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Milton Friedman’s Thermostat

- July 31, 2012

Via Matthew Yglesias on Twitter, “this insight”:http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/07/why-are-almost-all-economists-unaware-of-milton-friedmans-thermostat.html from the _Worthwhile Canadian Initiative_ economics blog looks to plausibly have relevance for political scientists.

bq. Milton Friedman’s thermostat is an idea that has very broad application, and has nothing in particular to do with Monetarism or even macroeconomics. Or even economics. … Everybody knows that if you press down on the gas pedal the car goes faster, other things equal, right? And everybody knows that if a car is going uphill the car goes slower, other things equal, right? But suppose you were someone who didn’t know those two things. And you were a passenger in a car watching the driver trying to keep a constant speed on a hilly road. You would see the gas pedal going up and down. You would see the car going downhill and uphill. But if the driver were skilled, and the car powerful enough, you would see the speed stay constant. So, if you were simply looking at this particular “data generating process”, you could easily conclude: “Look! The position of the gas pedal has no effect on the speed!”; and “Look! Whether the car is going uphill or downhill has no effect on the speed!”; and “All you guys who think that gas pedals and hills affect speed are wrong!”

bq. And no, you can not get around this problem by doing a multivariate regression of speed on gas pedal and hill. That’s because gas pedal and hill will be perfectly colinear. And no, you do not get around this problem simply by observing an unskilled driver who is unable to keep the speed perfectly constant. That’s because what you are really estimating is the driver’s forecast errors of the relationship between speed gas and hill, and not the true structural relationship between speed gas and hill. And it really bugs me that people who know a lot more econometrics than I do think that you can get around the problem this way, when you can’t. And it bugs me even more that econometricians spend their time doing loads of really fancy stuff that I can’t understand when so many of them don’t seem to understand Milton Friedman’s thermostat. Which they really need to understand.

bq. If the driver is doing his job right, and correctly adjusting the gas pedal to the hills, you should find zero correlation between gas pedal and speed, and zero correlation between hills and speed. Any fluctuations in speed should be uncorrelated with anything the driver can see. They are the driver’s forecast errors, because he can’t see gusts of headwinds coming. And if you do find a correlation between gas pedal and speed, that correlation could go either way. A driver who over-estimates the power of his engine, or who under-estimates the effects of hills, will create a correlation between gas pedal and speed with the “wrong” sign. He presses the gas pedal down going uphill, but not enough, and the speed drops.

One possible place where this idea applies is to political campaigns. Journalists depict political scientists as saying that campaigns don’t matter. But as per the cars climbing hills, campaigns _do matter_ – campaign operatives respond to changing conditions, just as the driver e.g. puts her foot on the accelerator when the hill gets steeper. If they didn’t do this, the candidate would be in trouble. But much (not all) of the time, their actions will be a wash. One of the interesting implications of the blogpost is that if one just observes an actor’s actions, and not the conditions under which she is taking that action, one is likely to get confused, _especially_ where the actor is only able to respond to changing conditions in a partly adequate fashion.

bq. Watch what happens on a really steep uphill bit of road. Watch what happens when the driver puts the pedal to the metal, and holds it there. Does the car slow down? If so, ironically, that confirms the theory that pressing down on the gas pedal causes the car to speed up! Because it means the driver knows he needs to press it down further to prevent the speed dropping, but can’t. It’s the exception that proves the rule.

Here, for example, a naive observer might take a particular campaign action, which is associated with the candidate’s defeat, as evidence of incompetence by the campaign. It’s not – it may be correlated only because it is the best thing that the campaign can do under particularly difficult external circumstances.