Tuesday, 21 March 2006

The Game of Monetary Policy

Given the budget is close, let's talk Economics. Here's a model of how to win a Nobel prize in that esteemed discipline. Come up with a macro economic theory, publish it, have it suffiently well accepted that governments use it to set monetary policy.

This is difficult, of course, but at least the programme is clear. It is a model from science: discover something, publish it, help explain the world, add to knowledge.

But what if that was not possible? What if Economics is fundamentally different from Physics, in that the very act of discovering something and using it makes it less likely to correctly predict future behaviour? It could be that the economy does not just change fast, the dynamics change too. The way to understand it next year won't be the way to understand last year, not just because we will know more, but because last year's theories won't work any more.


Blogger Rabinal said...

Interesting ideas. I proposed this kind of system in 1998 at the complex systems conference in Sydney, and called it a "Variable Structure System" in which the system provides an output that is used to reconfigure the system and its dynamics. In this way people (eg at Sussex Uni) have tried to make "evolutionary electronics". There is a semantic point about what you mean by the term "dynamics" applied to such a self-adjusting system.

2:10 pm  

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