Electronic Design

Economics For Engineers Is A Branch Of Psychology

I maintain that I'm the only one I know who doesn't understand economics. This entitles me to speculate without claiming that I know what I'm talking about. Here are some hypotheses that I invite you to criticize:

We are in the longest and greatest period of prosperity in American history. And, it keeps growing despite the efforts of the Federal Reserve to slow it down by increasing interest rates. How come?

First, the business cycle is an oscillating feedback control system. Information about sales is fed back, with some delay, to managers who then command production, purchasing, and finance. There are delays in production, in purchases, and in transit. There are storage delays in inventories, in work-in-process, as well as in transportation. Furthermore, information and communication errors and delays occur everywhere. Judgement errors are made by managers due to confusion in interpreting the data that they do receive.

To controls engineers, this is a description of a wildly oscillating system, which it is, named the "business cycle." When these controls engineers face an oscillating system, such as a ship steering control that's making the ship yaw back and forth, they work to reduce time delays and noise (inaccurate and erroneous signals) and to reduce as many human judgements as possible to formulas.

This is exactly what computers and fast and accurate communications and calculations have been doing to businesses. And, they have been doing it better and better every month. That, in turn, is having the same effect as correcting the ship steering control, which is eliminating the business cycle and generating our steady-state prosperity.

Also, there has been an explosion of initial public offerings of stocks in new corporations (the "dot-coms"), which claim to be genuine profit-making businesses with the profits to come. Promoters have become instant millionaires from selling their promotional stock for money provided by the purchasers of that stock, instead of from money earned by their hypothetical businesses. Some of these businesses are genuine innovations based on the communication power of the Internet. But many merely hope to transfer sales from established businesses to themselves without creating any new products or services.

This situation, based on ignorant enthusiasm by investors, stimulated by brokers and journalists, is a classic bubble waiting to be burst by a wave of disillusion. The classic book on the subject, which describes the Tulip bubble, the South Sea bubbles, and others, is Extraordinary Popular Delusions And The Madness Of Crowds, by Charles MacKay (Words-worth Editions Ltd., 1999). Another recent book is Famous First Bubbles: The Fundamentals Of Early Manias, by Peter Garber (MIT Press, 2000).

I speculate that economics is really a branch of psychology. Every economic decision made by every individual is based on his prediction that either he or his organization will benefit from it. That prediction is based on the individual's mood of optimism or pessimism and is rationalized by plain or fancy economic analysis or arguments. The swings in stock market prices are the clearest illustrations that I know. Both of those moods are determined by the facts that the individual knows, the economic theories he or she believes, the moods promulgated by the news media, and the persuasion of that person's brokers. Please send your arguments to me.

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