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Evan Davis on.... negative feedback loops

Updated Saturday 7th March 2009

The Bottom Line presenter Evan Davis wonders if fear of a stuck economy can become a self-fulfilling prophecy.

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Copyright The Open University

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There’s something to be very scared of in an economy. It’s called a negative feedback loop. It’s where one thing leads to another that then causes the first thing and, if the one thing is bad and leads to something else bad, you can get into a horrible vicious circle that tears the economy down.

Now, an interesting question is whether gloomy sentiment has that vicious circle feature to it? - whether it becomes self-fulfilling, that we feel bad which makes us act in a way that brings the economy down that makes us feel even worse?

Business clearly worries that that phenomenon exists, that maybe, if we talk too much about how badly the economy’s doing, we’ll make it do more badly. And we got a rather interesting example in the discussion about how that might happen; it’s the hibernation factor.

If businesses think the recession will be short-lived, then they’ll carry on spending on education and training and research and development and investment; the economy maybe won’t do that badly. If, however, we talk them into a very gloomy mood, they’ll hibernate for two years. They’ll batten down the hatches, cut everything unnecessary, survival will be the only name of the game and they’ll simply, sort of, disappear for two years until the economy turns up.

If businesses hibernate, well the economy will be vastly worse than it would otherwise be. And it’s that ability of the way we talk about the economy to drive the strategies that people respond to it with, and then to deliver the outcomes that are the very ones we fear... I think it’s that chain that makes business, well, very annoyed sometimes at the very gloomy way in which we talk about economics and the economy.

 

 

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