsoft WordMicrosoft WordMicrosoft Word is a word processor designed by Microsoft. It was first released in 1983 under the name Multi-Tool Word for Xenix systems. Subsequent versions were later written for several other platforms including IBM PCs running DOS , the Apple Macintosh , the AT&T Unix PC , Atari ST , SCO UNIX,...
files. Such limitations in compatibilityBackward compatibilityIn the context of telecommunications and computing, a device or technology is said to be backward or downward compatible if it can work with input generated by an older device...
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 extinguishEmbrace, extend and extinguish"Embrace, extend and extinguish," also known as "Embrace, extend and exterminate," is a phrase that the U.S. Department of Justice found was used internally by Microsoft to describe its strategy for entering product categories involving widely used standards, extending those standards with...
.