Analog Designer and control engineer Bob Pease and I have had a discussion or two via e-mail about control theory and control engineering. So when I came across a bit by him in a back issue of Electronic Design on how control control theory relates to how the Federal Reserve ought to control the money supply, I was interested. Here is what Bob had to say about the Fed:
FINANCIAL FLOOBYDUST * Switching gears, Alan Greenspan has admitted that he screwed up and had a bad model for the economy. He claims he misunderstood what was going to happen. What did Spice suggest for him to do? I coulda told you that Greenspan was not doing a good job on his PID controller.Notes: SPICE is an electronic circuit simulator. And you might like a general overview of PID controllers. For reasons I'm not going to go into here this is my favorite mathematical model of a PID controller.
He waited too long to start decreasing the interest rates, and then he decreased them too slowly. I noticed that at the time! Then, by leaving the interest rate at 1% for too long, he got the ARMs to start out too low. And then when the rates went up, the subprime mortgage holders got whip-sawed.
This is exactly how you make a limit-cycle oscillator! In other words, Mr. Greenspan did not have enough D (derivative) term in his controller, and he failed to anticipate new problems. And he had too much gain in the I (integral) path. I can do this any day, on my bench, but I don’t destroy a nation’s economy.
No, I don’t want to take over Greenspan’s job. I don’t want that job. But I could still do it less badly.
In private conversations with friends who are interested in economics I have maintained for years that economists are ignorant of control theory, treat all economics problems as if they are a calculus problem that can be solved in the limit, and ignore the short term dynamics of our economic plant. Which is to say they are looking for equilibriums rather than dynamisms. I read an economics paper once that said that if you follow the right path - not too much of this or too little of that - you will get optimum results. Assuming of course that the right path can be known in advance. But what if you don't know the right path in advance? Well then you are in need of a control system tuned to the economy that will tell you when and how much to correct your inputs to give a close enough approximation to the ideal path. And if your control system is not properly tuned? Well it will wreck the economy.
We do have a control system and it is not properly tuned. Welcome to the current wreck.
You can read more of my thoughts about control theory and economics at this posts: Economics Made Simple
Here are a few pages of books on Control Theory and Economics.So it is not as if there has been no thought about the problem before. The problem in my estimation is that these books have not influenced practicing economists much. Pity. For all of us.
Cross Posted at Classical Values