Macroeconomic causality

4 October, 2015 at 21:02 | Posted in Economics | Leave a comment

The Greek word “empiric” refers to ancient physicians who based their medical advice on experience, not theory. Medieval empirics came to the conclusion that blood-letting caused improvements in health because the health of the patients often improved after the blood was let. But we know now that temporal orderings do not imply causation, even though we give Nobel prizes [Clive Granger] to folks who use temporal orderings to infer causation. Just to make sure, we call it a fallacy and express it in Latin: Post Hoc Ergo Propter Hoc: After that, because of that.

41xUzvOt-TL._SX311_BO1,204,203,200_For scientifically valid causal inferences, we need an experiment; we need a control group and a treated group. Then the difference between the outcome for the treated group and the outcome for the control group is a measure of the effect of the treatment.

In the area of macroeconomics, experiments are hard to come by. What we have are only temporal orderings: first this and then that.

With only temporal orderings and no experimental evidence, we do what humans do: we rely on stories. To each temporal ordering, we attach a predictive narrative or a causal narrative or both. We draw firm causal conclusions from the temporal orderings when the causal narrative is compelling and when there is no equally compelling predictive narrative. This is literature and wisdom, not science …

So there you have it: Its faith-based decision making, which is very much influenced by the rhetorical skills of the advocates.

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