Causal versus Teleological Explanation in Economics

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Causal versus Teleological Explanation in Economics Author(s): Tönu Puu Source: The Swedish Journal of Economics, Vol. 71, No. 2 (Jun., 1969), pp. 111-126 Published by: Wiley on behalf of The Scandinavian Journal of Economics Stable URL: http://www.jstor.org/stable/3438991 . Accessed: 03/02/2015 11:44 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp

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CAUSAL VERSUS TELEOLOGICAL EXPLANATION IN ECONOMICS' Tonu Puu Universityof Uppsala

1. Scientific explanations A scientific explanationmay be regardedas an answerto the questionwhya certain event does occur. The explanation of singularoccurrencesusually involvesthe applicationofa general"law ofnature".Such lawsare universally quantifiedconditionalstatementsof the type "it is trueforeveryx, that if it possessesthe propertyp, thenit also possessesthe propertyq", symbolically: (x) (p(x) -+q(x)). The particularexplanationuses the generallaw togetherwith an affirmative statementthat in the case consideredthe antecedentclause is i.e. thatforx = a theproposition in a deducfulfilled, p(a) is true,as assumptions tiveinference wherethefactto be explained,i.e. q(a), appearsas theconclusion. Such generallaws have to be corroborated by observationalevidence,i.e. they mustin principlebe falsifiableand theymusthave been subjectto actual risk offalsification. A corroboration meansthatin actual observationno x has been found,suchthat it possessesthe property p withoutpossessingthe propertyq. have been Special qualifications requiredby some philosophersfromsuch conditional statements as may be acceptedas "laws of universallyquantified nature".Accordingly, it has not been consideredsatisfactory that a statement of this kind is "merely"well corroborated, but it has been requiredthat the laws mustbe somehow"necessary"or "nomological".This "necessity"is not understoodto mean logical truth.Rather the requirementof "necessity" fromthe realm expressesa desireto removemerelyaccidentalconcurrences of scientific laws. However,it is not possibleto state clearlywhatis meantby "nomicuniversality"overand above nonexceptional repetitionofobservations that do not contradicta universalproposition.Hence, most philosophersof scienceat presentdo not requireanythingmorefrom"laws of nature" than that theybe well corroborated universalpropositions.2 The author is deeply indebted to ProfessorTord Palander formany stimulatingdiscussions on the subject. 2 See R. B. Braithwaite, ScientificExplanation-A Studyon thefunctionofTheory,Probability and Law in Science, Cambridge 1964, pp. 293 ff.,E. Nagel, The Structureof ScienceProblemsin theLogic of ScientificExplanation, London 1961, pp. 57-73, and H. Reichenbach, The Rise of ScientificPhilosophy,Berkeley 1951, pp. 157 ff.The requirement,that it would be necessaryforeverything,that if it had one propertyit mustalso have another, is regarded as nonsensical. There remains, however,some preoccupation with the case where a universal statement of the kind referredto is "vacuously" consistentwith observational evidence. This happens if there are no x:es observed to possess the property p at all. Counter-factualstatementsof the type "there are no x:es such that p(x) is true, but ifthere were any, then q(x) must be true forthose too" are not regarded as scientificlaws. 1

