OPTIMISING SHORT-TERM ECONOMIC POLICY.

This paper describes the result of carrying out such a maximisation of a social welfare function prescribed for a model of the United Kingdom economy over the period 1957-66. The choice of social welfare function was a crucial part of the exercise and is discussed in some detail. Optimisation of the welfare function was achieved using modern control theory.[1] The next section of this paper describes the model; its dynamic properties are then evaluated in a subsequent section. Next, the optimisation goal is presented in terms of the model, and a social welfare function is chosen. The optimisation procedure is then applied and the results obtained are presented and discussed. Finally, consideration is given to the ways in which the procedures might in later research be modified as a result of the lessons learnt from this experiment. The results presented in this paper have shown that this model gives a good picture of how controls influence the economic system, despite the restrictions placed upon its size. The major cycles of the fitting period were reproduced and the model's poor ability at forecasting was a direct result of the primitive assumption of a fixed exchange rate. One advantage of its structure was that, apart from the control variables, it had only two exogenous variables. Although there was no quantitative way of assessing the dynamic properties of the model, the results of the dynamic multiplier tests were qualitatively satisfactory. On the other hand the attempt to use a control algorithm in order to suggest a policy which might have given better economic results at the end of 1961 must be admitted to have been a failure. The procedure correctly reflected the instructions given to it in the form of the social welfare function which was selected, but this function treated public and consumers' expenditure as perfect substitutes and omitted to take account of the desirability of certain items and overstated the undesirability of certain oth... [ABSTRACT FROM AUTHOR]