(1) I know what martingale variables are, but I don’t see why the non-martingale nature of the macroeconomic variables is relevant. Clearly, if you have figured out a novel way to predict the coming of the aliens ahead of others (or even just to predict its timing and other details more accurately), you can get rich by figuring out how their coming will affect the markets. This is perfectly analogous to a theory that will predict various macroeconomic variables more accurately than the state of the art, since these variables have predictable effect on asset prices. (In fact, once you have this information, they are no longer martingales for you, since e.g. if you know a recession is coming withing a year, the expected trend for countercyclical assets is upward.)
Or to put it differently, from all that you have written thus far, I still don’t see a concrete example (either actual or hypothetical) of the thing whose existence you assume: macroeconomic predictions that are interesting, novel, accurate, and at the same time useless for beating the markets.
(2) I understand that there are hypothetical questions about monetary systems where an accurate answer would have no practical implications by itself. However, presently we are in a situation where there are deep and bitter disagreements even about the predicted consequences of the ordinary and standard monetary policy options. What I find implausible is that one could obtain correct answers of the former sort without a theory that would at the same time be able to give more accurate answers to questions of the latter sort (which would again translate into investment information in a straightforward way). It would be as if you had a theory of mechanics capable of predicting the motions of hypothetical planetary systems but of no use for practical technical problems.
(3) Regarding your point about theoretical vs. applied research in other areas, the same heuristic actually is widely applicable. Whenever you see people doing research into something that should have straightforward practical applications, but you don’t see them running to monetize the results, something fishy is likely going on.
Of course, sometimes there is real insight that can’t be monetized in any obvious way, like for example fundamental theoretical physics. However, there is an essential difference here. A physical theory can make predictions only about things that are of no business interest, so in fact you have to spend money to contrive experimental setups to test it. In contrast, anything that a macroeconomic theory might be making predictions about and that might actually occur in the real world is inherently of business interest. (And again, if you have a counterexample, I’d be curious to hear it.)
For some reason I feel compelled to return to this topic:
My point is not that macroeconomics is a great field filled with great insights (it’s not and most macro theorists are terribly confused) but that it’s not as ridiculous as you seem to imagine it that some economists have novel, interesting and true things to say about inflation, unemployment, GDP etc and are not themselves fabulously wealthy.
(1) For example, some macroeconomic theories predict behaviors like the parable of the babysitting co-op. You can also run experimental economies (like this) and make predictions about the behavior of the economy.
I might set up a play economy where different people produce different goods and trade and consume them. Money is traded but not produced. We let this economy do its thing for a while and then suddenly (and without announcing in advance) give everyone 20% more money. Using my favorite macro theory I could make a number of interesting and novel predictions about what will happen (after a long time, prices will be 20% higher; in the short run people will devote more resources to producing traded goods instead of traded goods). Because this is basically irrelevant to the workings of the real economy, my predictions will be both more accurate than market predictions as well as useless for making money in financial markets.
Such theories would also make predictions about how good of an idea it would be to transition to a different monetary regime (say a competitive currency regime).
(2) As I said before, if traders approximate the parts of your model that are directly applicable then you don’t have any useful information advantage.
(3) Sure, and there’s plenty to be skeptical of in mainstream macro, but that doesn’t imply unlimited skepticism.
(1) I know what martingale variables are, but I don’t see why the non-martingale nature of the macroeconomic variables is relevant. Clearly, if you have figured out a novel way to predict the coming of the aliens ahead of others (or even just to predict its timing and other details more accurately), you can get rich by figuring out how their coming will affect the markets. This is perfectly analogous to a theory that will predict various macroeconomic variables more accurately than the state of the art, since these variables have predictable effect on asset prices. (In fact, once you have this information, they are no longer martingales for you, since e.g. if you know a recession is coming withing a year, the expected trend for countercyclical assets is upward.)
Or to put it differently, from all that you have written thus far, I still don’t see a concrete example (either actual or hypothetical) of the thing whose existence you assume: macroeconomic predictions that are interesting, novel, accurate, and at the same time useless for beating the markets.
(2) I understand that there are hypothetical questions about monetary systems where an accurate answer would have no practical implications by itself. However, presently we are in a situation where there are deep and bitter disagreements even about the predicted consequences of the ordinary and standard monetary policy options. What I find implausible is that one could obtain correct answers of the former sort without a theory that would at the same time be able to give more accurate answers to questions of the latter sort (which would again translate into investment information in a straightforward way). It would be as if you had a theory of mechanics capable of predicting the motions of hypothetical planetary systems but of no use for practical technical problems.
(3) Regarding your point about theoretical vs. applied research in other areas, the same heuristic actually is widely applicable. Whenever you see people doing research into something that should have straightforward practical applications, but you don’t see them running to monetize the results, something fishy is likely going on.
Of course, sometimes there is real insight that can’t be monetized in any obvious way, like for example fundamental theoretical physics. However, there is an essential difference here. A physical theory can make predictions only about things that are of no business interest, so in fact you have to spend money to contrive experimental setups to test it. In contrast, anything that a macroeconomic theory might be making predictions about and that might actually occur in the real world is inherently of business interest. (And again, if you have a counterexample, I’d be curious to hear it.)
For some reason I feel compelled to return to this topic:
My point is not that macroeconomics is a great field filled with great insights (it’s not and most macro theorists are terribly confused) but that it’s not as ridiculous as you seem to imagine it that some economists have novel, interesting and true things to say about inflation, unemployment, GDP etc and are not themselves fabulously wealthy.
(1) For example, some macroeconomic theories predict behaviors like the parable of the babysitting co-op. You can also run experimental economies (like this) and make predictions about the behavior of the economy.
I might set up a play economy where different people produce different goods and trade and consume them. Money is traded but not produced. We let this economy do its thing for a while and then suddenly (and without announcing in advance) give everyone 20% more money. Using my favorite macro theory I could make a number of interesting and novel predictions about what will happen (after a long time, prices will be 20% higher; in the short run people will devote more resources to producing traded goods instead of traded goods). Because this is basically irrelevant to the workings of the real economy, my predictions will be both more accurate than market predictions as well as useless for making money in financial markets.
Such theories would also make predictions about how good of an idea it would be to transition to a different monetary regime (say a competitive currency regime).
(2) As I said before, if traders approximate the parts of your model that are directly applicable then you don’t have any useful information advantage.
(3) Sure, and there’s plenty to be skeptical of in mainstream macro, but that doesn’t imply unlimited skepticism.