The concept of homeostasis

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from Ken Zimmerman  (originally a comment)

On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes … These economists did not, of course, believe that the system is automatic or immediately self-adjusting, but they did maintain that it has an inherent tendency towards self-adjustment, if it is not interfered with, and if the action of change and chance is not too rapid.

Those on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting. They believed that the failure of effective demand to reach the full potentialities of supply, in spite of human psychological demand being immensely far from satisfied for the vast majority of individuals, is due to much more fundamental causes …

This begs the question, what is self-adjusting? Rather than go down that rabbit hole, I prefer to begin with a concept with a long and useful history that thus might benefit economics and economists—homeostasis.

I begin with this from the journal article, ‘Exploring the concept of homeostasis and considering its implications for economics’ (Antonio Damasio, Hanna Damasio).

In its standard format, the concept of homeostasis refers to the ability, present in all living organisms, of continuously maintaining certain functional variables within a range of values compatible with survival. The mechanisms of homeostasis were originally conceived as strictly automatic and as pertaining only to the state of an organism’s internal environment. In keeping with this concept, homeostasis was, and still is, often explained by analogy to a thermostat: upon reaching a previously set temperature, the device commands itself to either suspend the ongoing operation (cooling or heating), or to initiate it, as appropriate. This traditional explanation fails to capture the richness of the concept and the range of circumstances in which it can be applied to living systems. Our goal here is to consider a more comprehensive view of homeostasis. This includes its application to systems in which the presence of conscious and deliberative minds, individually and in social groups, permits the creation of supplementary regulatory mechanisms aimed at achieving balanced and thus survivable life states but more prone to failure than the fully automated mechanisms. We suggest that an economy is an example of one such regulatory mechanism, and that facts regarding human homeostasis may be of value in the study of economic problems. Importantly, the reality of human homeostasis expands the views on preferences and rational choice that are part of traditionally conceived Homo economicus and casts doubts on economic models that depend only on an “invisible hand” mechanism.

This clearly lays out how homeostasis can apply to economic arrangements (institutions). These are regulatory mechanisms aimed at achieving balanced and thus survivable life states but not via any automatic or automated processes. In other words, economics is a regulatory process that helps but does not guarantee human success or survival. It promotes homeostasis.

Constructing ‘gadgets’ like IS-LM macroeconomic models, or, for that matter any mathematical model is not just useless but destructive of all efforts to create such an economy. By this the result is direct threats to the survivability of our species. Economic institutions that do not regulate leave the door open for disaster.

This brings us to the question of the point of the regulation. Do economic institutions regulate to maintain themselves or to protect our species? Currently, most regulate to protect themselves and the small minority of humans that benefit from them. Reversing this is one of major projects of our time.