Selected Essays of Axel Leijonhufvud
Chapter 12: Notes on the theory of markets
I In a 20-year old paper that has not gotten the attention it deserves, Richard Goodwin1 dealt with the market as a servo-mechanism or homeostat. A homeostat is a control device that regulates the behavior of a ‘machine’ on the basis of information about, and evaluation of, its actual past performance, that is, on the basis of feedback. The purpose of control is to bring actual performance into line with desired performance and this is done, in effect, through a process of trial and error. The application of these concepts to the question of the stability of the equilibrium of an isolated market is quite straightforward, but still worthwhile, I think, if you go slow – just throwing it out as a loose analogy, obviously, does not do anything for us. We will regard, then, the market as a device for ‘solving’ demand and supply equations by trial and error, that is, through an iterative process. It will help if we consider ﬁrst the very simplest kind of device. The illustration familiar to all is that of the thermostat (Figure 12.1). –1 ˆ T 1 ˆ ε =T– T 1 T E ˆ T = desired temperature (input into control device) T = actual temperature (the output) ε = observed error (to be brought to zero) E = ‘shift operator’ (marks the response of the control device) Figure 12.1 Diagram of a thermostat 221 222 Markets, ﬁrms and the division of labor In Figure 12.1, we have to the left an exogenous input – a desired value for the controlled variable...
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