The Dao of Capital: Austrian Investing in a Distorted World

Chapter Eight

Homeostasis

Seeking Balance in the Midst of Distortion

A homeostatic system, by its very nature, is always in flux, self-correcting when it strays too far in one direction or another. Never static, it is animated by a process of continuous discovery, balancing and rebalancing based on the information available through self-monitoring. Although the word homeostasis was not specifically used by the founding fathers of the Austrian tradition, its meaning is deeply embedded in this school of thought as is its observations about the functioning of the economy as it is pushed and pulled by entrepreneurial forces into and out of stationarity. Just as the Austrians anticipated many of the recent “discoveries” of behavioral scientists (in particular the work on hyperbolic discounting), we will see that the Austrian tradition describes the market process in ways very compatible with modern cybernetics—the study of communication and control within a system.

In its natural state, a system—from a forest to a market—achieves balance through internal governance and guidance, which depend upon the system’s own ability to internally communicate and react to changing conditions due to the interactions of a variety of players, whether buyers and sellers in a marketplace, trees and herbivorous predators (especially fire) in the forest, or entrepreneurs deciding when and how to become ever more roundabout to meet the ultimate demands of consumers. Within the system, errors will occur ...