Home > The Economics Profession > Hicks on the inapplicability of probability calculus

Hicks on the inapplicability of probability calculus

from Lars Syll

To understand real world “non-routine” decisions and unforeseeable changes in behaviour, ergodic probability distributions are of no avail. In a world full of genuine uncertainty — where real historical time rules the roost — the probabilities that ruled the past are not necessarily those that will rule the future.

When we cannot accept that the observations, along the time-series available to us, are independent … we have, 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 … I 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 should always ask ourselves, before we apply them, whether they are appropriate to the problem in hand. Very often they are not … The probability calculus is no excuse for forgetfulness. 

John Hicks, Causality in Economics, 1979:121

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To simply assume that economic processes are ergodic — and a fortiori in any relevant sense timeless — is not a sensible way for dealing with the kind of genuine uncertainty that permeates open systems such as economies.

  1. Paul Davidson
    February 25, 2014 at 2:25 pm

    after reading my article on the fallacy of rational expectations, Hicks wrote to me in a letter dated 12 February 1983 in which he said “I have just been reading your RE [rational expectations] paper….I do like it very much….You have now rationalized my suspicions and shown me that I missed a chance of labeling my own point of view as nonergodic. One needs a name like that to ram a point home.”

    This letter is not on file in the Duke University library archive of famous economists.

  2. Paul Davidson
    February 25, 2014 at 3:48 pm

    Correction to my last posting. The last line of my comment should have read “This letter is NOW on file in the Duke University library archive of famous economists.

    Sorry for the my mistyping

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