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