When I was in high school I was one of those geeky - nerdy kids. This was the late 1970's and calculators were just coming on the market, so I had a Texas Instruments SR-50A in a pouch on my belt and a slide-rule in my shirt pocket. If the PC had existed back then, I would have been a prototypical computer geek. One of my favorite classes was Vocational Electronics.
One day during my Junior year the instructor gave us a lab assignment involving resonant circuits. We were to build a tank circuit with an inductor and a capacitor in parallel, calculate the frequency the circuit should resonate at, then measure the voltage across the circuit as we varied the frequency to see if the formula actually worked.
There were two of us working on the lab. I finished the lab quickly; Mike, well, not so quickly. While I waited for him to finish the assignment, I started experimenting with values of capacitor outside the range from the assignment. As I got farther and farther and farther away from the values in the design of the assignment, the more error there was in the formula. Eventually, the error was so large I had to conclude that the formula didn't work.
As I've gone through the last 30 or so years, I've found many other things that work well with "normal" values, but when those values are pushed to the extremes, the rules don't work. What is true in the middle just isn't true at the periphery.
That is the nature of science... to push the values to the extremes and see where the theory breaks down, where the rules don't work any more, where the "truth" isn't so true any more. Then science's task is to figure out why the rules don't work anymore.
I told this story to set up a point about the current economic situation and the Obama administration's attempts to fix it. The plans to fix the economy are based on a theory by John Maynard Keynes that became popular in the 1940's. Keynes theorized that recessions and depressions are caused by a decline in "agregate demand" and that by pumping money into the economy that demand could be stimulated.
For the last 70 years, every time the economy has started to contract, the Federal Reserve has lowered interest rates and the government has increased spending. Keynes' theory seems to work, but this contraction has some different features to it. Interest rates were already low, and are now essentially zero, the deficit is higher than ever before. Will the Keynesian bailout/stimulus work?
It doesn't get a lot press, but there is another theory, proposed by the austrian economist Ludwig von Mises in 1924 that says both the boom (bubble) and the bust are caused by intervention by the government. Under this theory, the Fed's open market operations and the government's deficit spending send false signals in the economy, which cause faulty investments that appear as a bubble, then collapse when the banks, etc., realize that the resourses aren't really there. If this theory is correct, then the government has been building a large bubble (and patching the sides of it when it has tried to collapse) since the great depression. Evenutally, the bubble will become so large that lowering interest rates will no longer "stimulate" and deficit spending will only cause the value of the dollar to tank and massive price inflation.
So, are we in that area where the rules don't work anymore for Lord Keynes theory? We'll have to wait and see.
One day during my Junior year the instructor gave us a lab assignment involving resonant circuits. We were to build a tank circuit with an inductor and a capacitor in parallel, calculate the frequency the circuit should resonate at, then measure the voltage across the circuit as we varied the frequency to see if the formula actually worked.
There were two of us working on the lab. I finished the lab quickly; Mike, well, not so quickly. While I waited for him to finish the assignment, I started experimenting with values of capacitor outside the range from the assignment. As I got farther and farther and farther away from the values in the design of the assignment, the more error there was in the formula. Eventually, the error was so large I had to conclude that the formula didn't work.
As I've gone through the last 30 or so years, I've found many other things that work well with "normal" values, but when those values are pushed to the extremes, the rules don't work. What is true in the middle just isn't true at the periphery.
That is the nature of science... to push the values to the extremes and see where the theory breaks down, where the rules don't work any more, where the "truth" isn't so true any more. Then science's task is to figure out why the rules don't work anymore.
I told this story to set up a point about the current economic situation and the Obama administration's attempts to fix it. The plans to fix the economy are based on a theory by John Maynard Keynes that became popular in the 1940's. Keynes theorized that recessions and depressions are caused by a decline in "agregate demand" and that by pumping money into the economy that demand could be stimulated.
For the last 70 years, every time the economy has started to contract, the Federal Reserve has lowered interest rates and the government has increased spending. Keynes' theory seems to work, but this contraction has some different features to it. Interest rates were already low, and are now essentially zero, the deficit is higher than ever before. Will the Keynesian bailout/stimulus work?
It doesn't get a lot press, but there is another theory, proposed by the austrian economist Ludwig von Mises in 1924 that says both the boom (bubble) and the bust are caused by intervention by the government. Under this theory, the Fed's open market operations and the government's deficit spending send false signals in the economy, which cause faulty investments that appear as a bubble, then collapse when the banks, etc., realize that the resourses aren't really there. If this theory is correct, then the government has been building a large bubble (and patching the sides of it when it has tried to collapse) since the great depression. Evenutally, the bubble will become so large that lowering interest rates will no longer "stimulate" and deficit spending will only cause the value of the dollar to tank and massive price inflation.
So, are we in that area where the rules don't work anymore for Lord Keynes theory? We'll have to wait and see.
Comments