Knowing and Making

Anthony Evans at The Filter makes  a suggestion I agree with : ...I recollect a conversation I had with Russ in class once, where I cast doubt on the "follow the money" implications of public choice. He suggested that if you look hard enough it's usually the case that poor policy stems from vested interests. At the time I was unable to articulate my feeling that often it's simply mistaken beliefs. Yes indeed. In fact, many economic phenomena - micro and macro - stem from mistaken or incomplete beliefs. I am developing a model which will shed some light on this, but it may take some time. In the meantime, a simple question. The world is complicated; and there are millions of things I could do that might very well be in my interest. How would I know about all of them?

Anthony J. Evans (who kindly linked to my camel story earlier in the year - or as he notes, perhaps not all that kindly) has written a paper about economic counterfactuals . He confirms what's now becoming a mantra among economists (if not their public): economists can't make predictions. However, he says, rather than giving up completely on exploring the future, they should do so with two tools of the economist's imagination: counterfactual analysis and scenario building. Counterfactuals are stories about the past - a retrospective prediction if you will - considering what might have happened had a different decision been taken at a key moment. For example, what if the financial sector had not been rescued by governments in 2008? Or what if governments themselves had defaulted on their debts? Scenarios are possible alternative futures - constructed not so that you can predict which one will happen, but so that you can prepare to understand events as they unfold. Each sce...