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Everything Is Under Control

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

Brian Hayes

An Invisible Hand on the Controls

Even without any external controls, economic systems are laced with multiple feedback loops. Adam Smith’s price mechanism is the best-known example: When demand exceeds supply, prices rise, thereby curtailing demand and allowing prices to fall back toward their original level. This is a negative-feedback loop, which has a stabilizing influence. Other loops introduce positive feedback, as with the inflationary spiral: Rising prices bring demands for higher wages, which lead to still higher prices.

Smith believed that built-in feedback mechanisms are the best possible regulator of an economy; left alone, the system will find its own equilibrium, balancing production and consumption. Keynes agreed that economies tend toward equilibrium, but he pointed out that the same economy might wind up at many different points of equilibrium. A thriving economy has a high level of production balanced by a high level of consumption; for a depressed economy, supply and demand remain in balance, but both are at lower levels. The aim of Keynesian economic policy is to nudge us from a recessionary equilibrium toward a more prosperous one.

Keynes did not formulate his ideas in the vocabulary of control theory, but some of his followers did. Phillips took this approach not only in the design of the MONIAC but also in later essays that explore PID control laws for economic variables. At about the same time, Arnold Tustin, a British engineer, published a treatise on “the problem of economic stabilisation from the point of view of control-system engineering.” These works and a few others from the same era include block diagrams and stability graphs that would be perfectly at home in a text on industrial control problems.

With the advent of optimal control a decade later, there was another surge of interest in control theory as a tool for solving economic problems. In the early 1970s a series of joint conferences brought economists together with control engineers, and dozens of publications explored the synergies of the two disciplines. Furthermore, the Federal Reserve began experimenting with control-theory methods in the suite of statistical and mathematical tools that inform its policy deliberations. A 1974 review article by Michael Athans of MIT (a control theorist) and David Kendrick of the University of Texas at Austin (an economist) remarked on the atmosphere of excitement in a new interdisciplinary area that seemed to have bright prospects.

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