University of Illinois researchers take control of economic uncertainty with science
As Congress debates the pros and cons of an automaker bailout, researchers at the University of Illinois at Urbana-Champaign have developed economic models and
The techniques use engineering principles, especially in the area of control, to explain deviations in economic systems. While many current models can’t predict a market crash, the Illinois model gives economists the chance to see potential curveballs and to better understand how to control them.
“When you authorize a $700 billion stimulus package, for example, you’d like to know it’s going to work,” said Sean Meyn, professor of electrical and computer engineering at Illinois and resident researcher in the Coordinated Science Laboratory. “We want to give economists the most complete preview of how their actions might play out.”
Many models used today are static and can’t account for a dynamic, complex, and uncertain world. Working with Illinois economics professor In-Koo Cho, Meyn developed a model that captures two features found in typical markets, but often not considered in economic theory: 1) constraints on increasing supply to meet demand and 2) uncertainty.
In the case of the automotive industry, these factors arise at every level of the market – from local suppliers to the global market. For an individual manufacturer, such as Ford, it is not possible to instantly decrease production of energy-efficient vehicles (constraints) when the price of oil suddenly drops (uncertainty) – even if the demand for hybrid cars goes down. The company has already established assembly lines and stocked parts to build these cars and stands to lose millions if the cars aren’t made.
More critical issues arise at a higher level, such as the overall national automotive industry and its interaction with the national economy. The researchers’ model would take into account various control factors, including loans and their conditions (even examining whether the loans should go towards investments or to bonuses and incentives for creativity). The model would display possible outcomes and degrees of uncertainty.
Meyn and Cho applied some of their research, then in its infancy, to the 2000-2001 California power crisis that followed deregulation. They were able to explicitly model “friction” (in this case, the fact that power generation was subject to ramping constraints), and discovered that their model predicted highly volatile prices similar to those seen then in California, and in many markets around the world today.
“This gave me optimism that if we take the trouble to build models that capture constraints and uncertainty, then we might learn about potential pitfalls and how to avoid them, or minimize their impact,” Meyn said.
In addition to economics, the researchers’ work has applications in finance, wireless networks, bioinformatics and manufacturing systems. Meyn’s research has also been applied to air traffic control in an effort to reduce delays and improve safety.
For more information about Meyn’s research, please visit http://decision.csl.uiuc.edu/~meyn/.
About the Coordinated Science Laboratory
The Coordinated Science Laboratory, part of the University of Illinois’ distinguished College of Engineering, is one of the nation's premier multidisciplinary research laboratories, focusing on information technology at the crossroads of computing, control and communications. Created in 1951 to address urgent military needs associated with the Korean War, CSL continues to transform society by developing and deploying new technologies in areas such as defense, medicine, environmental sciences, robotics, life-enhancement for the disabled and aeronautics.