Control Theory Economics (was Re: Giffen Data?)

[From Rick Marken (2002.12.12.0930)]

Bill Powers (2002.12.12.0800 MST)

All it takes is seeing that the aggregate
consumer and producer are basically the same entity: the aggregate controller.

I know you’ve been saying that, but I have some reservations about
this idea. It’s true that the individuals who operate the composite producer
are also consumers, but they have different goals in those two roles. The
income of the people who own or manage the composite producer is generally
tied to the part of the producer’s expenses that is called profit. It is
in their interest to increase profit as much as possible, paying out capital
income, wages, and investment costs to other consumers or producers only
to the extent absolutely necessary. I think this may be a minimax problem,
in that there may be some rate of payout at which profit reaches a maximum,
with lower profits for either greater or smaller payouts. What I was writing
about was the apparent ignorance of the existence of payouts for wages
and capital income that are too small. If not enough is paid to
consumers as wages and capital income other than profits, there will not
be enough income for the producer and profits will fall as the business
activity contracts. I think this is what we see going on right now.

Yes. I understand that. And it’s an important point. But I still think
my concept is useful and helpful. Your point focuses on only one small
component of the composite producer, the “managers”, whose income comes
from profit. If the managers take too large of a proportion of the total
income from production as their income then there will not be enough income
left over for the rest of the composite producer (“labor”) to be paid enough
to buy the gross product of production. This is the point at which business
activity contracts. This is happening because a small subset of the
people who make up the composite controller are taking too much of the
money that should be used to divide up the gross product of production.
It’s not caused by a problem with the composite producer, per se. It’s
caused by a very small part of the composite producer.
I’m pushing the view of the economy as composite controller as a starting
point. Of course we have to understand the details of how the system works;
that will all come out in the modeling. But what I like about viewing the
economy as a composite controller is that it helps me see that whole process
as a highly cooperative venture. With this gestalt in my head it is immediately
apparent that people who act with the goal of getting rich are simply being
uncooperative (and unconsciously hurtful). They are not heroes; they are
quite the opposite.

Instead of “cutting costs,” which ends up reducing
the buying power of consumers and thus further reducing producer income,
what producers ought to be focusing on is increasing the amount of money
in the hands of people who will turn right around and spend it on goods
and services. Some people –

Reich, for example – see this.
Yes. Hooray for Robert Reich.

This control system view of the economy is quite
different than what seems to >have become the conventional view, which
is that producers and consumers are >two different entities.
It’s not so much that producers and consumers are different entities,
but that consumers fall into two groups: those who benefit from increases
in producer costs other than profits (wage-earners, pensioners, etc), and
those who benefit from decreases in them, and resulting increases in profits
(mainly the owners and controllers of the means of production). This is
where the real conflict lies. Those who want to increase profits want to
sell the lowest quality in the lowest quantity for the highest possible
price, while those who live off producer expenses other than profits want
exactly the opposite: the most goods of the highest quality for the lowest
possible price.

Agreed. And this is a systemic problem that occurs as a result of how the
composite controller is organized at the individual level. But people
won’t see this as a problem unless they understand the closed loop nature
of the economy as a whole; that all people are components of the composite
controller. Without an understanding of the closed loop nature of
the economy, then how this conflict is resolved makes no economic difference.
Best regards



Richard S. Marken, Ph.D.

The RAND Corporation

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