December 28, 2016    3 minute read

A Rethinking Crescendo: Positive Feedbacks In The Economy

Determining Market Behaviours    December 28, 2016    3 minute read

A Rethinking Crescendo: Positive Feedbacks In The Economy

It is critical to learn about the positive feedback in the economy since it shaped the way one looks at economics, from a stable, well organised and oiled to a much more variable and complex system. The old economic vision, which refers to conventional economics, focuses on diminishing returns within a system. The former enhances the idea of the best market outcome under any circumstances generated by a single equilibrium operating in the open market phenomenon.

The Negative Feedback Loop

The diminishing returns assumptions lead to a negative feedback loop that stops the trigger towards a more produced outcome. Since it directs to a predictable price and market share for a company in the microeconomics level or a nation in the macroeconomics level, it is far from being a complete knowledge-based system. It prefers the idea of the best resources allocations within the single equilibrium.

In contrast, the new theory on a particular economic alternative suggested by Brian Arthur focuses on the increasing returns assumption. In fact, the recent focuses on complexity economics which is more emerging in reality than the conventional theory. The increasing returns assumptions reflect that the market may not select the best outcome from a variety of different alternatives.

It reflects that the economic environment is more complex and uncertain in a single outcome than conventional theory is. The market is volatile under the increasing returns assumptions since economics is about human action and the behaviour of economic agents plus their interactions within a market. So, this economics type of view is a knowledge-based science to cover most of the solutions referring to an individual problem that the economic system may face.

Understanding The Small Events

As Brian Arthur stated: “when you mathematise something, you distill its essence”. Indeed, this new theory, dating back to the 90s, was useful for high technology companies to understand that the market could be shifted by small, random events, luck, or a little external circumstance. Arthur declared in a Scientific American paper that economic activity is quantised by individual transactions that are too small to observe. Furthermore, the increasing returns assumption relies on a positive feedback loop which counts on the idea that a slide off output could be fed back to the process resulting in a trigger case; actions within a system go in the same direction.

Economics with its different theories that reflect different scientists points of views could be entirely useful if one could know from the beginning what the positive solutions are in adopting certain problem-solving cases for companies or nations. In fact, looking backwards seems very different than looking forward in a single case since the paths of a company or a government could be very different.

The Effect

For that reason, agents tend to look backwards in order to find the wrong path that was taken or to develop the assumptions that led to the right track chosen in the first place. That is the complex system within economies; small changes will certainly lead to bigger effects.

Brian Arthur took the initiative so the different market players could assume that their behaviour is entirely harmonious with the pattern that they created within the economic system in the first place, then stow the filter that they could implement on what they see regarding the market’s equilibria outcome.

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