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## Causal versus Positivist Econometrics

Defining Feature of Real Econometrics

We can define “Real Econometrics” as being the search for causal relationships within a collection of variables. There exists an enormous amount of confusion about what exactly is a causal relationship. We will take a simple and practical approach, developed by Woodward in his book on “Making Things Happen”. Given a collection of variables X,Y,Z1,Z2,…,Zn, we will say that X is a cause of Y if we can create changes in Y by changing the values of X. This is a “practical” definition in the sense that if we learn about causal relationship, we can use it to create changes in the world around us.

Why is there confusion about causality?

Children (and animals) are born with the ability to learn about causal relationships, and to use them to bring about desirable changes in their external environment. Since understanding of causation is built deeply into us, ordinary people find it difficult to understand why philosophers are so confused about causality. We need to discuss this issue because dominant methodology of statistics and econometrics is built on foundations of a philosophy (logical positivism) which is a source of enormous confusion. However, students should not worry if they fail to understand the source of this confusion. The point of trying to explain this is to explain why conventional statistics and econometrics is wrong. It does not matter for learning real statistics.  read more

1. April 17, 2021 at 1:54 pm

The logical positivists (Carnap, Hempel, Neurath, etc.) and their allies (Russell, early Wittgenstein) certainly had their shortcomings. However, modern mainstream economics has never been based on logical positivism, or incorporated it. If it had, it would have probably been better off. Joan Robinson was much closer to logical positivism than was Paul Samuelson. For the record, the characterization of Hume as arguing that causation is merely correlation is in my view, a misunderstanding of Hume. In some ways, Hume was an open systems theorist, perhaps to a fault in denying that we could ever have anything approaching certainty that observed relationships would continue. Hume’s argument was that we often make the inference to causation when we observe persistent connections between events, but that that inference is fallible. Amongst Empiricists, Mill addressed the issue of causality when he noted that the correlation between the sun rising and setting is actually a result of more general causal laws related to the rotation of planets, etc. If you want to blame someone for the sorry state of mainstream economics, the fault does not lie with Carnap, Hempel, Russell, etc., regardless of their shortcomings. The fault actually lies at least in part with Mill’s argument that psychology is the most general law for humans and that we can know psychology through introspection, thus rejecting Compte’s evolutionary and integrated approach to the social sciences. This idea that economics is a “science” based on introspective axioms and deductive chains of reasoning traces to Mill and his betrayal of Empiricism in the social sciences. It was continued through Marshall, though Marshall at least rejected the idea of maximally general axioms and long deductive chains. The view that came later with formal general equilibrium theory of economics being modeled through pure math was also a departure from the ideas of logical positivism.