Editing Path dependence (section)

==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]].<ref>{{cite book|title=An evolutionary theory of economic change|last1=Nelson|first1=R|last2=Winter|first2=S|date=1982|publisher=Harvard University Press}}</ref> A common expression of the concept is the claim that predictable amplifications of small differences are a disproportionate [[Ultimate cause|cause]] of later circumstances, and, in the "strong" form, that this historical hang-over is [[inefficient]].<ref name="LMTypes2">{{cite book |last1=Liebowitz |first1=S. |url=http://encyclo.findlaw.com/0770book.pdf |title=Encyclopedia of Law and Economics, Volume I. The History and Methodology of Law and Economics |last2=Margolis |first2=S. |date=September 2000 |publisher=Edward Elgar |isbn=978-1-85898-984-6 |editor1-last=Bouckaert |editor1-first=Boudewijn |location=Cheltenham |page=985 |quote=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). |access-date=2010-05-20 |editor2-last=De Geest |editor2-first=Gerrit |archive-url=https://web.archive.org/web/20101206033616/http://encyclo.findlaw.com/0770book.pdf |archive-date=2010-12-06 |url-status=dead}}</ref>

There are many models and empirical cases where economic processes do not progress steadily toward some pre-determined and unique [[economic equilibrium|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 [[Attractor|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 (economic)|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. 

=== Economic development ===
In economic development, it is said (initially by [[Paul A. David|Paul David]] in 1985)<ref>{{cite journal |first1=Martin |last1=Stack |first2=Myles |last2=Gartland |year=2003 |title=Path Creation, Path Dependency, and Alternative Theories of the Firm |journal=Journal of Economic Issues |volume=37 |issue=2 |page=487 |quote=Paul David and Brian Arthur published several papers that are now regarded as the foundation of path dependency (David 1985; Arthur 1989, 1990).|doi=10.1080/00213624.2003.11506597 |s2cid=155562359 }}</ref> 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",<ref name=":4">{{Cite journal|last=David|first=Paul A.|date=1985|title=Clio and the Economics of QWERTY|url=https://econ.ucsb.edu/~tedb/Courses/Ec100C/DavidQwerty.pdf|journal=The American Economic Review|volume=75|issue=2|pages=332–337|issn=0002-8282|jstor=1805621}}</ref> and said that inferior standards can persist simply because of the [[Legacy system|legacy]] they have built up. That [[Dvorak Simplified Keyboard#Comparison of the QWERTY and Dvorak layouts|QWERTY vs. Dvorak]] is an example of this phenomenon, has been re-asserted,<ref>{{cite journal |last=Diamond |first=Jared |author-link=Jared Diamond | date=April 1997 |title=The Curse of QWERTY |journal=[[Discover Magazine]] |url= http://discovermagazine.com/1997/apr/thecurseofqwerty1099}}</ref> questioned,<ref>{{cite journal |last1=Liebowitz |first1=S. J. |last2=Margolis |first2=S. E. |date=April 1990 |title=The Fable of the Keys |journal=Journal of Law and Economics |volume=30 |pages=1–26 |ssrn= 1069950|quote=we conclude that QWERTY is about as good a design as any alternative |doi=10.1086/467198|s2cid=14262869 }}</ref> and continues to be argued.<ref>{{cite conference |last=David |first=Paul A. |url=http://EconPapers.repec.org/RePEc:wpa:wuwpeh:0502004 |title=At Last, a Remedy for Chronic QWERTY-skepticism! |conference=European Summer School in Industrial Dynamics (ESSID) |location=l'Institute d'Etudes Scientifique de Cargèse (Corse), France |date=5–12 September 1999}}</ref> Economic debate continues on the significance of path dependence in determining how standards form.<ref>{{cite web |url= http://eh.net/encyclopedia/path-dependence/ |title=Path Dependence |last=Puffert |first=Douglas |date=2008-02-10 |access-date=20 May 2010}}</ref>

