History and Path Dependence

This chapter differs from the previous chapters in that it deals with the more qualitative approach of economic history. Complexity economists are convinced that history matters, which means that the economy does not always converge to the same equilibrium regardless of initial conditions. The chapter argues that historians have a very different way of thinking about the world than economists. Historical economics, which is related to complexity economics, applies this way of thinking to economics. The evolution of the economy is often path dependent, so that small events can lead the economy to one of several equilibria. If this is true, attention to historical detail is important in explaining economic phenomena observed in the present. The chapter also introduces the concepts of lock-in, critical junctures, and punctuated equilibrium. It is argued that inefficient lock-in is more common than neoclassical economists would like to believe. These concepts are illustrated with a narrative account of the history of the automobile. Finally, the chapter shows how some of these concepts can be formally modeled.