Path Dependence, its critics, and the quest for ‘historical economics’

The concept of path dependence refers to a property of contingent, non-reversible dynamical processes, including a wide array of biological and social processes that can properly be described as ‘evolutionary’. To dispel existing confusions in the literature, and clarify the meaning and significance of path dependence for economists, the paper formulates definitions that relate the phenomenon to the property of non-ergodicity in stochastic processes; it examines the nature of the relationship between between path dependence and ‘market failure’, and discusses the meaning of ‘lock-in’. Unlike tests for the presence of non-ergodicity, assessments of the economic significance of path dependence are shown to involve difficult issues of counterfactual specification, and the welfare evaluation of alternative dynamic paths rather than terminal states. The policy implications of the existence of path dependence are shown to be more subtle and, as a rule, quite different from those which have been presumed by critics of the concept. A concluding section applies the notion of ‘lock-in’ reflexively to the evolution of economic analysis, suggesting that resistence to historical economics is a manifestation of ‘sunk cost hysteresis’ in the sphere of human cognitive development.