CAUSALITY in ECONOMICS John Hicks

Hicks Is economics a science? This distin guished and provocative book calls into question the increasing tendency of eco _______ CAUSALITY nomists to attach themselves to the coat-tails of the scientists. Thus it is not concerned with the scientific method in economics, but with the relation of scientific method to economic method, of scientific explanation to economic I I CAUSALITYIN ECONOMICS IN explanation; for to discover the cause of a phenomenon or of an event is to explain it. ECONOMICS Although it is now fifty years since the author began to write on economics, he has succeeded in looking at economics from the outside and provided a book that examines causality in economics John Hicks as one case of causality in general. This unconventional approach throws new light on some basic concepts of economic theory. The place of statistical techniques in the sciences and in economics is examined and a corresponding distinction drawn. Sir John Hicks is Fellow of All Souls College, Oxford, and until 1965 was Pro fessor of Economics at the University of Oxford. He was awarded the Nobel Prize in 1972. Amongst his many publications is The Crisis In Keynesian Economics, also published by Blackwell. Hicks Is economics a science? This distin guished and provocative book calls into question the increasing tendency of eco _______ CAUSALITY nomists to attach themselves to the coat-tails of the scientists. Thus it is not concerned with the scientific method in economics, but with the relation of scientific method to economic method, of scientific explanation to economic I I CAUSALITYIN ECONOMICS IN explanation; for to discover the cause of a phenomenon or of an event is to explain it. ECONOMICS Although it is now fifty years since the author began to write on economics, he has succeeded in looking at economics from the outside and provided a book that examines causality in economics John Hicks as one case of causality in general. This unconventional approach throws new light on some basic concepts of economic theory. The place of statistical techniques in the sciences and in economics is examined and a corresponding distinction drawn. Sir John Hicks is Fellow of All Souls College, Oxford, and until 1965 was Pro fessor of Economics at the University of Oxford. He was awarded the Nobel Prize in 1972. Amongst his many publications is The Crisis In Keynesian Economics, also published by Blackwell. This book was published by ANU Press between 1965–1991. This republication is part of the digitisation project being carried out by Scholarly Information Services/Library and ANU Press. This project aims to make past scholarly works published by The Australian National University available to a global audience under its open-access policy. CAUSALITY IN ECONOMICS CAUSALITY IN ECONOMICS John Hicks AUSTRALIAN NATIONAL UNIVERSITY PRESS CANBERRA 1980 First published in Australia 1980 Printed in Great Britain for the Australian National University Press, Canberra © Basil Blackwell 1980 This book is copyright. Apart from any fair dealing for the purpose of private study, research, criticism, or review, as permitted under the Copyright Act, no part may be reproduced by any process without written permission. Inquiries should be made to the publisher. National Library of Australia Cataloguing-in-Publication entry Hicks, Sir John. Causality in economics. Index Simultaneously published, Oxford, Eng.: Basil Blackwell. Bibliography. ISBN 0 7081 1366 4 1. Economics. 2. Causation. I. Title. 330’.01 CONTENTS Preface vii I Why Economics? 1 II The Kinds of Causality 12 III Theory and Application 27 IV ‘Statics’ and ‘Equilibrium’ 39 V Contemporaneous Causality—Stocks and Flows 62 VI Contemporaneous Causality in Keynes 73 VII Sequential Causality—Lags and Reserves 87 VIII Probability and Judgement 103 Index 123 Preface When I was introducing my book about Economic History11 could claim that, although I am no historian, I had read a good deal of history; in introducing this one I can make no corresponding claim. When I was an undergraduate student, I read the philosophical classics, such as they were given to us in Oxford in the twenties, but I have not kept up with my reading in that field. So the subject of this book is not one which I have kept in my cupboard, mulling over it for years (as Harrod said he had done with his Foundations of Inductive Logic); I came upon it quite recently, and rather suddenly. How that was I will try to explain. I took part, in 1974, in a conference on the ‘Micro- Foundations of Macro-economics’, an International Economic Association conference at S’Agaro in Spain. The proceedings of that conference have sub sequently been published. Though some excellent papers were given, reviewers have rightly perceived that the conference as a whole was a failure. We did not get to grips with the question we were supposed to be discussing. I could see that at the time, and as I came away I was asking myself why. One of the reasons, I became convinced as I thought 1 A Theory of Economic History (1969). Vlll PREFACE it out, was that the question had been wrongly posed. It took for granted that ‘micro’ (the economics of the firm and of the individual) was a solid foundation, on which the more dubious ‘macro’ (economics of the whole economy, usually a national economy) was to be built. What were the grounds for holding that the one was more solid than the other? We were begging that question, but we should have faced it. To have discussed the foundations of economic theory in gen eral was perhaps too large, and too divisive, a matter for discussion among a group. Heart-searching ofthat kind is better conducted by oneself. An intermediate inquiry might nevertheless have been possible; we might have discussed, without attention to ‘micro’, the foundations of macro-economics. What is macro-economics for? This is a more special question than what economic theory is for; some of the answers which, to j udge from their practice, economists would give to the latter question are clearly ruled out. There is much of economic theory which is pursued for no better reason than its intellectual attraction; it is a good game. We have no reason to be ashamed of that, since the same would hold for many branches of pure mathematics. But macro-economics is not a par ticularly good game. It is true that there are some problems, of purely intellectual interest, which seem to come out of it; but if one pursues them very far, one feels that one is on the wrong track.2 They are not characteristic of macro-economics. 2 I have twice had experience of this myself. Both in the course of working at my Trade Cycle book (1950) and in the course of working at Capital and Time (1974) I found myself involved with convergence problems which were math ematically interesting. I could not refrain from giving them some attention, though I felt that they were questions which, in view of the nature of my models, I ought not to be asking. PREFACE IX Secondly, there is a part of economic theory which is pursued for the sake of ideology; it is concerned with ideal arrangements, whether of the Left or of the Right. There is something of that in the work of Keynes, who is the father of modern macro economics; but in the work of his successors (those who would regard themselves as macro-economists) it has faded out. Macro-economics is more down to earth than that. In the third place, there is optimum theory, alloca tion theory, ‘given ends and scarce resources’. In some of its forms, as sometimes in welfare economics, it gets close to ideology. It has nevertheless been shown that it can be realistic, as in its offshoot cost-benefit analysis; and it has something to say which can be of use for business management. But it does not have much to do with macro-economics. Links between them may exist, but they are tenuous. What then is left? There are two main uses which seem to be left. One is descriptive. The concepts of macro-economics are used, all the time, for summariz ing experience, not only by statisticians, but also by politicians and by journalists. One of the tasks of the economic theorist is the criticism of such concepts: the refinement of a pure measure of national income (for instance) and the study of the relation between the pure measure and the practical, or popular, measures which stand proxy for it. I do not question the impor tance of this*activity, but it is not the use with which I shall be here concerned. The other use is the analytical use, which perhaps after all is central. I do not mean analysis in the sense in which all theory is analysis; I am thinking of analysis applied to facts. When theory is applied, it is being used as a means of explanation: we ask not merely what happened, but why it happened. That is causa tion; exhibiting the story, so far as we can, as a logical X PREFACE process. How does one do that? How can one do that? It was by that route that I was led to causality. Having got that far, I had to stand back from economics. The study of causation is much wider than economics; it is what science is about, and what much of history is about. So I could not say what I wanted to say about economics, and indeed about macro economics, until I had taken a stand on much wider questions.

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