Economic Growth and the High Wage Economy

5 A behavioral model of path dependency

Introduction

The conventional wisdom’s understanding of long- run equilibrium paths of growth and development as well as of equilibrium product market development has been challenged by the pioneering theoretical research of Paul David (1985) and Brian Arthur (1989, 1990) on path dependency.¹ They argue that in a world of increasing returns to scale, there may be a multiplicity of possible equilibrium solutions to identical economic problems and for the dominant solution to be suboptimal. The prevalent economic outcome in terms of product type, industry, or labor market institutions, for example, can itself be a product of some seemingly inconsequential and random event that, through the process of increasing ...