Edited by Lars Magnusson and Jan Ottosson
Chapter 7: Path Dependence and Public Policy: Lessons from Economics
Stephen E. Margolis INTRODUCTION Path dependence, as economists have come to use the term, is a condition in which economic outcomes exhibit inertia – they are what they are because they have been what they have been. At this very simple and general level, economies must exhibit path dependence, and lots of it. The houses, roads, factories and offices that we have today must be the ones that were built sometime in the past. In this sense, path dependence is an unavoidable consequence of ordinary durability of many physical assets. Similarly, the production technologies that are available to us today are those that we developed in the past. Knowledge too is a durable investment. Path dependence in this very limited sense is the rule, not the exception. Economists model individual choices, and therefore aggregate outcomes, as the result of the interplay between what we want and what we can have – our preferences and production possibilities. In turn, production possibilities depend on our endowments, institutions and technologies. Since all three of these depend fundamentally on what has gone on in the past, economic outcomes must depend on history. None of that is new. Durability, broadly defined, has always been a part of economic analysis. A new twist in this old concern with persistence has appeared in the economic literature since the mid-1980s. This literature expresses a view that economic outcomes depended on the past in more complex and more remote ways than we have ordinarily recognized. The influence of the past is...
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