Path dependence Guide, Meaning , Facts, Information and Description
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 determine the path followed and 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 is relevant to what occurs now and when or if the economy attains equilibrium.Some examples of path dependence in economics:
- Typewriters standardized on the QWERTY layout to avoid jamming. Computers subsequently adopted the same layout even though jamming was not a concern. The costs of retraining make it expensive to adopt another layout.
- 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.
- 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).
External links
- "QWERTY, Lock-in, and Path Dependence" (arguing that lock-in leads to market failure)
- Margolis and Liebowitz, "Path Dependence, Lock-In, and History" (a critique of path dependence theory)
This is an Article on Path dependence. Page Contains Information, Facts Details or Explanation Guide About Path dependence