I’m not trained in philosophy, but I do regard myself as a philosophical pragmatist. So when I grapple with issues of causality I try to imagine which definition of ‘causation’ is the most useful. Consider two possible causes of WWII:

a. Nationalism

b. Mr. and Mrs. Hitler getting married and having a baby in 1889.

I suppose one could argue that both a and b are correct, in the sense of being necessary conditions for WWII, or least (in case b) the specific way WWII played out. (Another hypothetical German leader might have also pushed Germany into to war in the late 1930s, but perhaps with more modest goals.)

But which “cause” is the most useful? If we consider history as a useful guide to contemporary policymakers, I’d say cause “a” is a more useful way of thinking about causation. It’s not very likely that, ex ante, policymakers could identify and stop parents from producing the next tyrant:

And what rough beast, its hour come round at last,

Slouches towards Bethlehem to be born?

On the other hand, the explanation of “nationalism” might lead policymakers to create cooperative multinational structures such as the (pre-euro) European Union. Indeed it’s widely believed that the folly of nationalism was an important lesson of WWII, and a factor in the creation of the EU.

David Beckworth has a delightful and amusing post discussing two views of the business cycle, the balance sheet recession and the deficient excess money demand recession. It only takes a minute, so I’d recommend taking a look before continuing.

Let’s imagine a demand side recession where NGDP falls sharply relative to trend. Also suppose the decline in NGDP is (in an accounting sense) a result of falling base velocity, not a falling monetary base. Recall this famous equation:

MB X Base velocity = P X Y

How do we know whether the recession was “caused” by balance sheet problems or a shortfall of base money? Beckworth doesn’t use this equation, but he points to the “observational equivalence” of the two theories. Both causes imply lower velocity.
In my view the balance sheet approach has some merit under a gold standard regime. The central bank has very limited ability to adjust the base, and hence it’s important to avoid huge swings in velocity. Trying to prevent severe balance sheet problems is one way of doing so (we can debate how effective, but it’s at least a potential solution.)

Under fiat money regimes, the central bank has almost unlimited ability to adjust the base. This makes it natural to think of better monetary policy as being the relevant counterfactual. If the central bank can almost costlessly adjust the base as much as desired, and if it’s really hard to implement regulatory policies so that balance sheet disruptions don’t impact velocity, then I think it makes sense to view monetary policy as the cause of demand-side recessions.

For a philosophical pragmatist like me, the bottom line is as follows:

If doing policy A is the easiest way of preventing economic catastrophe B, then the “cause” of catastrophe B is not doing policy A.

Or at least the most useful way of thinking about causation, among multiple possible factors.

What about under a gold standard? If abandoning the gold standard is the least costly way of preventing something like the Great Depression (and I’m not sure it was necessary to do so, but let’s just suppose it was), then monetary policy, broadly defined, might still be regarded as the most important cause of the 1929-33 contraction. I do realize that this means that the invention of fiat money might be said to “change” the cause of the Great Depression, after the fact. And yes, I’m willing to embrace that paradoxical result. When we fight over history we are actually fighting over current policy issues.

I’m sure readers of this blog are more knowledgeable about philosophy than I am, so I look forward to alternative definitions of causality. I’m especially interested in the ways in which alternative explanations might be more useful. Note that in this post I discussed the implications for public policy. But in other realms there are implications for business, or implications for applications of science and technology, etc. I did not mean to suggest that government policy plays any special role in causality. Just that I find this definition useful as an economist who thinks in terms of which macro policy regimes are best.

If it is unwise to use macro policies to prevent recessions, then the optimal public policy doesn’t tell us anything about causality. Instead you might point to decisions made by private actors that led to recession.

PS. Speaking of baby Hitler and philosophy, is there any more perplexing picture than the cover of this book? And what if Ron Rosenbaum had instead titled his book “Understanding Hitler”? That’s way above my pay grade—I look forward to volume 6 of Knausgaard’s magnum opus. But I do fear that humanity’s relentless pursuit of knowledge will, in the end, leave us in a very cold place.

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