Economists from [[Alfred Marshall]] to [[Regional science#New economic geography|Paul Krugman]] have noted that similar businesses tend to congregate geographically ([[Economies of agglomeration|"agglomerate"]]); opening near similar companies [[labor mobility|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 [[Knowledge spillover|increasing its relative efficiency]]. This [[network effect]] follows a statistical [[power law]] in the idealized case,<ref>{{cite journal |last=D'Souza |first=Raissa M. |year=2007 |title=Emergence of Tempered Preferential Attachment from Optimization |journal=[[Proceedings of the National Academy of Sciences of the United States of America|Proc. Natl. Acad. Sci. USA]] |volume=104 |issue=15 |pages=6112–6117 |doi=10.1073/pnas.0606779104 |pmid=17395721 |display-authors=etal|pmc=1839059 |doi-access=free }}</ref> though [[negative feedback]] can occur (through rising local costs).<ref>{{cite journal |last1=Jennen |first1=M. |last2=Verwijmeren |first2=P. |year=2009 |title=Agglomeration Effects and Financial Performance |journal=Urban Studies |id=ssrn 1009226 |doi=10.1177/0042098010363495 |volume=47 |issue=12 |pages=2683–2703|s2cid=154044026 |url=https://zenodo.org/record/895942 }}</ref>
Buyers often [[cluster effect|cluster]] around sellers, and related businesses frequently form [[business cluster]]s, so a concentration of producers (initially formed by accident and agglomeration) can trigger the emergence of many dependent businesses in the same region.<ref>{{cite book |title= Global Networks and Local Linkages: The Paradox of Cluster Development in an Open Economy |author= Jen Nelles, Allison Bramwell and David Wolfe |year= 2005 |publisher= Montreal and Kingston: McGill-Queens University Press for Queen's School of Policy Studies |isbn= 978-1-55339-047-3 |page= 230 |url= http://www.druid.dk/uploads/tx_picturedb/dw2005-1650.pdf |access-date= 2010-05-20 |archive-url= https://web.archive.org/web/20160604045844/http://www.druid.dk/uploads/tx_picturedb/dw2005-1650.pdf |archive-date= 2016-06-04 |url-status= dead }}</ref>

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) [[United States|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.

=== Types of path dependence ===
Liebowitz and Margolis distinguish ''types'' of path dependence;<ref name="LMTypes">{{cite book |last1= Liebowitz |first1= S. |last2= Margolis |first2= S. |editor1-first= Boudewijn |editor1-last= Bouckaert |editor2-first= Gerrit |editor2-last= De Geest |title= Encyclopedia of Law and Economics, Volume I. The History and Methodology of Law and Economics |url= http://encyclo.findlaw.com/0770book.pdf |access-date= 2010-05-20 |date= September 2000 |publisher= Edward Elgar |location= Cheltenham |isbn= 978-1-85898-984-6 |page= 985 |quote= 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). |archive-date= 2010-12-06 |archive-url= https://web.archive.org/web/20101206033616/http://encyclo.findlaw.com/0770book.pdf |url-status= dead }}</ref> some do not imply inefficiencies and do not challenge the [[Normative economics|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 [[Free market|private]] locked-in inefficiencies exist.<ref>{{cite web |url= http://www.utdallas.edu/~liebowit/palgrave/palpd.html |title=Path Dependence '''4. Evidence for Third-Degree Path Dependence''' |author=Stephen E. Margolis |author2=S. J. Liebowitz |access-date=20 May 2010 |quote=Our reading of the evidence is that there are as yet no proven examples of third degree path dependence in markets.}}</ref> Vergne and Durand qualify this critique by specifying the conditions under which path dependence theory can be tested empirically.<ref>{{Cite journal | last1 = Vergne | first1 = J. P. | last2 = Durand | first2 = R. | doi = 10.1111/j.1467-6486.2009.00913.x | title = The Missing Link Between the Theory and Empirics of Path Dependence: Conceptual Clarification, Testability Issue, and Methodological Implications | journal = Journal of Management Studies | volume = 47 | issue = 4 | pages = 736 | year = 2010 | s2cid = 107050516 |quote=In particular, we suggest moving away from historical case studies of supposedly path-dependent processes to focus on more controlled research designs&#91;,&#93; such as simulations, experiments, and counterfactual investigation."| doi-access = free }}</ref>

Technically, a path-dependent stochastic process has an [[asymptotic distribution]] that "evolves as a consequence (function of) the process's own history".<ref>{{cite book |title=Evolution and path dependence in economic ideas: past and present |first=Paul |last=David |year=2005 |publisher=Edward Elgar |isbn=978-1-84064-081-6 |page=19 |quote=as generally is the case for branching processes &#91;in Path dependence, its critics and the quest for 'historical economics'&#93;}}</ref> This is also known as a [[Ergodic (adjective)|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.

=== Conditions which give rise to path dependence ===
Path dependence may arise or be hindered by a number of important factors, these may include

* Durability of capital equipment
* Technical interrelatedness
* Increasing returns
* Dynamic increasing returns to adoption<ref>{{cite web |last1=Puffert |first1=Douglas |title=Path Dependence |url=http://eh.net/encyclopedia/path-dependence/ |website=eh.net Encyclopedia}}</ref>