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Control theory applied to business cycles.

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gussosa Posted: Tue, Feb 19 2008 10:22 AM

I am studying for an exam on Control Theory (the mechatronics stuff) and it came to my mind that I could prove (showing the absurd) the impossibility of controlling economic cycles.

My first idea was to demonstrate that when central banks or economic ministers try to control the economy they are actually just trying to change some variables to control noise (i.e. uncertainty or normal fast variations) and not the actual signal. I always get that impression when I hear they say they want to lower the unemployment by 2% or pump the dollar up by a 10%, all in matter of months or even days.

Then I realized that counter-cycle politics (their favourite recipe) just increase noise and accelerates the sucession of business cycles, thus raising uncertainty. More than everything, because they know so little about the economy (very little can be measured and even less can be controlled) they can't create a valid model, so they are just throwing stabs in the dark.

Are there any books on the subject? I just don't want to reinvent powder. 

Any book dealing with control theory in economics? 

Pity the theory which sets itself up in opposition to the mind!

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Solredime replied on Tue, Feb 19 2008 12:21 PM

I'm not exactly versed in mechantronics, though I was certainly interested when I found out a subject such as biomechatronics existed. Probably very interesting to study either one of the two.

The only thing I was going to say is that the economic cycles themselves, as described by ABCT theory, are entirely caused by the monetary system of credit expansion. I have yet to see any serious reasons to believe that any cycles would exist without fractional reserve banking and artificial interest rates. Of course, events such as wars don't count because they're not cyclical, not would their idiosyncrasies be so similar every time these destructive events occured.

So when trying to prove the impossibility of controlling economic cycles, make sure you have in mind the ABCT, and that it is entirely plausible that they would be absent without the current monetary system. Basically, governments not only try to implement anti-cycle policies, they also create them.

The idea of noise is very interesting though. 

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I wonder if the ABCT couldn't be understood under the wider notion of price controls, and perhaps even subsumed under the calculation argument. Has any Austrian attempted to show something like this?

 

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ccathey replied on Tue, Feb 19 2008 3:49 PM
Gussosa- When I was studying control theory for my MS and BS, I had questions about modeling econ. control problems with the same tools I used in class and I came to the following conclusions based my reading of Austrian Econ: 1)  Physical systems do not make choices and can therefore be mathematically modeled with some degree of accuracy.  People do make choices and as a result the math models break down after awhile.  It is possible to look at people collectively and generate a better model, but even these break down.  Gene Callahan (I think) has a pretty good discussion of forecasting models breaking down - being continually updated and monitored in financial markets.  And I think Roger Garrison has another pretty good discussion of how these models tend to fall apart during crises - when they are need the most.  But as an engineer - it boils down to the fact that for a particular voltage and current a motor will deliver a particular speed and torque, but a person placed in a particular store with a particular amount of cash won't repeatably do the same thing.2)  Feedback from a physical system has a constant meaning, but economic statistics don't.  For example, voltage from a tach always relates to a particular shaft speed, but CPI doesn't always relate to a particular price level that is relevant to most people.  There are plenty of discussions on www.mises.org as to the problems with CPI, but a summary of what I found important:a)  Political manipulation of the index.b)  Failure to account for quality of goods changes in an open and repeatable manner.c)  Failure to control for technology life cycle.  Lets assume personal music devices are included in the CPI, at what point in the product life cycle do you switch from CD players to MP3 players?  If you switch early, then the index reflects the drop in price of MP3 as a result of production ramp up.  But if you switch late, then the index reflects the rise in price due to CD obsolescence.  Which is correct?'d)  Failure to control for changes in buying patterns.  IE... what is the correct ratio of food to transportation?e)  Failure to recognize that changing the definition of CPI means that you do not have a constant measurement reference3)  An important concept in controls is aliasing - sampling at a rate sufficiently high to capture the dynamics of the system.  Economic data is collected and published anywhere from daily to yearly and yet tries to model decisions that are made in minutes and hours.  This is particularly true during crises when stock markets can crash over a few hours.   4)  Feedback control requires a goal - steady state conditions and transient response.  How does a person develop those goals for a nation?  What should the CPI rate be, or the GDP, or the trade imbalance or the per capita income?   All of the above is just a simplified restatement of the calculation problem that Mises and Hayek pointed out in the 1920s and that modern Austrians like Garrison, Block and Salerno have been talking about for at least a decade that I have personal knowledge of. C. Cathey

 

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Kirznerian replied on Tue, Feb 19 2008 11:08 PM

gussosa:

Are there any books on the subject? I just don't want to reinvent powder. 

Any book dealing with control theory in economics? 

 

These arguments were made more than a half century ago, in different form, but with the same substance.  Hayek's books about the monetary theory of the cycle are a good example.
 

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Kirznerian replied on Tue, Feb 19 2008 11:14 PM

ccathey:
1)  Physical systems do not make choices and can therefore be mathematically modeled with some degree of accuracy.  People do make choices and as a result the math models break down after awhile.  It is possible to look at people collectively and generate a better model, but even these break down.  Gene Callahan (I think) has a pretty good discussion of forecasting models breaking down - being continually updated and monitored in financial markets.  And I think Roger Garrison has another pretty good discussion of how these models tend to fall apart during crises - when they are need the most.  But as an engineer - it boils down to the fact that for a particular voltage and current a motor will deliver a particular speed and torque, but a person placed in a particular store with a particular amount of cash won't repeatably do the same thing.


 

And these choices cannot be put in a model because humans are too complex to be modeled.  But if you had all the data, it would be possible.

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ccathey replied on Wed, Feb 20 2008 2:01 PM

Kirznerian:

And these choices cannot be put in a model because humans are too complex to be modeled.  But if you had all the data, it would be possible.

 I disagree, if only because any such model would have to assume that humans don't choose, don't have free will and all outcomes are predestined.  The debate over free will vs predestination is a long one that won't be settled here, but as I understand Mises and the concept of human action:<p>1)  The fact that we act implies that we choose - at the very least we choose to act or not. <p>2)  The fact that we act implies that the future is uncertain (ie we can change the future by our actions).  Since the future is uncertain, that implies that the actions of other actors are unknown.  This can be attributed to purely a knowledge problem (which I understand was the thrust of Hayek's argument) or, if we assume that the actors are like ourselves, then the uncertainty can be attributed to choice. <p>CC

 

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macsnafu replied on Wed, Feb 20 2008 9:56 PM

Inquisitor:
I wonder if the ABCT couldn't be understood under the wider notion of price controls, and perhaps even subsumed under the calculation argument.

Now that is an interesting idea.  Since the market process is a discovery process, any coercive action that interferes in that process necessarily undermines economic calculation, distorts economic information, and creates economic "noise" or static. 

 

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Inquisitor replied on Wed, Feb 20 2008 10:13 PM
Well it seems intuitively plausible to me - I just wonder if it hasn't already been investigated.

 

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gussosa replied on Thu, Feb 21 2008 3:09 PM

Inquisitor:
Well it seems intuitively plausible to me - I just wonder if it hasn't already been investigated.
 

Exactly my problem. I am looking for a subject that hasn't been investigated over and over. 

Pity the theory which sets itself up in opposition to the mind!

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