Thursday, March 10, 2011

The Lucas Critique, a Footnote

From the previous post (from Wikipedia): is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.

But how can one "predict the effects of a change in economic policy" when one fails to understand the economic problem that motivates the policy change?

My perceptions of economic conditions, and of changes in economic conditions, arise from my graphs of "highly aggregated historical data." I just want to point out that I do not design policy on the basis of my graphs. Rather, I study the economic problem.

A viable solution can only emerge from a correct analysis of the problem.

Everybody and his brother have a solution. But no one bothers to understand what the problem really is. As a result, none of these so-called solutions can solve the problem. They just change the economy and make the problem more difficult to see.

Meanwhile, the problem persists.

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