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The 21st-Century Case for a Managed Economy

The role of disequilibrium, feedback loops and scientific method in post-crash economics

By Sean Harkin

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eBook £17.99 / $21.99
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The 21st-Century Case for a Managed Economy

The role of disequilibrium, feedback loops and scientific method in post-crash economics

By Sean Harkin

Jacket text

This book argues that the scientific concept of feedback – the idea that change in some element of a system can cause further change in that element – represents a general concept of economic change. Positive feedback causes runaway change, such as a market bubble, inflation or long-run growth, while negative feedback causes stability and stasis. Emphasising both kinds of feedback stands in contrast to the equilibrium theories of classical economics which, in effect, emphasise negative feedback only. In practical terms, the feedback perspective implies a need for extensive government involvement in the economy to suppress undesirable feedback effects – such as those causing wild instability or self-perpetuating inequality – while supporting desirable feedback effects – such as those causing economic growth.

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For decades, free-market economists have told a consistent story. Markets are rational, efficient, stable and fair, and even volatile financial markets should be left mostly to their own devices. The economic crisis that began in 2007 has, however, disproven such belief in the perfection of markets.

The reason market fundamentalism fails is simple: it is built on economic theories that incorporate only one half of how the economy actually operates. These theories focus on a concept of long-run equilibrium that sees the economy as being continually drawn back to balance after any change from this position, in a form of what scientists would call negative feedback.

However, there is also positive feedback; a process whereby a given change amplifies itself until the system is driven far from equilibrium, and this phenomenon is equally visible in the economy. Positive feedback drives economic growth, speculative bubbles, inflation, recessions, deflation and self-perpetuating inequality. It is what gives us the secular trends and cyclical fluctuations we observe in the real economy. And it deserves to be a central part of our economic theory.

This book makes a first attempt at applying the concept of feedback to economic theory and economic policy. It recognises that the state must support desirable feedbacks while suppressing undesirable ones. But it also recognises that central planning leads to oppression and inefficiency. This leads us back to the common-sense idea of a mixed economic system in which the role of the state is almost as great as that of the market.

About the author

Sean Harkin is a risk manager working in the City of London. He specialises in quantitative analysis of financial and economic data and has worked on structured finance, sovereign debt, bank capital and other areas. Sean was previously a research scientist working in the field of cell and molecular biology. He holds an MPhil from University College London and a BSc from the National University of Ireland.

Media coverage

From European CEO Magazine:

Markets do not always work well. They need guidance. Seán Harkin, a research scientist turned risk manager, makes the case for a mixed economic system where the role of the state is almost as great as that of the market. ?Feedback?, positive and negative, plays a significant role. Change in the system is either ?driven?… Read more »

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From worldfinance.com:

Stimulus Versus Austerity: The Need To Balance Risk- World Finance16th August 2010

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From worldfinance.com:

Feedback Economics – Ideas from systems science show that governments must manage the market- World Finance21st June 2010

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From europeanceo.com:

“There is much learning in these pages and Harkin?s prose is commendably uncluttered given the subject matter. Its arguments, never lacking enthusiasm, deserve a wide audience.”- Reading Club, European CEO Magazine26th May 2010

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Contents

About the Author
Acknowledgements
Preface

Part One: Foundations
1. Introduction: Disequilibrium and the Logic of Feedback
2. From the Old to the New

Part Two: Feedback in Action
3. The Business Cycle: How Feedback Drives Economic Volatility
4. Depression and Hyperinflation: Extreme Examples of Feedback
5. Two Modern Crises as Feedback Loops

Part Three: Policy
6. Counter-Cyclical Policy
7. The Limitations of Counter-Cyclical Policy
8. Counter-Cyclical Policy in a Globalised World
9. Harmful Effects of Counter-Cyclical Policy
10 Growth and Inequality as Feedback Processes
11. Conclusion: The Need for Change

References
Index



Published: 25/04/2010
Edition: 1st
Pages: 258
Formats: paperback - ISBN 9781906659547
ebook - ISBN 9780857191212
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