LETTERS TO THE EDITORS
Fantasy Is Reality
To the Editors:
British fantasy author Terry Pratchett’s 2007 Diskworld novel, “Making Money,” features a clone of A. W. H. Phillips’s MONIAC that Brian Hayes described in his column “Everything Is Under Control” (May–June 2009). Called “the Glooper,” this fictional machine models and predicts the flow of money through the economy of Ankh-Morpork, the Diskworld’s largest city. When carefully adjusted, it also controls that flow. Realizing this, the Glooper’s operators conclude that turning such a device over to the government would place it in the wrong hands. Obviously, that’s fantasy.
To the Editors:
Brian Hayes’ marvelous article in your last issue explained how modern control theory can be applied to the economic process. I have never observed any current economist make mention of this approach, despite those earlier efforts. Two important factors must also be recognized.
Adam Smith’s well-known assumption that demand will fall when prices go up, thereby bringing prices back down, implies a basically stable system. This philosophy was enthusiastically embraced by Milton Friedman and his disciples with the view that markets are self-correcting. But this principle applies to only a limited number of situations. In a generally rising market, people may buy in panic before prices rise further, creating increased demand and further price rises. Or they buy stocks, hoping to profit on the rising market, driving prices up further until saturation. The same happens in reverse. The fact is that human behavior makes the system basically unstable. Yet, just as it is easy to balance a broom on one’s finger when it is near equilibrium, actions by the Federal Reserve have effectively controlled the U.S. economy when it is near equilibrium. When there is a large departure from equilibrium, however, violent corrective action must be taken, or the system collapses (the broom falls). Markets, then, self-correct by saturation and catastrophe.
The second factor is the effect of an amplifier. Hayes does mention that if the gains of the controller are set too high, it can drive the system toward instability. What is not mentioned is that there is a huge gain buried within the “production” part of his block diagram. That gain is credit, a critical part of a thriving economy. We are seeing now how excessive credit can drive the system to instability.
Herbert I. Flomenhoft
Palm Beach Gardens, FL
Mr. Hayes responds:
Herbert Flomenhoft calls attention to an important issue: Positive feedback loops could make an economy inherently unstable. An unstable process is not necessarily uncontrollable, but it does require greater alertness. (When you ride an unstable bicycle, don’t take your hands off the handlebars.)
What’s most worrisome about the mechanisms Flomenhoft describes is that they make prediction so problematic. If rising prices could either diminish demand or augment it, economists attempting to maintain a steady state would have a hard time knowing how to respond.