A Self-Correcting System
Feedback occurs all
around us--it is everywhere in biological systems, and
engineers use it extensively in control structures. It also provides markets with
an important element of stability. For example, if a product
becomes less available, its price rises. The higher price changes behavior of both buyers and sellers to limit the rise
and to set the stage for a future reduction
in price that often offsets the initial rise.
Higher prices give buyers an incentive to use less of a
product by substituting or doing without. Higher prices of
petroleum in the 1970s, for example, encouraged people to
drive less, to work closer to the places they lived, to
insulate their homes, to turn down thermostats in winter and
to turn up thermostats in summer, to buy smaller and more
fuel-efficient cars, and to find a host of other ways to cut
usage. The higher the price, the greater is the incentive
for consumers to change behavior.
Higher prices encourage producers and potential
producers to find ways to produce more of the product. As a
response to the oil price increases, producers found ways to
extract more oil from old wells. They also found it
worthwhile to greatly step up the search for new oil fields
around the world, and a considerable amount of new oil was
found as a result of this search.
Higher prices signal both buyers and sellers to search for new ways
to meet old demands. The higher prices of oil spurred
attempts to increase the energy efficiency of machines. It
encouraged people to switch to substitute fuels. It spurred
research on alternative energy sources, including new ways
to tap the energy in solar radiation, wind, and water.
Dampening feedback sets into motion changes that are opposite those mentioned above when price falls. When
oil became cheaper in the mid-1980s, people were encouraged
to use more, producers were encouraged to search less,
and everyone was encouraged to stop substituting away from
oil.
Viewed in terms of the concept of feedback, the market
system reveals important self-stabilizing features.
Sometimes these features are ignored. For example, there
were some highly publicized "doomsday" forecasts in the
early 1970s that foresaw a rapid depletion of the earth's
resources and a collapse of industrial societies. These
studies often ignored price effects entirely, simply
assuming that one could extrapolate present usage trends
into the future. In this view, the use of the resource would
continue to rise until suddenly it would be depleted and
usage would collapse to zero.
The future is very hard to predict with any accuracy.
Perhaps someday, industrial civilization will collapse
because of resource depletion. But anyone who believes such
a forecast of the future should be able to explain why this
outcome is reasonable given the dampening feedback system of
price incentives. If they ignore this feedback, they will
inevitably foresee doom and gloom, but they do not deserve
serious intellectual consideration.
Finally, be aware that feedback systems can have delays
in adjusting. A system with dampening feedback may not be in
equilibrium, but it does have forces that keep it close to
equilibrium.
Copyright
Robert Schenk
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