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
                    A. Strong
                    B. Weak
                            1. Separable
                                    a. additive
                                    b. overlapping
                            2. Non-separable
                                    a. Static
                                           i. reciprocal
                                           ii. non-reciprocal
                                    b. Contemporaneous
                                           i. reciprocal
                                           ii. non-reciprocal
                                    c. Sequential 

    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 A 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.
            Contemporaneous causality, 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 in 1956.
            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
      Auburn Unviersity