ANNOUNCE PCT and an economic emergency
Posted: Sat Dec 06, 2008 7:54 am
Posted by ""Fred Nickols"" <nickols@att.net>
Bill Powers, creator of Perceptual Control Theory (PCT), a feedback or co=
ntrol
loop based view of human behavior, has grown concerned about some positiv=
e
feedback loops in the economic system and wrote a letter which I am passi=
ng
along. My guess is that the folks on the SD list have also spotted the s=
ame
loops. Anyway, I thought I=92d check reactions to Bill=92s letter on thi=
s list.
Regards,
Fred Nickols
Managing Partner
Distance Consulting, LLC
Control Systems Group Network (CSGnet)
[mailto:CSGNET@LISTSERV.ILLINOIS.EDU] On Behalf Of Bill Powers
[From Bill Powers (2008.12.05.0444 MST)]
This is a letter that needs to be conveyed to as many people who make eco=
nomic
decisions as possible. OUR ECONOMIC SYSTEM CONTAINS DESTABILIZING FEEDBAC=
K LOOPS
THAT CAN DESTROY IT. WE NEED TO FIGURE OUT HOW TO REMOVE THEM AS QUICKLY =
AS
POSSIBLE.
This is a true time bomb. It is perfectly obvious, and it is to my shame =
and
that
of everyone who understands the dynamics of control systems that it was n=
ot
noticed, publicized, and corrected long ago. It is very simple and we are
watching it operate every day that this recession deepens.
Its cause is some set of policies or principles that are thought to be ne=
cessary
to maintain the viability of a business, but which, when generally adopte=
d, have
the effect of exaggerating swings in the market and, if widespread enough=
, throw
the market into a state of dynamic instability that feeds on itself. Incr=
eases
in
market activity cause a piling-on effect which drive the increases even f=
urther
and induce more frenzied market activity. The same underlying relationshi=
ps work
the other way, too: when the market peaks and starts downward, this cause=
the
enthusiasm to wane and the market activity to slow down, and the slowdown=
causes
an even more dampening effect, which makes the slowdown accelerate. Which=
ever
way
the market tends to change, the change is exaggerated by this feedback ef=
fect.
The initial result when the amount of feedback is small is that the econo=
my
displays ""boom-and-bust"" cycles of relatively small amplitude, which die =
out
after a time. When the degree of this effect becomes large enough, the s=
wings
start to get larger and can enter a region in which a runaway effect occu=
rs.
Then
the only way to stop the growing oscillations is for something in the sys=
tem to
be damaged enough to reduce the feedback effect below the fatal threshold=
of
sensitivity.
One obvious destabilizing effect we are seeing right now is that companie=
s faced
with falling sales are laying off parts of their workforces to reduce cos=
ts and
preserve their net income. As the number of employed persons decreases, t=
he
total
income of the average consumer falls, so there is less money to spend on =
goods
and services -- the very spending that is the source of income for the co=
mpanies
who are laying off workers (and each others' customers). So we have the
situation
in which the attempt of companies to reduce expenses and restore their in=
come to
profitable levels has the effect of reducing, not increasing, the total n=
et
income of all companies. That leads to an increase in the attempts to red=
uce
expenses, and so on. If enough companies follow the same policy, there ca=
n be
only one outcome: total collapse.
This is probably not the only destabilizing feature in the basic relation=
ships
that make up our economic systems. It is only one obvious feedback loop w=
ith the
wrong sign. This is known technically as a positive feedback loop, one in=
which
small changes lead to larger changes, in contrast with the negative feedb=
ack
loop
in which small perturbations are negated by feedback effects and are imme=
diately
smoothed out. In popular usage ""positive feedback"" means encouragement an=
d
approval, but if encouragement occurs only when one is doing better and i=
s
withdrawn when one begins to do less well, the seeds of true positive fee=
dback
have been planted; at the first sign of doing less well, approval will de=
crease,
and the resulting lessening of encouragement will cause performance to de=
crease
even more, and so on to disaster. What works on the way up continues to w=
ork on
the way down. Changes in either direction are exaggerated by positive fee=
dback,
and the result is instability. If there is enough instability, the system=
will
destroy itself.
The cure for positive feedback and its destructive effects is to ferret o=
ut and
remove all the positive feedback loops. There should be little resistance=
to
doing this, because what will be revealed is the clear fact that actions
intended
to improve matters are actually making them worse. Any sane person will c=
ease
such actions even if their undesirability is not immediately explained or
understood. Once we step back and look at the overall relationships, the
instability that is caused by a wrong response to problems becomes obviou=
s. Then
the main issue is seen clearly: what do we need to change to prevent this=
sort
of
destabilizing feedback from occurring?
