Bryan Caplan is promoting bets on Keynesian theory - encouraging Keynesians to put their money where their mouth is.
He is concerned that the only bets around are about inflation, and that you don't have to be a Keynesian to think inflation will stay low.
True enough but this kind of gets at the heart of the problem, right? If it's hard to get detailed empirical analyses to tease out a distinction between theories, how can you expect a bet on any kind of headline indicator to? There is a lot of other stuff going on out there and in particular a lot of endogeneity.
If you're someone that would bet that when government spending goes up output will go up (this is what Bryan suggests) - without cleaning up the endogeneity bias - then you really don't understand how economics works and shouldn't be betting on it in the first place.
You certainly shouldn't be representing Keynesianism with your bet.
Bets are great for getting people to be more serious about the claims they make, but I think the proponents of betting vastly overestimate how useful it is.
Tuesday, May 7, 2013
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Daniel, we all understand "understand how economics works." In fact, there is now almost universal agreement that we understand how economics does not work.
ReplyDeleteWhat we are still looking for is an understanding by economists how the the economy works.
plasterer surrey
ReplyDeleteI think you are right that the TUC (and all of us) have not done enough to highlight and campaign against the ConDems plans to water down health & safety.
I wonder if you economists understand how very strange this mania for betting looks to outsiders. To give a few examples, Archimedes, Isaac Newton, Albert Einstein, Madam Curie, Werner von Braun, and Richard Feynman established substantial reputations without betting. For that matter, I don't recall that Keynes and Samuelson and Solow waged much against other economists (though IIRC, Keynes played the stock market, and Samuelson was involved with a hedge fund). But Caplan's enthusiasm for bets looks like something out of the late 18th Century. It reeks of decadence.
ReplyDeleteI don't think it's quite as broad as "you economists".
DeleteBut it's understandable why economists would highlight the value of bets. Much market activity is essentially betting, after all - and it has valuable properties for eliciting scarce information about the future path of a particular asset.
That's all fine.
Also fine is noting that when talk is cheap it tends to be of lower quality.
What I think is crazy is when people analogize this much farther afield and think they can arbitrate anything with bets.
Let me put my position this way: if you actually could come up with the terms of a wager that could distinguish between two theories, then fine. Betting on it will chase out cheap talk. My concern (and I think most economists would completely agree with me - and you - on this) is that bets are best for things like races and the behavior of single assets. They are best for the behavior of completely unconditioned variables.
The behavior of completely unconditioned variables will not get you very far when it comes to doing science.
Maybe it will discipline some people to say "maybe I should think about inflation differently", but it is hardly up to the task of evaluating more elaborate theories.
Hmmm... I think it says some something about economics that you choose to consider proposed theories as "cheap talk." Physical scientists dont' as a rule.
ReplyDeleteMoreover, physicists often come up with competing theories to explain interesting phenomena. I.e., the bets they might make could cancel out.
As an example, in 1905 both Henri Poincare and Albert Einstein provided explanations for the failure of the Michelson-Morley experiments to characterize the ether. They came up with the same equations to determine contractions of moving objects, and a judge of their predictions would have had to throw up his hands. But Poincare's theories were considered by physicists at the time as being ad hoc ideas; Einstein had a sweeping and elegantly formed theory which impressed his contemporaries no end, and was judged the winner. The REAL test of Einstein's ideas, of course, was the E=mc2 equation, which wasn't confirmed (or even taken as especially important) until 1938 or so -- thirty years after Einstein's derivation. And by 1938, physicists honored Einstein for General Relativity, rather than for what he had done while fresh out of the university.
Summing up: betting wouldn't have moved theoretical physics faster, or to better results.