Volume 2, Issue 3, 2002
Knowing How to Manage
Are Economic Decisions Rational? Path Dependence, Lock-In and ‘Hinge’ Propositions
According to neo-classical economic theory, free markets should eventually settle at the most efficient equilibrium. Critics of the view have claimed, however, that even if the idealised conditions demanded by the theory were met (such that the markets in question were completely fee) one would still not find those markets settling at the optimally efficient equilibrium because of the path dependent' nature of economic decision-making. Essentially, the claim is that economic decision-making is always informed by the historical setting in such a way as to prevent those decisions from generally tending towards an optimally efficient
It is argued that this debate has been hampered by the fact that the usual three-tiered way of understanding path dependence offered by Stan Liebowitz and Stephen Margolis fails to capture what proponents of the view have in mind. By examining the way in which the notion of path dependence is often described in
terms borrowed from the philosophy of science, this paper contends that we can gain a more accurate understanding of this notion by recasting it in the light of the Wittgensteinian conception of a 'hinge' proposition. This new account has the advantage of being clearer about the kind of empirical data that is relevant to the issue of whether path dependence is a genuine and economically significant phenomenon. Furthermore, it is argued that this modified account of path dependence may be able to resist some of the key objections that have been levelled against this notion.