Vol. 2, No. 4, Fall
1980, pp. 4-5
Causality in Economics
by John R. Hicks
New York: Basic Books, Inc., 1979, pp. xii, 124
Causality is an unlikely topic for a book authored by sir John Hicks.
This fact alone may attract many readers and may cause the book to take
on a certain aura of importance. Hicks, by his own account, had not thought
much about this subject until he witnessed the recent inquiries into the
microeconomic foundations of macroeconomics. Significantly, he became convinced
that these inquiries were all question begging and that macroeconomics
and microeconomics are on equal footing. Advocates of methodological individualism
will not be able to understand why he took this position, but the fact
that he took it will help them understand how he could write this book.
The supposed methodological parity between relationships among individuals
and relationships among economywide aggregates is symptomatic of the general
methodological views that underlie Hicks' treatment of causality in economics.
The reader who expects to
discover how to establish causal relationships between economic phenomena
and how to identify the direction of causation will be sorely disappointed.
He will find instead a far ranging discussion that implies a certain taxonomy
of causal relationships. An early chapter entitled "The Kinds of Causality"
identifies a number of categories, but careful reading is required to see
just how each category fits into the overall scheme of things. An outline
is provided here to serve both as a reader's guide and as a format for
the present review:
I. OLD CAUSALITY
A. Natural (acts of man)
B. Supernatural (acts of God)
II. NEW CAUSALITY
Only the more important categories and subcategories will be considered
in what follows. Not surprisingly, Hicks quickly rejects the old concept
of causality of the seventeenth and eighteenth centuries and adopts the
newer concept associated with the names Hume, Kant, and Gibbon. More on
this old/new distinction later.
The major subcategories
under New Causality are Strong and Weak causality. This distinction seems
to permit the separation of statements that use the "if and only if" from
those that only use the word "if." No special significance is attached
to Strong causality, and this category is given little attention because,
according to Hicks, it has no independent research program. [?] Under Weak
causality there is a split between separable and non-separable causality,
although the defining distinction is not particularly helpful. "There are
two kinds of weak causation: separable, in which A is stated
to be a cause of B, by itself, and non-separable, in which
is not stated to be more than part of a separable cause" (p. 13). Subsequent
discussion implies that causation is of the separable variety unless there
are causal relationships among the individual causes. (The abstractness
of this part of the review reflects the abstractness of Hicks' book).
Although it is unclear why
this separable/non-separable distinction should be allowed to define major
categories of causality, Hicks' treatment of the two categories is completely
different. Separable causality is dealt with in a symbolic form only. Hicks
considers the case in which two causes, A1 and A2,
along with an effect, B, are actually observed. Hypothetical alternatives
are then constructed in which either A1 or A2
do not occur and in which neither A1 nor A2
occur. The possible effects ("+" for the occurrence of B and "-" for the
non-occurrence) are arrayed against the actual occurrences and hypothetical
non-occurrences of A1 and A2. This
gives rise to a 4 X 8 table of +'s and -'s. The reader soon discovers that
this exercise is not going to shed much light on the issue of causality
in economics. He also sees that the technique is of limited use, since
the inclusion of additional causes will result in an unmanageable number
of rows and columns. The symbolic treatment offered in this part of the
book could be greatly simplified and generalized by the use of Boolean
algebra, a technique used inter alia in the design of digital computer
circuitry. Boolean algebra, it might be noted, would not respect the boundary
between separable and non-separable causality. More importantly, the adoption
of this mathematical technique would make it obvious that Hicks is really
offering a method of systematically itemizing possible concatenations of
causal relationships. He is not providing a method for establishing causality.
The greater part of Hicks'
book is devoted to New Weak Non-separable causality. But his discussion
of these causal relationships does not seem to hinge on their newness or
weakness or on their non-separability. The focus instead is on the time
dimension of the cause and the temporal relationship between cause and
effect. The three subcategories under non-separable causality (static,
contemporaneous, and sequential) correspond to three perspectives on time:
eternity, a period of time, and a point in time. Static causality describes
the relationship between the economic determinants of a persistent state
of affairs. This is the sort of causality found in classical (i.e. Ricardian)
economics. But here, like elsewhere in the book, the reader will be disappointed
if he is looking for some criteria by which to choose between, for example,
the labor theory of value, subjective value theory, or some eclectic theory.
Hicks is not really concerned with what constitutes causality. He only
notes that there are some theories in which both cause and effect are eternal.
in which both cause and effect span a finite period of time, manifests
itself in Marshallian partial equilibrium analysis and in formal Keynesian
theory (IS-LM analysis). This portion of the book, which concentrates heavily
on Keynesian theory, should be viewed not as a discussion of causality
but as a continuation of the discussion found in Hicks' Crises in Keynesian
Economics and related journal articles. Hicks claims, for instance,
that Keynes was the first economist to fully appreciate the relationship
between the current supply of capital goods and the existing capital stock.
Those who have read the exchanges between Hayek and Keynes in the early
thirties will surely be amazed if not dumbstruck by this claim. (The essence
of Hayek's criticism of Keynes' theory was that the level of aggregation
precluded any possibility of dealing adequately with capital complementarity.)
Hicks does hit upon an important
point about analyzing periods in which expectations are assumed to be constant.
