Op amps and the profit motive

Reading Hayek has fired some neurons in directions not directly related to what Hayek has to say.  

I have found myself reflecting on the analogy between op amps and the profit motive.

I am not really an electrical engineer, though I did my share of playing around with circuitry as a youngster. In addition to Threepio, I once invented a noise-emitting diode. Pretty simple, actually; forward-bias the diode in a high-voltage circuit where it was supposed to be reverse-biased. It emits a sharp burst of noise, not to mention puff of smoke, but it’s only good for one duty cycle.

I grew up at the right time to play around with op amps as a young Jedi. An op amp is a pretty clever little device. It’s basically a really high-gain amplifier, but designed to amplify the voltage difference between two inputs. Turns out ordinary high-gain amplifiers tend to be noisy, inaccurate, and unreliable, and an op amp is no exception. However, when you feed part of its output back into one of the inputs, the reverse feedback transforms it into a wonderfully noiseless, accurate, and stable amplifier. The trick is that any tiny difference between the inputs produces a huge (albeit noisy) difference in the output, which, when fed back to one of the inputs, rapidly adjust the output until the inputs are precisely matched.

It occurs to me that the profit motive is similar in operation.

Profit margins are usually pretty narrow. I’m reliably informed that the average grocery chain operates on a profit margin of less than a percent. Even a powerful, unscrupulous, rent-seeking monopolistic outfit like <redacted on advice of counsel> never claimed more than about a 24% profit margin, though this was enough to give Congress the vapours. As it probably should have, but that’s somewhat tangential.

But profit margins are also usually pretty volatile. A slight change in the difference between the income and expenses of a firm can transform it from a top performer making millions a year into an investment disaster losing millions a year. This provides an enormously powerful motive for the executives of the company to make fine adjustments to the expenses and incomes to bring them back into balance.

An op amp expends a tiny fraction of its output power to provide its necessary feedback. A firm likewise expends a relatively small fraction of its balance sheet as profits that provide the necessary feedback.

One important difference is that I’ve never seen an op amp engage in rent seeking — attempting to nail its output at a guaranteed small positive balance in order to eliminate the risk of a negative balance. Plenty of firms would be happy to settle for a small guaranteed profit, a “fair return” if you will, to avoid any risk of loss. But that’s sheer idiocy, since it completely misses the point of the profits as a feedback mechanism.

Of course, profits are not as enjoyable a feedback mechanism as the threat of having the living sin choked out of you by an irritated Sith Lord. From the point of view of said Sith Lord, I mean, of course. But His Majesty only has one of me, and I can’t be everywhere at once.