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Automatic Stabilizers as Publicly-Oriented Predictors

Automatic Stabilizers as Publicly-Oriented Predictors Economy Near Us (XXXVII)

In the economic process, the volatility of macroeconomic variables is not the true problem, but its unpredictability. In fact, this conclusion is equally valid for microeconomics. For example, under the EMH – Efficient Market Hypothesis – a predictability, as low as it may be, provides to the (qualified) observer some opportunities to be exploited above the market average returns, without extra risks to assume or extra costs to pay. The volatility has the two “classical” causes: the invisible hand, that is, the aggregate behaviour of the economic actors in the market, and the visible hand, that is, the state (usually normative) intervention in that market (when the state behaves as economic actor, it is also part of the invisible hand). Consequently, as can easily be noticed, the majority of economic (quantitative) models of decisions are aimed at predicting the future market, usually in terms of price. The real and therefore useful predictions must be related to predictors, which are, conceptually, economic or institutional variables with a much lower volatility or, at the very limit, with no volatility, at least in short and medium term. For example, the risk of bonds is null or, at least, constant even if it is different from zero. Our topic in this article is the well-known predictors in the economy, namely the automatic stabilizers. 

The essence of the concept 

The automatic stabilizers are, in their essence, negative feedbacks of non-discretionary type. The automatic stabilizers can be either part of the invisible hand or part of the visible one. We may consider the three distinct (or distinguishable) areas of economic process:

  1. a) non self-testable area;
  2. b) self-testable area;
  3. c) testable-indifferent area.

The self-testable area belongs to automatic stabilizers within the invisible hand (in this area the state intervention is illegitimate), while the non-self-testable area belongs to automatic stabilizers of the visible hand (in this area, the state intervention is legitimate and mandatory). Both types of automatic stabilizers – of invisible hand and of visible hand – are introduced discretionarily only, namely by positive norms (Nota bene: in non-formal normative societies, for example before the social contract is “signed”, there are still norms, only they are not formal, i.e., codified). In relation to the testable-indifferent area, the state intervention is legitimate but non-mandatory. Thus, any automatic stabilizer is introduced at the discretion of the actor, but its functioning is only automatic – after its designing and normative implementation, an automatic stabilizer becomes autonomous in relation to its “parents”.

No matter what kind of automatic stabilizers we are discussing, their simple existence in the economic “machinery” has the potential to make that “machinery” much more predictable and, so, to reduce by a very large margin the uncertainty regarding the future. As an aside, the uncertainty regarding the past can never be reduced; I would say that the counter-factual analysis of the past – for example, using Cliometrics, which introduced this concept – should mean examining the alternative uncertainty to the effective uncertainty the economic actors concerned faced in the past. 

Brief discussion 

The most important (and useful) function of a working automatic stabilizer is that of predictor. Indeed, like Nozick’s principle of behaviour, announced by an individual (who also publicly commits himself to respect the principle concerned), which acts as a predictor for all the others – the so-called symbolic utility –, an automatic stabilizer sends to the entire society an (institutional) assurance that the phenomenon/process under that automatic stabilizer has worked, is working, and will work in the same way for all.

The predictor supplied by automatic stabilizers is publicly relevant because it is implemented inside the normative framework of society, through a positive norm, and by verifying all the democratic rules in the matter of public choice. Of course, this is the case in the hypothesis that the society is a free and democratic one, not only democratic – the democracy can be inferred by freedom, but conversely it is false. The public relevance of the automatic stabilizer’s role in providing predictability also has a beneficial impact on the socialization process by smoothing the economic and social cycles.

This process occurs in the long term, which introduces in the societal process a general predictability in all domains of activity. The possibility of scrutinising the distant future is of great usefulness, although, probably, the time horizon must be large but not too large. As Popper has taught us, it is not needed (and, of course, it is not possible)

These automatic stabilizers inherently reduce the state intervention which would give them the risk of illegitimacy. This means that, though the automatic stabilizers are politicized in their initial stages – design and implementation –, they subsequently escape from politics and become a quasi-technical tool, available to all.

We should also remember the fatigue of predictors based on automatic stabilizers. The predictability is an opportunity for all who know about it. But using the opportunities provided by predictability leads precisely to the reduction of the “windows” (both as in size and frequency). Therefore, as time passes, the predictability loses its role. We can call such a process “predictability fatigue”. Thus, from time to time, the automatic stabilizers, as bearers of societal predictability, must be revisited and correspondingly adjusted.

But what about the necessary positive feedbacks in society? As shown above, the automatic stabilizers are of negative feedback type: their target is to bring the system back to the benchmark when deviations occur. However, some domains are (or should be) “governed” by positive feedback, that is, by (beneficial) escalating processes – for example, the binomial education – productivity. The truth is that the positive feedbacks, regardless of whether they are discretionary or automatic, are also signals for predictability, although in this case some thresholds must be introduced to stop the escalating process (obviously, such a precaution is not needed in the case of automatic stabilizers).

Of course, not all human activities are well-served if the society’s predictability is improved (based on either negative or positive feedbacks). There are at least two (awfully specific) human areas in which predictability is both impossible and undesirable:

- Creativity (no matter that we are talking about art, science, politics, social innovations, etc.). The social evolution (which inextricably accompanies the biological evolution) cannot and should not be predicted nor planned (though the Œdipus effect is extremely strong here), because there is a creativity of second order: the creativity of creativity;

- The personal development. The individual in a state of freedom (free-will) must be left alone to choose his own desired path in life. From this, it results exactly what could be called the minimax state – the normative framework must rule only the mutually related individual liberties, not the freedom itself. 

Conclusion 

Automatic stabilizers are, in almost all areas of human activity, beneficial, including the implementation of the minimax state. Actually, it is possible to prove that the minimax state and the sustainable state are equivalent from a logical point of view. The crucial role of automatic stabilizers is to provide a high (but not too high) degree of societal predictability, which provides an important symbolic utility to individuals. In fact, the automatic stabilizers are working, in long term (but not too long) as very Nozickian principles which send to all directions signals regarding the (generally desired) future society.

 

 
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OEconomica No. 1, 2016