The full chapter is published in Cavana et al (eds.) Feedback Economics, Springer, 2021.
Imperial College London
Many important regularities observed in the economy are feedback processes, including stability, fluctuations, crises, lock-in/network effects and growth. Each type has its endogenous causal structure, driven by its specific incentive structure and agents’ behavioural responses. The price mechanism is a balancing feedback system. Fluctuations, probably including the business cycle, are due to balancing feedback with delay. Reinforcing feedback also occurs. The interrelation of real-world economic phenomena, e.g. prices, with perceptions and/or expectations can lead to self-fulfilling prophecies, including crises. Complementarity between a product and corresponding expertise, e.g. a QWERTY keyboard and its skilled users, leads to technological lock-in—especially important nowadays, with “network effects” when an app is widely used, thereby excluding competitors. Interaction between competitors is an arms race, where each participant tries to stay ahead of rivals, e.g. in reducing unit costs; the possible advantage of each is constantly eroded, but the aggregate result is a long-term fall in costs, and hence also in prices; growth occurs because more is produced with the same resource inputs. Other systems phenomena also occur, e.g. the prevalence of power laws. All these systems phenomena provide microfoundations that causally connect the micro- and macro-levels.