The toss, the Lucas critique and stability

Sometimes, important matters can shed light upon less important ones. Here’s an example. This letter in the Times from Michael Stafford reminds me why the UK economy has been so stable in recent years:

I have long felt that in any Test series it would be fairer if the two captains tossed only once, before the first Test. Whoever won the toss would then decide whether to bat or bowl first in that Test.
From then on, the choice would go to the captain who had not made the decision in the previous match.

There‘s a problem with this. Imagine the home side in a series were one-up and due to choose whether to bat or bowl in the following test. The groundsman would then prepare a featherbed pitch which might crumble on the last day, knowing his side would choose to bat first and so have a good chance of running up an unassailable total.
If he didn‘t know who would choose to bat, he couldn‘t prepare a pitch so favourable to his own team. The current system is therefore fairer.
What Mr Stafford fails to see is that if we change the rules, we change people’s behaviour - in this case groundsmen. This what the Lucas critique says.
What’s this got to do with economic stability?
Simple. This too might be due to the fact that changes in rules change behaviour.
In this case, the rule change was giving the Bank of England independence back in 1997. This led to a change in behaviour - people believed inflation would remain more stable. So the Bank hasn’t needed to raise interest rates so much as it did before in response to a pick-up in inflation. This in turn means we haven’t needed recessions to kill off inflation, as we did in the 1980s; Bill Martin and Bob Rowthorn tell the story here. 
Alternatively, the stability might be just luck (pdf).

Comments

[dearieme]

"The Lucas critique": I love the way you attribute samples of the Bleedin' Obvious to economists. Personally, I'd be tempted to attribute that critique to my dear father, except that probably Aristotle got there before him. And the founders of Sumer before him. And the hunter-gatherers of the Serengeti before them.

[jameshigham]

You're right. Tehre is a statistical problem with it. What inititaly appears the fairest way does not always pan out that way.

[Chris]

Or how about the following:
The home captain decides on the number of runs that he considers represents the advantage of batting first (e.g. 100 runs). He offers a choice to the visiting captain of either (a) accepting the bonus 100 runs and batting second, or (b) batting first. (The bonus runs could be negative if it's a bowler-friendly track.)

[Mark Wadsworth]

This economic stability is 50% luck and 50% fudging the figures, the Goblin King has done a lot of teeming and lading to ensure at least a small amount of growth in each quarter.

I don't think that The Badger will be anywhere near as lucky or have the same scope to fudge the figures.