Why should the word find an application in this sense? To answer this we need to take a step back and reconsider the Buddhist view of consciousness (Sanskrit vijñāna; Pāli viññāṇa). Consciousness is always 'consciousness of ', the Buddha did not allow for a free floating entity called consciousness that was waiting to be aware of something (see JR: What is Consciousness?) - consciousness is dependently arisen, and this is the most important application of the principle of conditionality. In particular consciousness arises in dependence on contact between a sense organ and a sense object. Particularly with reference to the mental sense (manas) the object is called 'a dharma' - and this specifically includes the information garnered from the other five senses. So a sight object gives rise to sight consciousness, but this sight consciousness in turns becomes the object of the mind sense, it is itself a dharma. As we've seen over the past two weeks the primary meaning of dharma is foundation. Here the dharma acts as a 'foundation' to vijñāna since vijñāna arises in dependence (in part at least) on sense objects. We can see, then, that dharma in this sense is related to words for cause (hetu, paccaya) and condition (nidāna, upanisa, bandhu).
Now the main interest in the early suttas is on vijñāṇa not on dharmas; that is, on the subjective pole of experience rather than the objective. So for instance the processes which enable us to have experiences - the five skandha (P. khandha) - are mentioned frequently and treated quite exhaustively. The nature of dharmas is only given cursory attention if any. The reasons for focusing on the mind are pragmatic because it is the insights into the functioning of mind that are liberate us.
However, the lack of definite statements about dharmas in the suttas left a lacuna that became very attractive to a certain type of mind - and unfortunately they were frequently the same people who preserved the texts and were the chief textual authorities and exegetes.
The first step was the abhidharma. Abhidharma is an interesting word. PED gives 'special dhamma' as it's chief sense, but under abhi- they say the primary meaning is "that of taking possession and mastering" which suggests that its meaning would be impossible to guess from the etymology (which is not uncommon). What the abhidhamma is, is an analysis of the Buddhadharma and in particular of the dharmas themselves in the sense I am exploring now. The abhidharmikas were concerned with identifying the types and categories of dharmas both mental and physical, and the interactions between them in creating consciousness. I must confess at this point that I have never really studied abhidharma, and don't have much interest in it. Presumably the original intent grew out of injunctions in meditation texts such as the Satipaṭṭhāna Sutta to observe the arising and passing and away of dharmas. However the subtle shift of the attention from the moon to the finger meant that the dharmas themselves, rather than their contingency per se moved into focus, and this seems to me to be a fundamental error.
Another issue which has plagued Buddhism presumably from the moment the Buddha died is whether it is possible for any of us to have the experience he had. While he was alive to say yes he seems to have inspired huge confidence. I presume that the shift to the view (exemplified in Peter Masefield's flawed work Divine Revelation in Pali Buddhism ) which says that without the physical presence of a Buddha awakening is not possible was a gradual giving way to pessimism, rather than a sudden collapse of confidence. However one of the motivations, as I understand it, behind the abhidharmika's efforts was to understand awakening - to intellectually keep the possibility of liberation alive.
In the abhidharma the idea of what a dharma is begins to take on form. Scholars are quick to point out that they do not see a definite ontology here.  It is not that the abhidharmika's set out to establish the nature of a dhamma, but in creating their lists of dharmas they provided an opening for those with a more ontological bent. What they do is create finite lists which they present as exhaustive - there are these kinds of dharmas and no more. That the different abhidharmikas came up with overlapping but often quite different list tells us much in retrospect. The definiteness of these lists was problematic. By the time of the commentarial tradition in 5th century Sri Lanka a dharma has become a thing - which may well be why this is the favoured translation of dhamma in contemporary times.
The various early schools of Buddhism (the tradition records eighteen names) each had their own collections of suttas, their own vinaya, and their own abhidharma. Since the sutta collections vary mostly in how they are arranged it is presumed that these stem from a common stock . Each surviving vinaya shows a little more variation - especially in the number of pratimokṣa rules and in how elaborated is their account of the Buddha's life. Each abhidharma however has a significantly different take on the subject - though of course all shared a method and aimed at the same goal.
The Sarvāstivādin abhidharmikas seem to have gone further down the ontological road than any other Buddhist groups. Their very name means 'everything exists' (sarva asti). They held dharmas to be substantially existing elements of reality. Just how far they gave strayed from the Buddha's teaching is brought into focus when one considers that Nāgārjuna is thought by some scholars to have written his stark and decisive polemic, Mālamadhyamika Kārikā (MMK), in response to the Sarvāstivādins.  Amongst other aims Nāgārjuna comprehensively dismantles the twin notions of existence and non-existence. Neither apply. If Nāgārjuna appears nihilistic it is perhaps because he was writing against a pernicious form of eternalism. In any case we can read MMK as an attempt to wrestle Buddhism back on track - away from any interest in the nature of reality, and back to an interest in the nature of experience. It is terms of experience, not in terms of mysticism or paradox, that we need to understand that 'things' neither exist nor non-exist, because those 'things' are our mental processes which have no ontological status, no substantial being. Indeed in what sense can any process be said to 'exist'?
- In my unpublished essay 'Did the Dhamma Die with the Buddha' I critique Masefield's method which seems to have ignored or obscured any evidence which contradicted his thesis. By demonstrating that counter examples are readily available in his source - the Pali texts - for all of his major claims, I show that his over all thesis that no-one could attain enlightenment after the Buddha died is wrong.
- To some extent I am relying on Noa Ronkin's Early Buddhist Metaphysics as a survey of attitudes of other scholars to this issue, particularly chapter 2 (p.34ff).
- However the variation in the organisation of the collections argues for a late date for the collections themselves, ie there was no 'canon' until quite some time after the Buddha - which seems to contradict traditional narratives of the canon being settled at a council held immediately after the Buddha's death.
- I think some scholars argue that what the Sarvāstivādins meant by 'svabhāva' was not inherent existence, but something more like individual characteristic. Buddhist texts are seldom fair to the ideas of their opponents, nor to the people who hold different ideas (who are regularly portrayed as fools). So if Nāgārjuna was misrepresenting the Sarvāstivādins this was consistent with the tradition, though it seems to me that in writing polemics one is usually motivated by an actual perceived error. In any case the points he makes about existence/non-existence seem to me to be important and useful.
- Cox, Collett. 2004. 'From Category to Ontology: the Changing Role of Dharma in Sarvāstivāda Abhidharma.' Journal of Indian Philosophy. 32: 543-597.
- Gethin, Rupert. 2004. 'He Who sees Dhamma sees Dhammas: Dhamma in Early Early Buddhism.' Journal of Indian Philosophy. 32: 513-542.
- Ronkin, Noa. 2005. Early Buddhist Metaphysics : The Making of a Philosophical Tradition. London: Routledge Curzon.