Stabilizing the economic system does not require telling people what to b=
uy or
what to sell, or for how much, or to whom. It requires intervention only =
when a
reaction to a change in economic activity, either upward or downward, res=
ults in
amplification of the change rather than smoothing it out. Just why this
amplification occurs has to be studied so the correct adjustment can be m=
ade. It
could be only that there is too much reaction to a change. It could be th=
at the
reaction is too much delayed, so what would have been a stablizing reacti=
on if
it
had occurred right away becomes destablizing when applied too late. Or it=
could
be that the intuitive reaction to a problem is exactly the reaction that =
will
make it worse, showing that there is a mistaken understanding of how one =
part of
the system affects other parts.
Reaching an understanding of instability in the economic system is no lon=
ger an
abstract goal of only academic interest. It is a necessity for our surviv=
al. It
requires a massive investigation and the efforts of many competent scient=
ists
who
know how to analyze and model large systems -- a Manhattan Project that w=
ill
finally unravel the mysteries of how the economic system works. We need t=
o
understand exactly what kind of technical public-sector interventions can=
be
brought to bear when the free market goes into free fall, without infring=
ing on
rights or imposing micromanagement on individual entrepreneurs and consum=
ers.
The
answer, at times, could be as simple as a slowing of changes similar to w=
hat the
stock market imposes when panic threatens an individual stock. Sometimes =
it
could
require rulings about policies which, if followed by enough transacting p=
arties,
threaten the entire system. Some existing regulations might prove to caus=
e more
of the problems they were intended to lessen.
The only way to find the answers we need is to construct a working model =
of the
economy, which requires studying it in sufficient detail to construct tha=
t
model,
and then, once consensus is reached, using the model first to reproduce t=
he
economic events that are so troublesome to everyone, and then looking for=
the
minimum changes required to prevent them from ever happening again.
Please forward this letter wherever you think it might do some good.
Bill Powers
Posted by ""Fred Nickols"" <nickols@att.net>
posting date Fri, 5 Dec 2008 07:30:54 -0700
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Bill Powers, creator of Perceptual Control Theory (PCT), a feedback or co=
ntrol
loop based view of human behavior, has grown concerned about some positiv=
e
feedback loops in the economic system and wrote a letter which I am passi=
ng
along. My guess is that the folks on the SD list have also spotted the s=
ame
loops. Anyway, I thought I=92d check reactions to Bill=92s letter on thi=
s list.
Regards,
Fred Nickols
Managing Partner
Distance Consulting, LLC
Control Systems Group Network (CSGnet)
[mailto:CSGNET@LISTSERV.ILLINOIS.EDU] On Behalf Of Bill Powers
[From Bill Powers (2008.12.05.0444 MST)]
This is a letter that needs to be conveyed to as many people who make eco=
nomic
decisions as possible. OUR ECONOMIC SYSTEM CONTAINS DESTABILIZING FEEDBAC=
K LOOPS
THAT CAN DESTROY IT. WE NEED TO FIGURE OUT HOW TO REMOVE THEM AS QUICKLY =
AS
POSSIBLE.
This is a true time bomb. It is perfectly obvious, and it is to my shame =
and
that
of everyone who understands the dynamics of control systems that it was n=
ot
noticed, publicized, and corrected long ago. It is very simple and we are
watching it operate every day that this recession deepens.
Its cause is some set of policies or principles that are thought to be ne=
cessary
to maintain the viability of a business, but which, when generally adopte=
d, have
the effect of exaggerating swings in the market and, if widespread enough=
, throw
the market into a state of dynamic instability that feeds on itself. Incr=
eases
in
market activity cause a piling-on effect which drive the increases even f=
urther
and induce more frenzied market activity. The same underlying relationshi=
ps work
the other way, too: when the market peaks and starts downward, this cause=
the
enthusiasm to wane and the market activity to slow down, and the slowdown=
causes
an even more dampening effect, which makes the slowdown accelerate. Which=
ever
way
the market tends to change, the change is exaggerated by this feedback ef=
fect.
The initial result when the amount of feedback is small is that the econo=
my
displays ""boom-and-bust"" cycles of relatively small amplitude, which die =
out
after a time. When the degree of this effect becomes large enough, the s=
wings
start to get larger and can enter a region in which a runaway effect occu=
rs.
