aaron crews online

Have I Lost My Mind? PID Control of the Economy

Reading through Umair Haque's post, The Efficient Community Hypothesis, I was struck by a seeming parallel between markets and my own world of process control.  Umair first describes the Efficient Market Hypothesis (EMH):

Much maligned, often misunderstood, here, paraphrased, is what the EMH really says.

"The EMH, originally put forth by Eugene Fama of the University of Chicago in the 1960s, states that the prices of securities reflect all known information that impacts their value. No matter what definition is used, the hypothesis does not claim that the market price is always right."

The upshot? Even when markets are efficient, they can still be of little social use, because they can result in dramatic mispricing. The result? Bubble, crash, and collapse: welcome back to 2009, 1989, or 1929.

Isn't this the same thing that happens in a Proportional-only control algorithm?  Your PV (in this case, price) ends up offset from your set point (value).

(download)

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have-i-lost-my-mind-pid-control-of-the-economy-BJfnstauneHuyudgFdzH.zip (24 KB)

If this analogy actually works, though, the better sensor can help, but only if 1 of two things happen:

1. Some extra market dynamics are taken into account to add an integral (time) component to the equation.  In effect, you can't just lower the price until it sells, then raise the price until it doesn't sell (on-off control), and you can't make the price changes proportional to inventories (P-only control).  There needs to be an additional consideration.
2. Proportional-only control stays as it is, but you move to value-based pricing (using that better sensor) so that you hit closer to your setpoint and hopefully converge on the real product value.

Disclaimer:  Whenever I have a thought like this it occurs to me that I am likely to be completely misguided.  I'm just putting this out there.  Do any economists or engineers care to set me straight?