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Path DependencePath-dependence exists when the outcome of a process depends on its past history, on the entire sequence of decisions made by agents and resulting outcomes, and not just on contemporary conditions. A closely related concept is hysteresis, a property of systems (usually physical systems) whose states depend on their immediate history. Consider as an example the technological development of videocassette recorders (VCRs) for home use. It is argued that management errors and minor design choices by Sony led to its Betamax format being defeated by VHS in the 1980s. Two mechanisms can explain why the small but early lead gained by VHS became larger over time. The first is the bandwagon of VCR manufacturers in favour of the VHS format in the U.S. and Europe, who switched because they expected VHS to win the standards battle. The second was a network externality: videocassette rental stores observed that more people had VHS players and stocked up on VHS tapes, this in turn lead other people to buy VHS players, and so on until there was complete vendor lock-in to VHS. 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. A classic example is the rules of the road: whereas cars in most countries drive on the right, cars in the U.K. and countries that were part of the British Empire continue to drive on the left, and to have the steering wheel on the 'wrong' side. Technically the two options are equivalent. The initial choice to drive on a particular side was accidental, but remains a legacy in these countries. Once this social convention emerged, though, it became permanent because of the huge switching costs involved in modifying it. Examples from economics, history, software, and biology are presented below. Economics There are plenty of instances where economic processes do not progress steadily toward some pre-determined and unique equilibrium, but instead are impossible to forecast and unlikely to converge. This dynamic vision of economic evolution is very different from the neo-classical economics tradition, which in its simplest form assumed that a single well-known outcome would 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 the 1980s, the U.S. dollar exchange rate rose dramatically, destroying many manufacturing enterprises in the industrial heartland by pricing their products out of the market. After the dollar stabilized, the factories remained closed because it was too expensive to restart them.
- A high rate of unemployment at one point in time, say during a recession, can lead to a permanently higher unemployment rate. A link between cyclical and structural unemployment reflects the actual skill loss during a spell of unemployment. This gets reinforced by potential employers' negative view of the capacities of job-seekers who've been out of a job for a long time.
- If the economy follows adaptive expectations, current inflation is partly determined by past experience with inflation, since experience determines expected inflation and this is a major determinant of actual inflation.
Technically, path-dependence has been defined as a non-ergodic stochastic process, which means that the asymptotic distribution of the process evolves as a consequence of its history. History The history of humanity is almost by definition path-dependent. Accidental events such as the death at an early age of major historical figures like Napoleon or Hitler would surely have altered the political geography of Europe and even the languages spoken in different countries today. Technology 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. Biological evolution Evolution 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. External links
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