Early on in engineering career I learned an expression that I think has application to the economy although it may not be obvious until one thinks about it. The expression was “Tell the operator to keep his hands off the controls!” I learned the importance of this while working with a gas processing plant which featured an automated feed-back control system. The system was designed to measure a variable which indicated the quality of the output – the product of a physical, chemical process. Variations in the input raw gas stream would sometimes cause the output to vary from spec. The automated system would adjust the inputs to bring the output back to its intended set point quality. These were sophisticated enough control systems that many plants could run for hours unattended. Even if an operator was on duty, he did not have to spend all his time in the control room. The automated systems were designed such that the operator could make manual changes if necessary, but that was not often really required. However, frequently the operator would return to the control room from other duties and notice that the output had varied from its intended set point. He understood how the process worked and knew what needed to be done, and with the best of intentions, he would attempt to “help” the automated system by making manual changes. The difficulty was that in the vast majority of cases, the system had all ready begun to correct itself, but those corrective steps were invisible to the operator. Hence, his attempts to “help” would usually result in an “overcorrection” and wider swings and cycles than would happened if he had let the system finish correcting the process on its own.
Feedback systems , I learned, always have lags which result in successively smaller cycles until the process has a chance to settle back to a “steady state”. The actions of the control system are mostly “invisible” to operator, so that he has no way to know where things are in the correction process. A timely operator assist in the right direction and in the right magnitude might actually help, but any error in timing or magnitude results in more cycles and more severe cycles than might otherwise happen. Because the odds of his getting all of this right are small, the admonition became to “Tell the operator to keep his hands off the controls!”
After John Maynard Keynes developed his macro-economic theory in the late 1930s, many economists thought that his concepts provided a basis to use government fiscal policy to control the economy. In 1776, Adam Smith wrote of the “invisible hand” of a free market economy as having the ability to produce the goods and services required by a society without government planning or intervention except to establish the rules of the playing field (to prevent monopolies for example). But we had what seemed to be a continuous stream of “business cycles” which became an extreme downturn in the depression of the 1930s. A free market economy probably works because it has lots of feedback loops that cause individuals and companies to adjust to changing output needs and desires. And feedback systems always cycle. But if we could use government fiscal policy to “manually” adjust the inputs, then perhaps we could end the cycles and never have another “depression”.
By the 1960s we had economic advisers at the highest levels of the federal government committed to ending the economic cycles. But it has been 50 years or more and it does not seem to have happened. I don’t believe that John Maynard Keynes economic theories which became much of the basis for todays macroeconomic theory are not necessarily wrong. But the systems we are dealing with are not relatively simple physical systems as is the case in the gas processing case. They involve many more variable and complex relationships. The measurement lag times are longer and the timing and magnitude of changes is made frequently more difficult by the need for congress to get itself together. In addition the economic responses to actions involve human being’s perceptions, and us humans don’t always respond in the same way to same things. So if a knowledgeable operator in a relatively simple gas processing or natural gas liquids fraction plant cannot prevent the cycles and will in most cases make them worse, why would we expect anything different from the attempt to manually control the economic system. Maybe we would be better off telling the government “Keep your hands off the economic system.”
When we are in a down cycle, the temptation is to try to “fix” the system is hard to resist. Indeed there may be times when the system gets outside its “control range” and operator intervention is helpful. If the successive cycles in a plant are getting bigger rather than smaller, it’s an indication to the operator that he may need to provide some assistance. But those times are relatively rare and usually require some patience, an understanding that the cycles cannot be totally eliminated, and could, in fact, be made worse. I think a case can be made that in the last 50 years only twice has government intervention helped. In only one of these cases was action by congress involved and the timing on the congressional action was mostly luck.
From a regulatory standpoint, the congress is usually doing is the same type of thing that the military is frequently accused of. In military matters, the next war has never been like the last war, but armies are frequently accused – with justification – of preparing to fight the last war. By the same token, no two economic downturns are exactly alike either. But the regulators are generally creating regulations to prevent the last crisis. But we usually learn from the last crisis without a lot of help so the next crisis will rarely have the same causes as the last one even if there were no change in the regulations. But new, more intrusive regulations provide an unnecessary cost, productivity burden, and delay to any recovery. So I would say to the government, “Keep your hands off the economic controls”, and give the system a chance to work.