Then
the only way to stop the growing oscillations is for something in the sys=
tem to
be damaged enough to reduce the feedback effect below the fatal threshold=
of
sensitivity.
One obvious destabilizing effect we are seeing right now is that companie=
s faced
with falling sales are laying off parts of their workforces to reduce cos=
ts and
preserve their net income. As the number of employed persons decreases, t=
he
total
income of the average consumer falls, so there is less money to spend on =
goods
and services -- the very spending that is the source of income for the co=
mpanies
who are laying off workers (and each others' customers). So we have the
situation
in which the attempt of companies to reduce expenses and restore their in=
come to
profitable levels has the effect of reducing, not increasing, the total n=
et
income of all companies. That leads to an increase in the attempts to red=
uce
expenses, and so on. If enough companies follow the same policy, there ca=
n be
only one outcome: total collapse.
This is probably not the only destabilizing feature in the basic relation=
ships
that make up our economic systems. It is only one obvious feedback loop w=
ith the
wrong sign. This is known technically as a positive feedback loop, one in=
which
small changes lead to larger changes, in contrast with the negative feedb=
ack
loop
in which small perturbations are negated by feedback effects and are imme=
diately
smoothed out. In popular usage ""positive feedback"" means encouragement an=
d
approval, but if encouragement occurs only when one is doing better and i=
s
withdrawn when one begins to do less well, the seeds of true positive fee=
dback
have been planted; at the first sign of doing less well, approval will de=
crease,
and the resulting lessening of encouragement will cause performance to de=
crease
even more, and so on to disaster. What works on the way up continues to w=
ork on
the way down. Changes in either direction are exaggerated by positive fee=
dback,
and the result is instability. If there is enough instability, the system=
will
destroy itself.
The cure for positive feedback and its destructive effects is to ferret o=
ut and
remove all the positive feedback loops. There should be little resistance=
to
doing this, because what will be revealed is the clear fact that actions
intended
to improve matters are actually making them worse. Any sane person will c=
ease
such actions even if their undesirability is not immediately explained or
understood. Once we step back and look at the overall relationships, the
instability that is caused by a wrong response to problems becomes obviou=
s. Then
the main issue is seen clearly: what do we need to change to prevent this=
sort
of
destabilizing feedback from occurring?
Stabilizing the economic system does not require telling people what to b=
uy or
what to sell, or for how much, or to whom. It requires intervention only =
when a
reaction to a change in economic activity, either upward or downward, res=
ults in
amplification of the change rather than smoothing it out. Just why this
amplification occurs has to be studied so the correct adjustment can be m=
ade. It
could be only that there is too much reaction to a change. It could be th=
at the
reaction is too much delayed, so what would have been a stablizing reacti=
on if
it
had occurred right away becomes destablizing when applied too late. Or it=
could
be that the intuitive reaction to a problem is exactly the reaction that =
will
make it worse, showing that there is a mistaken understanding of how one =
part of
the system affects other parts.
Reaching an understanding of instability in the economic system is no lon=
ger an
abstract goal of only academic interest. It is a necessity for our surviv=
al. It
requires a massive investigation and the efforts of many competent scient=
ists
who
know how to analyze and model large systems -- a Manhattan Project that w=
ill
finally unravel the mysteries of how the economic system works. We need t=
o
understand exactly what kind of technical public-sector interventions can=
be
brought to bear when the free market goes into free fall, without infring=
ing on
rights or imposing micromanagement on individual entrepreneurs and consum=
ers.
The
answer, at times, could be as simple as a slowing of changes similar to w=
hat the
stock market imposes when panic threatens an individual stock. Sometimes =
it
could
require rulings about policies which, if followed by enough transacting p=
arties,
threaten the entire system. Some existing regulations might prove to caus=
e more
of the problems they were intended to lessen.
The only way to find the answers we need is to construct a working model =
of the
economy, which requires studying it in sufficient detail to construct tha=
t
model,
and then, once consensus is reached, using the model first to reproduce t=
he
economic events that are so troublesome to everyone, and then looking for=
the
minimum changes required to prevent them from ever happening again.
Please forward this letter wherever you think it might do some good.
Bill Powers
Posted by ""Fred Nickols"" <nickols@att.net>
posting date Fri, 5 Dec 2008 07:30:54 -0700
--===============3588546101211878660==
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MIME-Version: 1.0
Content-Disposition: inline
Content-Transfer-Encoding: 7bit
_______________________________________________
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