Stability

The big news today is the US Federal Reserve’s big FOMC meeting. The expectation is that the Fed will announce a big rate hike, one of the biggest in decades. The previous rate hike amounted to 0.5%, and the expectation for today is 0.75%.

While it’s entertaining watching Jim Cramer and his ilk share their opinions on various matters which–I think–they likely have no clue about, it’s even more interesting learning about how institutions like the Fed really have no clue what they’re doing.

Who Controls Monetary Policy? #

The problem with monetary policy (in the US) as I see it is that the people who set the monetary policy have little incentive to act in the best interests of the ordinary working class like you and I. The Federal Reserve, after all, is technically an independent non-government entity (i.e., private), although the board of governors is appointed by the head of the government.

The Fed is governed by the Federal Reserve Act, which stipulates that the Fed is required “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”.

The interesting bit of language is the “stable prices” part. As some may have noticed, prices haven’t been so stable around the world of late.

“Stability” Is in the Eye of the Beholder #

I find this interesting in part because it reminds me a lot of the problems in software. Software engineers often talk about “stability” when discussing software, which can take on various definitions depending on the context. The problem with this concept of stability is that the perception of stability varies depending on who you are. With software, stability is often just a matter of how good the person operating the computer is at using computers. I suppose a crude definition for stability is that your program shouldn’t crash or produce incorrect output.

In the case of the Federal Reserve, a lot of people seem to believe the Fed is responsible for making the stock market go up and to the right in a stable and predictable way. Of course the Fed maintains this is not the case, although the Federal Reserve Act doesn’t explicitly state that “stable prices” excludes stock prices as far as I can tell from the words in the bill.

One more thing: the people who make up the Federal Reserve’s board don’t exactly represent your typical end-user (aka the working class). Most of them are privileged folks who made a lot of money in private industry profiting from things that don’t really benefit the working class as far as I can tell. Banking in general is a business of middlemen extracting juice by squeezing those who have the greatest need, whether that’s someone taking out a mortgage for a home so they don’t die of exposure, or the $50 overdraft fee someone might be charged because they tried to spend $5 more than the remaining balance of their checking account.

One thing that seems to be pretty stable is the upward trend in corporate profits.

Software Stability vs. Economic Stability: A Deeper Comparison #

The parallels between software stability and economic stability run deeper than they might initially appear:

Complex Systems with Emergent Behaviors #

Both software systems and economic systems are complex, with countless interacting parts that create emergent behaviors difficult to predict. In software, we write unit tests for individual components but still encounter unexpected behaviors when those components interact. Similarly, economists can model individual market behaviors but struggle to predict how the entire system will respond to policy changes.

Stakeholder Perspectives #

In software, stability means different things to different stakeholders:

• For developers, it might mean “doesn’t crash when running tests”
• For ops teams, it means “doesn’t bring down production at 3 AM”
• For users, it means “lets me accomplish my task without frustration”

In economics, stability similarly means different things to different groups:

• For Wall Street, it means “predictable returns and asset appreciation”
• For businesses, it means “manageable input costs and consumer demand”
• For workers, it means “steady employment and wages that keep pace with living costs”

Misaligned Incentives #

Both domains suffer from misaligned incentives. Software developers might optimize for clean code or interesting technical challenges rather than user needs. Economic policymakers might optimize for indicators that look good in headlines (stock market performance, GDP growth) rather than metrics that reflect everyday economic well-being (real wages, wealth inequality, cost of essentials).

What Does True Stability Look Like? #

If we take the Fed’s mandate for “stable prices” seriously, we might ask what actual price stability would look like for ordinary people. Is it stable when:

• Housing costs consume an ever-larger percentage of income?
• Healthcare and education inflation outpace wage growth decade after decade?
• Asset prices (stocks, real estate) consistently grow faster than wages?

From a systems perspective, true stability might be better defined as “sustainable equilibrium” rather than “numbers going up.” A truly stable system can withstand shocks, self-correct after perturbations, and maintain balance among its various components.

But this kind of deep stability often requires sacrificing short-term gains for long-term resilience—something our quarterly-results-focused economic and political systems rarely reward.

Who Benefits from “Instability”? #

There’s a certain irony in the fact that while the Fed pursues “stability,” the wealthiest segments of society benefit enormously from carefully managed instability:

• Market volatility creates trading opportunities
• Asset bubbles create wealth for those who already own assets
• Inflation erodes debt but hurts those living paycheck to paycheck
• Economic cycles allow capital to buy distressed assets cheaply during downturns

Meanwhile, the one metric that has shown remarkable stability is corporate profitability, which continues its upward march regardless of economic conditions. In Q1 2022, even as inflation squeezed consumers and supply chains remained disrupted, U.S. corporate profits reached record levels.

Building Better Systems #

Whether in software or economics, truly stable systems require:

1. Feedback from all stakeholders, not just the most powerful
2. Diverse perspectives in the design and governance process
3. Transparent mechanisms that can be understood and scrutinized
4. Built-in circuit breakers to prevent catastrophic failure
5. Alignment between incentives and desired outcomes

Until our economic systems incorporate these principles, we’ll continue to see “stability” that works wonderfully for some while creating precarious conditions for many others.

As we watch the Fed raise rates today in the name of controlling inflation, it’s worth asking: whose stability are they really engineering, and at whose expense?