Stocks and flows become a system when they talk to each other. The level of a stock often affects the flows that fill or drain it. A large population produces more births; a hot room makes a thermostat switch off the heater; a crowded road discourages some drivers from using it. These closed chains of cause and effect are called feedback loops, and they explain most of the behavior that makes systems interesting.

Two kinds of loop

Systems thinkers sort feedback loops into two kinds. A reinforcing loop amplifies change in whichever direction it is already going. Money in a savings account earns interest, the interest is added to the balance, and the larger balance earns more interest. Reinforcing loops can also run downhill. A struggling town loses jobs, young people leave, the tax base shrinks, services decline, and more people leave.

A balancing loop pushes a stock toward a goal or a limit. A thermostat compares room temperature with its setting and switches the heat on or off to close the gap. A shopkeeper notices empty shelves and orders more stock. A person eats until no longer hungry. Balancing loops are the source of stability, and also of resistance: a system full of them tends to return to where it was after a push.

Growth that feeds on itself

Because a reinforcing loop adds to its own base, it produces growth that keeps accelerating, since each gain enlarges the base for the next one. This is exponential growth. A handy rule of thumb says that something growing at a steady percentage doubles in about 70 divided by that percentage, so a city growing 7 percent a year doubles in about ten years and quadruples in twenty.

Reinforcing loops also shape fairness. The sociologist Robert Merton borrowed a line from the Gospel of Matthew, "unto every one that hath shall be given," to describe how well-known scientists receive extra credit for work that lesser-known colleagues do equally well. Systems thinkers call the general pattern success to the successful: early advantages compound, so those already ahead tend to pull further ahead. Children who read well early read more, learn more words, and find reading easier still. Nothing in the loop is unfair by design, yet without some balancing force it can turn small differences into large inequalities.

Vicious and virtuous circles

Ordinary language already has names for reinforcing loops. A vicious circle is one running in a harmful direction: poverty and poor health can worsen each other, because illness costs income and low income makes illness more likely and harder to treat. A virtuous circle runs the other way: better schooling raises earnings, which pay for better schooling for the next generation.

The run on the bank

One of the fastest reinforcing loops in economics is the bank run. A bank lends out most of what depositors put in, keeping only a fraction on hand. That works as long as depositors do not all want their money at once. But if doubts spread, each withdrawal makes the bank look weaker, which prompts still more withdrawals. The fear becomes self-fulfilling. Deposit insurance, which guarantees savers their money up to a limit, is a balancing force designed to cut this loop: if your deposit is safe whatever happens, you have less reason to rush.

Which loop is in charge

Real systems contain many loops at once, and which loop dominates a system's behavior can change over time. Systems thinkers call this shifting dominance. A new product spreads by word of mouth, a reinforcing loop, until most people who want it already have it; then a balancing loop takes over and sales level off. An epidemic grows fast until immunity, behavior change or treatment begins to dominate. Many forecasting mistakes come from assuming that the loop driving today's trend will drive it forever.

Worked example: Silicon Valley Bank, March 2023

Silicon Valley Bank served technology start-ups and the investors who funded them. Much of its depositors' money sat in long-term bonds, which lost value as interest rates rose. Most deposits were far above the insured limit, so the insurance brake was weak. On March 8 the bank announced a loss on bond sales and a plan to raise capital. Investors and founders, closely connected through group chats and social media, began telling one another to pull out. On March 9 customers tried to withdraw about 42 billion dollars, roughly a quarter of all deposits, in a single day. Regulators closed the bank on the morning of March 10.

Apply the ideas. The stock is deposits; the outflow is withdrawals. The loop is reinforcing: withdrawals weakened the bank, news of the weakness spread, and spreading news drove more withdrawals. Dense communication sped up the loop, so a run that once took days took hours. The balancing loop that should have held, insurance, covered too little of the money to matter. Regulators then guaranteed all deposits, a move that cut the loop but raised a new question, debated ever since, about whether such guarantees encourage risky behavior next time.