The analysis thus far has used the term ‘path dependence’ without detailing what it means and how it offers a lens through which to view post-1994 realities. This chapter discusses the theory of path dependence and its usefulness in making sense of contemporary South Africa.

NORTH AND PATH DEPENDENCE: UNDERSTANDING INSTITUTIONS

Douglass North, an American economic historian whose work on institutions won him the Nobel Prize in 1993, was not a student of economic exclusion. His academic concern was chiefly to understand why some economies seemed unable to grow over extended periods: ‘What accounts for the survival of societies and economies which are characterized by persistent poor performance?’ His interest in path dependence, which he defined as ‘a term used to describe the powerful influence of the past on the present and future’, was a product of his attempt to answer these questions.

Unlike many mainstream economists, North was not wedded to models which claim that humans act rationally only when they behave as computers, weighing the economic costs and benefits of each action and choosing the option which brings them most benefit or least cost. These models, he believed, only work in an abstract world in which there are no rules governing trade and so people can transact with each other without any cost. But in the real world, people are forced to pay a price to trade because every society needs rules to ensure that people transact only in ways consistent with its values. These rules are the institutions which govern economic life: ‘When it is costly to transact, then institutions matter. And it is costly to transact.’ Institutions, according to North, are ‘the humanly devised constraints that structure political, economic and social interaction’. They consist of ‘both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct) and formal constraints (constitutions, laws, property rights)’. Throughout history, humans have devised institutions to ‘create order and reduce uncertainty in exchange’. These institutions and the degree to which they are enforced determine the cost of transacting. They also impose constraints which can aid or obstruct economic growth. Institutions are effective (economically) if they make it more possible for people to reap the benefits of trading. If they do, they stimulate growth.