Hicks’ chef-d’oeuvre

28 Jun, 2020 at 16:15 | Posted in Economics | 2 Comments

When we cannot accept that the observations, along the time-series available to us, are independent, or cannot by some device be divided into groups that can be treated as independent, we get into much deeper water. For we have then, in strict logic, no more than one observation, all of the separate items having to be taken together. For the analysis of that the probability calculus is useless; it does not apply. We are left to use our judgement, making sense of what has happened as best we can, in the manner of the historian. Applied economics does then come back to history, after all.

hicksI am bold enough to conclude, from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed. We have no business to turn to them automatically; we should always ask ourselves, before we apply them, whether they are appropriate to the problem at hand. Very often they are not. Thus it is not at all sensible to take a small number of observations (sometimes no more than a dozen observations) and to use the rules of probability to deduce from them a ‘significant’ general law. For we are assuming, if we do so, that the variations from one to another of the observations are random, so that if we had a larger sample (as we do not) they would by some averaging tend to disappear. But what nonsense this is when the observations are derived, as not infrequently happens, from different countries, or localities, or industries — entities about which we may well have relevant information, but which we have deliberately decided, by our procedure, to ignore. By all means let us plot the points on a chart, and try to explain them; but it does not help in explaining them to suppress their names. The probability calculus is no excuse for forgetfulness.

John Hicks’ Causality in economics is an absolute masterpiece. It ought to be on the reading list of every course in economic methodology.

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  1. Very true. You may recall my earlier comment where I mentioned my experience as an undergraduate student in the early 1970s. In short, I attended a seminar at the Bangladesh Institute of Development Studies where the visiting Cambridge economist, Brian Reddaway was present. After listening to the mesmerising presentation by a young rising economist of his econometrically elegant paper, Reddaway advised to first check whether 2-variable scatter plots tell a plausible story. If not, then to forget sophisticated econometrics. Later as a graduate student in the early 1980s I understood the wisdom of Reddaway’s advice when I took advance monetary economics course from Clarence Barber, former President of Canadian Economic Association. He would come to the class with photocopies of 2-variable plots (long time series data) to destroy monetarism.

  2. “Applied economics does then come back to history, after all.”

    Of course it does. But of course Sargent, Krugman and 99 per cent of the economics profession don’t get this. They can’t. An economist IS basically a mathematical modeller. Although why they insist on this puzzles mathematicians as much as anyone else. There is too much at stake – too many reputations to admit Hicks is right. They will go to their graves clinging on to Model – however stupid and however irrelevant. All we can hope is that they don’t bring the rest of the world down with them.


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