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Quoting from the link [1]: Milton Friedman's Thermostat If a house has a good thermostat, we should observe a strong negative correlation between the amount o

Quoting from the link [1]: Milton Friedman's Thermostat If a house has a good thermostat, we should observe a strong negative correlation between the amount of oil burned in the furnace (M), and the outside temperature (V). But we should observe no correlation between the amount of oil burned in the furnace (M) and the inside temperature (P). And we should observe no correlation between the outside temperature (V) and the inside temperature (P). An econometrician, observing the data, concludes that the amount of oil burned had no effect on the inside temperature. Neither did the outside temperature. The only effect of burning oil seemed to be that it reduced the outside temperature. An increase in M will cause a decline in V, and have no effect on P. A second econometrician, observing the same data, concludes that causality runs in the opposite direction. The only effect of an increase in outside temperature is to reduce the amount of oil burned. An increase in V will cause a decline in M, and have no effect on P. But both agree that M and V are irrelevant for P. They switch off the furnace, and stop wasting their money on oil. [1]https://worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/milton-friedmans-thermostat.html https://worthwhile.typepad.com/worthwhile_canadian_initi/201...

WhitneyLand 3y ago
Relevant https://en.wikipedia.org/wiki/Lucas_critique https://en.wikipedia.org/wiki/Lucas_critique
GardenLetter27 3y ago
Econometrics without interventions is useless due to stuff like this. At least with instrumental variables for example you could tax the oil and see the real impact of less oil burned. https://en.wikipedia.org/wiki/Instrumental_variables_estimation https://en.wikipedia.org/wiki/Instrumental_variables_estimat...
pcwelder 3y ago
But this is textbook multi-collinearity that any student of economics should be able to observe and account for? The article discusses much grander issues than these easy to identify problems with causal analysis.
amatic 3y ago
That's interesting, I've never heard of Milton Friedman's thermostat, but there is a procedure called "The test for the controlled variable" intended to find if a system is controlling one variable or another, invented by W.T. Powers sometime in the fifties, I think. You make a hypothesis about what is the controlled variable, then you apply a disturbance. If the variable stays relatively undisturbed, the correlation between the disturbance and the controlled variable will be nearly zero.
JumpCrisscross 3y ago
> But both agree that M and V are irrelevant for P. They switch off the furnace, and stop wasting their money on oil If they have the power to switch off the furnace, an econometric construction is underpowered. The problem in economics is you often cannot switch off the furnace. You're forced to just watch it wondering.
- MichaelZuo 3y ago
  Technically ‘they’ do ‘have the power to switch off’, even switch off the whole of human civilization. ‘They’ just don’t have the power to switch back it on. If you restrict ‘they’ to decision makers over WMDs.
  - JumpCrisscross 3y ago
    > Technically ‘they’ do ‘have the power to switch off’, even switch off the whole of human civilization No, economics researchers do not.
    - MichaelZuo 3y ago
      Moonlighting as economics researchers, or even considering themselves as the superiors of economic researchers is possible, and can’t be excluded as a possibility. Hence why I said technically.
fuzzfactor 3y ago
>In Economics Do We Know What We're Doing? Economics is pure research. If you look away for a minute, or even blink, you might miss something important. You can't be much of an economist without being immersed in research, so much more than anyone else would think reasonable. Quoting one of the more mathematically gifted Nobel Prize winners; “If we knew what it was we were doing, it would not be called research, would it?” - A.Einstein

WhitneyLand 3y ago

Relevant https://en.wikipedia.org/wiki/Lucas_critique https://en.wikipedia.org/wiki/Lucas_critique

GardenLetter27 3y ago

Econometrics without interventions is useless due to stuff like this. At least with instrumental variables for example you could tax the oil and see the real impact of less oil burned. https://en.wikipedia.org/wiki/Instrumental_variables_estimation https://en.wikipedia.org/wiki/Instrumental_variables_estimat...

pcwelder 3y ago

But this is textbook multi-collinearity that any student of economics should be able to observe and account for? The article discusses much grander issues than these easy to identify problems with causal analysis.

amatic 3y ago

That's interesting, I've never heard of Milton Friedman's thermostat, but there is a procedure called "The test for the controlled variable" intended to find if a system is controlling one variable or another, invented by W.T. Powers sometime in the fifties, I think. You make a hypothesis about what is the controlled variable, then you apply a disturbance. If the variable stays relatively undisturbed, the correlation between the disturbance and the controlled variable will be nearly zero.

JumpCrisscross 3y ago

> But both agree that M and V are irrelevant for P. They switch off the furnace, and stop wasting their money on oil If they have the power to switch off the furnace, an econometric construction is underpowered. The problem in economics is you often cannot switch off the furnace. You're forced to just watch it wondering.

MichaelZuo 3y ago
Technically ‘they’ do ‘have the power to switch off’, even switch off the whole of human civilization. ‘They’ just don’t have the power to switch back it on. If you restrict ‘they’ to decision makers over WMDs.
- JumpCrisscross 3y ago
  > Technically ‘they’ do ‘have the power to switch off’, even switch off the whole of human civilization No, economics researchers do not.
  - MichaelZuo 3y ago
    Moonlighting as economics researchers, or even considering themselves as the superiors of economic researchers is possible, and can’t be excluded as a possibility. Hence why I said technically.

fuzzfactor 3y ago

>In Economics Do We Know What We're Doing? Economics is pure research. If you look away for a minute, or even blink, you might miss something important. You can't be much of an economist without being immersed in research, so much more than anyone else would think reasonable. Quoting one of the more mathematically gifted Nobel Prize winners; “If we knew what it was we were doing, it would not be called research, would it?” - A.Einstein