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Everything Is Under Control

Can control theory save the economy from going down the tubes?

Brian Hayes

Engineering the Economy

The principal architect (and plumber) of the MONIAC was A. W. H. Phillips, a New Zealander who had been an electrical engineer before he turned to economics. It’s easy to see the influence of his engineering background. A hydraulic simulation of the economy makes sense only if you believe that the circulation of money through a society obeys definite, mathematical laws, like those that govern real fluids and other physical systems. And the crank-wheels and cams on the MONIAC imply that the behavior of an economy is not only predictable but also controllable. If we twiddle the knobs and nudge the levers in just the right way, all the streams will flow smoothly and the various basins where wealth accumulates will never run dry or overflow.

This notion of engineering an economy was and is controversial. Adam Smith and other classical economists had argued that markets are self-correcting; meddling with them can only impair their efficiency. By the 1930s, however, the British economist John Maynard Keynes was making a case for a specific kind of intervention by governments and central banks: They could and should act to stabilize economies, he said—to smooth out cycles of boom and bust. Phillips was one of Keynes’s many followers.

The basic idea in Keynesian economic policy is to counteract any oscillatory tendencies. When an economy overheats, with business activity growing at an unsustainable pace, the central bank raises interest rates and thereby restricts the money supply. At the same time, governments raise taxes or reduce spending, which also cools the economy. Conversely, when business slumps, the aim is to spur growth by lowering interest rates and by letting the government run a deficit, spending more than it takes in through taxes.

Keynes has gone in and out of fashion, but even many of his detractors now accept the idea that controlling wild excursions of the business cycle is an appropriate policy goal. In the current economic downturn, it is taken for granted that governments will do their best to speed recovery and mitigate damage. In the U.S., both the recently departed Republican administration and the new Democratic one have enacted huge “stimulus” plans, and the Federal Reserve has cut interest rates to near zero. Everyone waits anxiously to see how well these measures will work.

The economics profession, naturally, has much to say about these matters, but there is another intellectual tradition that may also offer useful counsel: control theory, the branch of applied mathematics and engineering that deals with feedback systems. Devising a scheme to suppress oscillations, like those seen in the business cycle, is a common task for control theorists. The theory also identifies certain unfortunate situations where attempts to impose control can actually make matters worse, destabilizing a system that might otherwise have found its own equilibrium.

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