Hysteresis and Economics Taking the economic past into account

The goal of this article is to explore the rationale underlying the application of hysteresis to economic models. In particular, we explain why many aspects of real economic systems are hysteretic. The aim is to be explicit about the difficulties encountered when trying to incorporate hysteretic effects into models that can be validated and then used as possible tools for macroeconomic control. The growing appreciation of the ways that memory effects influence the functioning of economic systems is a significant advance in economic thought and, by removing distortions that result from oversimplifying specifications of input–output relations in economics, has the potential to narrow the gap between economic modeling and economic reality. Although economic systems evolve in time, mainstream economics on the whole is not cognizant of the history dependence of economic processes, even though the relevance of the historical dimension in economics has been emphasized time and again by historians and philosophers, for example, in [1], which is also one of the first works in economics to mention hysteresis explicitly (but without providing a rigorous definition). Merely accepting that economic structures evolve is not sufficient to single out any particular mechanism of history dependence at work. In many cases an economic agent can be 1