Path dependence
In economics, path dependence refers to the view that any economic process does not progress steadily toward some pre-determined and unique equilibrium. Rather, "initial conditions," i.e., where we start and the direction in which we move (the "path"), help determine the final result. Path dependence is sometimes referred to as "hysteresis," even though the two concepts are different in important ways. It is also called "lock in." Once a path is taken, there are costs of switching to a new path ("switching costs"), so that one is locked into the original path. If path dependence prevails, it implies that "history matters," what happened in the past helps determine what occurs now and when or if the economy attains equilibrium.
Some examples of path dependence in economics:
- Since the QWERTY keyboard came to dominate the common typewriter, it has been well-nigh impossible to switch to other forms of keyboards, including the Dvorak keyboard, which allegedly allows faster typing. So your PC or Mac uses it. (See ).
- 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. In the late 1980s, most of these firms did not simply come back to life. The problem is that the cost of setting up the original factories rose as a result of their being shut down.
- As noted in the discussion of unemployment, persistently high cyclical unemployment can lead to higher structural unemployment.
- If the economy follows adaptive expectations, the current amount of inflation is partly determined by past experience with inflation, since that experience determines expected inflation (a major determinant of actual inflation).
