History is a binding constraint
The concept
Path dependency is the observation that current options are shaped — and constrained — by the route a country took to get here. The keyboard you type on (QWERTY) was not chosen as optimal; it was chosen early for reasons that no longer apply, and now everybody knows it, so nobody changes. Paul David's 1985 paper Clio and the Economics of QWERTY made this the canonical illustration.
Path dependency in policy
The same logic applies to institutions. The United States is unlikely to adopt a large national sovereign wealth fund any time soon, largely because the US political and fiscal starting point makes one hard to introduce. Meanwhile the US is more likely to expand Earned Income Tax Credit-style structures because they already exist and have constituencies. Both countries could build good post-labour policy; the feasible paths are different.
Solutions that sell themselves
Policy designers who understand path dependency look for reforms that extend existing institutions rather than replacing them. The Alaska Permanent Fund extended the existing oil-revenue system. US employee stock ownership plans extended the existing retirement-plan rules. US Trump Accounts extend the existing system of tax-advantaged savings accounts. Each sells itself politically because it fits. Theoretically purer alternatives often fail precisely because they do not.
What this rules in and out
Path dependency rules out some popular proposals. A wholesale switch to a different economic system is very unlikely in societies with strong property norms. It also rules in proposals that seem too modest to matter — but which can compound into major change over decades. Gradualism is not weakness; it is a response to how institutions actually evolve.
Name one policy that worked brilliantly in one country and flopped in another. What explains the difference?