Skip to 0 minutes and 10 secondsSo far, we have seen that historical events do not take place randomly. Instead, they can be perceived as an emergent property of interrelated circumstances. Yet, we ended the previous lecture with a puzzle. For the first country to industrialise, a unique set of conditions was required. But once the right mix of ingredients was obtained in Britain, to spark off the Industrial Revolution, you would expect other countries to take advantage of this new technological knowledge. The conditions needed to copy existing technology are less demanding than those needed to come up with the technology in the first place. But for some reason, this did not happen. This conundrum is part of a long list of counter intuitive phenomena, observed in economic history.

Skip to 0 minutes and 57 secondsWhy did the steam engine linger long after the electric motor became available in the 1880s? Why is your keyboard designed the way it is, while more efficient alternatives are readily available? Why is the standard gauge for railways still the same as 200 years ago, when it was used for horse-drawn coal cars, and not for trains travelling at a speed of 200 kilometres per hour? The answer to all these questions is the same. This is, because the choices we made in the past influences the choices we make today. Changes in technology, in economic institutions, or in the economy, at large, are path dependent. Let's take one of the mentioned examples.

Skip to 1 minute and 39 secondsMore than half the world's railways still use the gauge that was introduced around 1830 by George Stephensen, an early railway pioneer. But even though the Stephensen gauge remains the most widely used distance between the rails of a railroads, many railway engineers today prefer a wider gauge to accommodate higher speeds, more load capacity, and improved passenger comfort. So why does the old system prevail? It prevails because the costs of conversion to a new gauge exceeds the immediate gains in operating efficiency. To illustrate-- a French train operator recently purchased trains that proved too wide for many regional platforms. And the cost of widening the platform runs into the tens of millions of euros.

Skip to 2 minutes and 31 secondsIn this example, it is clear that choices made in the past may leave society locked-in with a suboptimal of technology or inferior standards. This is also called the curse of technological interrelatedness. If you switch technology, but none of your competitors do, you pay the immediate switching costs and lose all extra value from using the most common technology. And it is too costly to coordinate all the users to make the switch collectively. This path dependence explains why, even though more efficient account technology was available in industrialised Britain, other countries remain in the pre-industrial stage long after 1800.

Skip to 3 minutes and 15 secondsIt explains how technological and institutional changes in society are partly influenced by decisions and developments in the past, even if the circumstances of the past may not seem relevant today. A path-dependence process evolves as a consequence of its own history, through positive feedback mechanisms. It results in a self-reinforcing pattern of development . Uncertainty plays in size of role. Fundamentally, path dependence is caused by the behaviour of doing things the way we know, out of uncertainty about the costs of alternatives. There are pervasive uncertainties about what a new thing will look like, and what its economic properties will be. Therefore, technologies evolve among trajectories, where a possible next step in this development depends on the steps that were previously attempted.

Skip to 4 minutes and 9 secondsThe choice between several technological options, available to an entrepreneur, is based on the uncertainty about costs and benefits. Which, in turn, depends on choices made previously. Even though previous choices of technology are based on chance, or limited information, and better alternatives are available, it may still be cheaper, in the short run, to continue on the same path and avoid the replacement costs associated with the switch to a new technology. The upshot of this, is that the free market can lock us into an inferior standard. Such a view in economic evolution is very different from traditional neoclassical approach to economics, which does not take into account, history.

Skip to 4 minutes and 55 secondsPath dependence maintains that the starting point, as well as accidental events, can have a significant effects on the course of history. It is impossible to understand and analyse history with theory that is heedless of these processes. As noted by Nobel Laureate, Douglas North, once the development path is set on a particular course, the network extemalities, the learning process of organisations and the historically derived modelling of the issues, reinforces the course. One can clearly see this in the case of Silicon Valley. Business clusters, initially formed by accident, can trigger the emergence of many dependent businesses in the same region. So path dependence limits the number of choices we have.

Skip to 5 minutes and 43 secondsBecause of the choices we make today depends on choices made in the past. This leads to inertia. Once a large container ship is under way, it takes time to change course. History matters. Further developments rely heavily on historical processes. This raises the question, whether history can teach us lessons that's going to help form policy today. The next lecture addresses this issue.

Uncertainty and path dependence

This video explains how in hindsight the future was always uncertain and the present state depends on history. We call this path dependence. And when this leads to an undesired outcome we can call this a lock-in as introduced in Week 2 when we talked about emergence.

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Decision Making in a Complex and Uncertain World

University of Groningen

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