Are There Feedback Loops That Control the Economy?

From a general historical perspective, feedback control in economic systems is an easy question to answer. We are still not in the Great Depression of the 1930s, the Dot-Com Bubble, the Subprime Mortgage Crisis, the Great Recession or the COVID-19 Pandemic shocks. Somehow, we got out of these shocks and the Economy is growing again. 

Here is one oft-repeated quote from the Great Depression:

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

― Andrew Mellon

Andrew Mellon was Secretary of the Treasury in the US during the Great Crash. Although his reported statement to President Herbert Hoover  is second hand and  somewhat heartless, it is probably also somewhat accurate. Eventually, all the excesses that developed during the Roaring Twenties in the US were liquidated during the Great Depression. The economy returned to a growth path, possibly not until after WWII. Eventually, economic systems recover, even from the worst tragedies.

Market Fundamentalism agues that markets eventually clean up their own problems,  Prices and production collapse but eventually recover. We have to just wait the process out. While the adjustment process is happening, a lot of people's lives will be ruined, but that is unfortunate.

The causal diagram above (an expanded Kaya Identity) describes the role of the market in controlling aggregate production and prices. It is sometimes called the AD-AS model (Aggregate Demand-Aggregate Supply). It is the basis of market fundamentalism and can be applied to Labor Markets, Energy Markets and Carbon Markets. It has even been applied to marketable birth licenses by Economist Kenneth Boulding (here).

Unfortunately and to my knowledge, market fundamentalism has not been applied to the overall problem of Climate Change. However, a market for global temperature would not solve the problem. System Theory argues that there should be negative feedback between system outputs and system inputs. Again and unfortunately, there certainly is and it is called a preventive Malthusian Check on population growth.

If global temperature gets too high, many parts of the planet will become unlivable. And, however unlikely, the entire planet could become unlivable as a result of the Runaway Greenhouse Effect. There might be many other feedback loops in the system that will prevent a climate catastrophe from happening, but these effects are considered "speculative" by climate scientists (see Ripple, 2023 below).

Readings

• Ripple Many Risky Feedback Loops Amplify the Need for Climate Action
• Dong Human-Nature Feedback Loops
• Hicks Keynes and the Classics
• Bent Hansen A Survey of General Equilibrium Systems