Unless the economy is in long-term equilibrium, expectations about the
future are bound to change during the period as actual occurrences differ
from earlier expectations. Thus, the assumption of static expectations
in period analysis is invalid. This is a theme that has been so emphasized
by Ludwig Lachmann in recent years that it has virtually become his middle
name. Yet, there is no reference to Lachmann's work. Interestingly, Hicks
solves this problem by conceiving of expectations as a range of
outcomes rather than as the mean outcome. So long as the actual
outcome is somewhere within the range, expectations about the future are
not modified. This is the exact solution that Lachmann proposed and discussed
at length in his Capital and Its Structure, which was published
Static causality finds its
expression in static analysis; contemporaneous causality in period analysis.
These categories give way to sequential causality when the analysis is
concerned with disequilibrium phenomena. In his discussion of this third
kind of non-separable causality, Hicks reaffirms that economics is about
individual decisions. This should get the attention of the methodological
individualists. Unfortunately, the multitude of individual decisions is
too soon allowed to be engulfed by huge aggregates. The economy is divided
into three sectors: the Monetary Authority, the Financial Sector, and Industry.
To keep the time element from disappearing altogether, Hicks transplants
the well known policy lags of textbook Keynesianism into each of the three
sectors; that is, the process of decisionmaking in each sector is characterized
by recognition lags, prescription lags, and impact lags. The level of aggregation
implies that there is no need to distinguish between, for example, a decision
to produce consumer goods and a decision to produce capital good. Further,
the treatment of the timing of decisions implies that all decisions within
a sector are made in unison. This unlikely melding of Patinkin aggregates
and Keynesian policy lags is offered as a new research paradigm.
While there are reasons,
as the above discussion suggests, to be dissatisfied with Hicks' taxonomy
of causality and with his treatment of the various categories, the reader
will find a number of appealing ideas scattered throughout the book. These
ideas, however, are not new to those familiar with the writings of the
Austrian school. Hicks introduces what he calls the "Economic Principle,"
a principle much broader than the profit motive conventionally conceived.
It seems to coincide, in fact, with Israel Kirzner's notion of entrepreneurial
alertness. Individuals tend to perceive opportunities and take advantage
of them. Unfortunately, Hicks introduces this principle in his discussion
of static causality, where successful entrepreneurship is taken for granted,
instead of in his discussion of sequential causality, where the entrepreneurial
process could have been investigated.
The important role of time
gets some emphasis in Hicks' book. Happily, time as a factor of production
or as the fourth dimension in a meta-static model gets no play at all.
The focus instead is on the crucial distinction between the past and the
future, There is a recognition that statistical data are unique to the
past and that econometric techniques are of limited value in predicting
what will happen in the uncertain future. It is Hick's recent attention
to the role of time in economics, incidentally, which has caused him to
virtually repudiate his own IS-LM rendition of Keynesian theory.
Hicks will command some
sympathy from Austrian-oriented readers when he deals head on with methodological
issues. There are hints of a categorical distinction between the natural
sciences and the social sciences when it comes to choosing an appropriate
methodology. Hicks echoes Mises when he tells us there are no constants
in economics. He notes that economists nevertheless seek to imitate scientists,
who do have constants on which to anchor their inductive theories, but
he questions first in the preface and again in the final pages of the book
whether they should. Least-squares parameters and confidence intervals
are understood to serve only a decorative function in many cases. Mises
is ecohed again when Hicks draws the distinction between class probability
and case probability. The fact that statistical theory is derived on the
basis of class probability and is then applied to phenomena in economics
which involve case probability makes Hicks a little uneasy. After wondering
out loud whether probability theory applies in economics, Hicks end his
discussion with the "[bold conclusion] that the usefulness of 'statistical'
or 'stochastic' methods in economics is a good deal less than is now conventionally
supposed." The reader will be pleased to see that these methodological
issues are considered important. But the primary effect of Hicks' scattered
remarks is to remind the reader that these issues have been raised and
effectively dealt with by Mises, Hayek, and Rothbard.
Hicks' book is sprinkled
with ideas that have the distinct flavor of methodological individualism.
Why is it that these ideas do not seem to gel into a more palatable whole?
The answer to this question lies at the very beginning of Hicks' taxonomy.
"Old Causality" is abandoned even though its unique suitability for economics
is recognized. "[E]conomics is concerned with actions, with human actions
and decisions, so that there is a way in which it comes nearer to the Old
Causality than the natural sciences do" (p. 9). Why, then did he opt for
the "New Causality" or the Enlightenment? Hicks explains, "It was the 'Old'
association between Causality and Responsibility which had to be rejected"
(p. 7). This rejection was accomplished in the Austrian school by retaining
the older concept of causality and dividing "Natural Causality (acts of
man)," or what might be called "Human Action," into two subcategories.
One category is concerned with the intended consequences of human action;
the other with the unintended consequences. Hayek has argued that the entire
science of economics falls within this latter category. That is, if it
were not for the fact that the individual transactions of a large number
of people give rise to an undesigned order, economics would have not subject
matter, The recognition (implicit or explicit) of the nature of economic
phenomena has caused almost every Austrian economist from Menger to Rothbard
to defend the older concept of causality against the newer concept that
is detached from human actions and human decisionmaking. Had Hicks followed
the Austrian lead and recognized that all economic phenomena are caused
by individuals making decisions, he would have been able to provide a much
more fruitful treatment of causality in economics—and he might even have
discovered why macroeconomic theories need a microeconomic foundation.
Roger W. Garrison