Another condition, mentioned earlier in chapter 29, is required for markets to work in a predictable manner, and that is independence:
· buyers and sellers should be independent of each other, their only connection should be the transaction;
· buyers should be independent of other buyers; and
· sellers should be independent of other sellers.
In other words the activities of buyers should have no effect on the actions of other buyers or on the ability of sellers to sell, and the activities of sellers should have no effect on other sellers or on the ability of buyers to buy. This condition is one of the basic tenets of free markets and follows from assuming perfect competition, which is required by perfect markets and in turn assumes perfect information and the presence of many buyers and sellers.[147] With perfect information participants act only on that information, there is nothing to be gained from being influenced by what other participants do. Also with many buyers and sellers there is nothing to be gained from banding together with other buyers or sellers because they can't influence such a big market. However, as for many other such tenets, it never applies in the real world and without it some very unexpected things occur. Three markets where there are important dependencies are labour markets, discussed below, the bank lending market, discussed in chapter 52, and financial asset markets, discussed in chapter 57. The effects of the dependencies are hidden at the local level for labour and lending markets, but they become very evident at the national level where they affect the economy as a whole. In financial markets the dependencies are plain for all to see all the time, in spite of the Efficient Markets Hypothesis (EMH) which denies their existence - see chapter 29. Dependencies also arise when other fair market conditions are missing or weak. For example if there are high entry barriers for new suppliers then existing suppliers form cartels, which may be formal, informal or tacit, where their actions are coordinated so as to benefit them at buyers' expense.
Dependencies between things that change over time are commonplace in all spheres of human and natural activity. Scientists and engineers devote a great deal of time and effort to analysing and understanding the behaviour of dependencies, and engineers make use of them all the time. An example will hopefully illustrate the point. The speed of a car engine changes in response to changes in accelerator pedal position, but the position of the accelerator pedal does not change in response to changes in engine speed. Here engine speed is dependent whereas pedal position is independent. Technically, engine speed is known as a dependent variable (a variable is merely something that varies), and accelerator pedal position is known as an independent variable.
A special type of dependency is one where there is feedback. The word 'feedback' has two distinct meanings, the usual meaning of the term is for example in product information, where users feed back their experiences of using a product to potential buyers, and this information is known as feedback. The other, more technical meaning, is where the effect or output of a controlled process influences the control or input to that process. For example body temperature is regulated by negative feedback. Receptors in the skin and brain measure blood temperature, and if it differs from the required set point of 37OC the brain responds by switching on the appropriate responses - shivering and narrowing of surface blood vessels (vasoconstriction) if too cold, sweating and widening of surface blood vessels (vasodilation) if too hot. With negative feedback an increase in the output (body temperature) causes information to be fed back to the control centre to take action to reduce it, and vice versa for a reduction in the output. Negative feedback acts in opposition to the output, and such mechanisms tend to be stabilising - they keep an output in a stable state.
Potentially more dangerous are positive feedback mechanisms, which act to reinforce an output by increasing the input control when the output increases, and vice versa. These tend to cause instability, and whenever they are applied in practice to achieve specific results great care is taken (or should be) to ensure that the system in question remains stable, or that there is an overriding limitation on the output movement. An example of deliberate positive feedback in an engineered system is an electrical on/off switch. Here if gradually increasing pressure is applied to the switch an internal spring is put under increasing tension until it responds suddenly by changing the state of the switch from off to on or vice versa. In this case the extent of the movement is limited by the geometry of the device. Switches are engineered in this way to ensure that they can only be positively on or positively off and always change rapidly from one state to the other, without any vague intermediate state which could cause arcing between the switch contacts, leading to overheating and possible fire. An example of unwanted positive feedback is when a microphone is placed too near to a speaker, when the amplified speaker signal from the microphone is inadvertently picked up by the microphone itself and re-amplified to give a loud howl that has everyone covering their ears. This is relatively harmless, but there are many very worrying positive feedback effects in global warming, where human activities to date have produced greenhouse gases and planetary warming, but the warming itself threatens to release yet more greenhouse gases from within the earth without further human intervention.[148] These and other positive feedback mechanisms present the most potent danger from global warming because we don't know with any certainty just where any of the 'tipping-points' lie. A tipping point is the point at which the release of greenhouse gases from the warming earth causes enough additional warming to release yet more gases in an upward spiral that man is powerless to stop. Worrying or what?
The examples cited are relatively simple positive feedback mechanisms where output growth continues until limited by the characteristics of the system. More complex systems involve two or more competing elements, where growth in one causes decline in one or more of the others. Such systems tend to exhibit oscillations. A good example of this type of mechanism is provided by the behaviour of populations of predators and prey. If we start with a large population of prey and a small population of predators the predator population rapidly increases because it has a large food supply. However this causes the prey population to fall until it can’t sustain the predator population and the predator population begins to fall. As it does the prey encounters less predation so the prey population starts to rise again, and so it goes on, each population size oscillating, with predator oscillations lagging behind prey oscillations.[149] Engineered systems also often exhibit oscillatory instabilities, and measures are taken to control them so as to ensure that the outputs remain within the required ranges for the purposes that are served.
I believe the point about dependencies in market behaviour is worth labouring because it has such important consequences in economics. Bank lending and financial asset markets both suffer from positive feedback, and both exhibit oscillating instabilities as a result, the competing elements being lenders and borrowers in lending markets and buyers and sellers in financial markets. In these cases measures are rarely taken to control them, because as ever the markets themselves are believed to apply all the controls that are needed. These markets are discussed in chapters 52 and 57 respectively in Part 2.
Labour markets are different in that they are subject to a natural negative feedback effect, which can leave them stranded in low employment conditions for long periods, where there is work to be done, people able and willing to do it, but no-one willing to make jobs available to bring the two together. This effect was encountered earlier in chapter 16 and is discussed in detail in the next chapter.