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The concept of feedback provides a way to view the functions of price in allocating resources. A system of feedback exists when two variables are interrelated, so that a change in variable A affects variable B, but, in turn, a change in variable B affects variable A.

Biological organisms and systems are full of feedback mechanisms. A simple one involves body temperature (variable A) and the amount a person sweats (variable B). The higher the body temperature, the more a person sweats. However, the more a person sweats, the lower will be body temperature. In this system, body temperature causes sweating, but sweating in turn causes body temperature. Feedback in this case is stabilizing, and is an example of dampening feedback (sometimes called negative feedback). Dampening feedback is illustrated below.

Negative Feedback

Feedback can also be destabilizing. For example, as land erodes, it supports less vegetation. But land with less vegetation erodes more readily. This feedback loop is amplifying feedback (sometimes called positive feedback), and is illustrated in this second picture.

Positive Feedback


The ideas above lead to the concept of a market system as a self-correcting system.

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Copyright Robert Schenk