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112 ToinuPuu Two types of explanation,called "causal" and "teleological"respectively, are importantin currentdiscussionson the characterofscientific explanation.' in the following In brief,theymay be characterized way. The causal explanaoccurrenceofanothereventas a causeto the occurrence tionstatesa preceding to be The teleological the event of explained.The latteris called the effect. explanationstates a futureoccurrenceof anotherevent as a "final" cause to the occurrenceofthe eventto be explained.The explicandumeventis said to occurin orderthatthe finalcause be obtained.2 2. Causal explanations A causal law is usually assumed to meet a numberof requirements, stated different The authors. four are withsome differently by following qualifications minormodifications reproducedfromthe acount of causalityby Nagel.3 First,the law is oftenrequiredto be a universallyquantifiedconditional conditionforthe effect.This must, statement,wherethe cause is a sufficient however,be immediatelymodified.Sometimesone especially "important" conditionbelongingto a set ofdifferent conditions,whichonlyin conjunction make up a sufficient conditionforthe effect,is picked out as a cause. The conditionsbelongingto this set is tacitly prevalenceof the complementary assumedwheneverthe condition,pickedout as a cause par pr6ference, actually conditionsmostlyhave the characterof prevails.Thus, these complementary moreor less permanentconditions.For example,the striking ofa matchis said to be the cause ofitsburstingintoflame,whereasthe presenceofoxygenin the atmosphereand drynessof the match are conditionstacitlyassumed to be made concernsthe problemthat the cause need prevalent.This modification sufficient not explicitlystate complete conditionsforthe effect. There is, however,anothertype of modificationwhichoughtto be mentionedin thiscontext,namelythat the cause may be regardedas belongingto the necessary insteadof the sufficient conditionsforthe effect.If the focusof interestin practicalapplicationsof the causal law is the producingofoccurrencesofthe eventcalledeffectit is naturalto be concernedwithsufficient conofthe ditions.If, instead,the focusof interestis theprevention ofoccurrences event called effectit is equally naturalto be concernedwithnecessarycondiSee Reichenbach, op. cit., pp. 191 ff.Also cf. Braithwaite, op. cit., pp. 319 ff. The concept of final cause is historicallyone of the fourcauses specifiedby Aristotle,i.e. the material,formal,efficientand final causes. The firsttwo are without interest in the present context, the remaining two referto the efficientcause in causal explanation and to the final cause in teleological explanation. Thus, teleologicalexplanation is sometimes also called final. Both terms referto the purposiveness involved when future goals are considered as causes to present events. The approximately synonymousterm functional explanation serves to focus attention on the role the explicandum is playing as part of a whole (organism or society) in order that specific goals be obtained. The distinction is not clear as some authors regard functionalexplanation as a sub-case of teleologicalexplanation, whereas othersregard functionalismas the more general concept. 3 See Nagel, op. cit., p. 74. 1

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Causal VersusTeleologicalExplanationin Economics 113 tions.The directionof implicationin a sentencestatingthe logicalrelationbetweencause and effectis obviouslyoppositein the two cases. This ambiguityas to whetherthe cause belongsto a set ofnecessaryor to a conditionsforthe effectseems to haveinducedsomephilososet of sufficient define a "refined"conceptof causality,wherethe cause is imagined to phers to completea set of conditionswhichin conjunctionmakeup a sufficient as well as necessaryconditionforthe effect.'This refinement is, unfortunately, connectedwithgreat disadvantages,because the requirementthat the cause be not onlya "marginally"sufficient conditionbut a "marginally"necessary conditionas well involves a narrowingof the class of occurrencesunderstood as effect.Afterall it is not necessaryto strikea matchin orderto make it burst into flame,because the same resultis obtainedby approachingit to a burning candle. Thus, in the classificationof effects,the burstinginto fromthe burstinginto flameby apflameby strikingmust be distinguished an a candle. Such enteringofthe cause intotheverydefiniproaching burning tion of the effectmay make the explanationstrivial. ofthe eventscalled cause and effecthave to be infiSecond,the occurrences In orderthat spanitesimallyclose or "contiguous"spatiallyand temporally. or remote occurrences of events be tially may regardedas cause temporally and effect,theymustbe connectedwitha chain of spatiallyand temporally close causal relations.The relationof causalityis thus a transitiveone, which makes it possibleto eliminatethe occurrencesof intermediary eventsin the chain. The requirementof spatial and temporalcontiguityis specificforthe physicalsciences. In the social sciencesthe cause correspondsto the stimulusand the effect to the responsein the behaviourofhumanindividualsor groupsofindividuals. The "atomic"causal relationis accordingly linkedto thesinglebehavingagent. In orderthat causal chains linkingseveral behavingagents may be formed, somerequirements have to be madeabout communications thatmakedecisions or actionsof one agent knowableto otheragents. Thus, the responseofone agentbecomesthe stimulusofanotheragent.If the actionstaken bydifferent ofeventsto be linkedby causal relations, agentsare regardedas theoccurrences is necessaryin orderthat actionstaken by one agent may be communication knowableto otheragents.Onlythenmay the same occurrenceof an eventbe bothcause and effectin a causal chain.Thus,in the social sciencescommunicationreplacescontiguity. As has Third,in the causal relationthecausemusttemporally precedetheeffect. been mentioned,this establishesthe fundamentaldifference betweencausal and teleologicalexplanations. This irreFourth,the causal relationhas to be asymmetricor irreversible. is a resultofpurelogicwhenthecausal law is a conditionalstatement versibility About the so-called "refinedconcept of causality" see forexample P. H. Nowell-Smith, Cau8ality, in Encyclopaedia Britannica, 1964, Vol. 5, p. 106.

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Swed. J. of Economics 1969

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114 Tinu Puu as assumedabove. Moreover,extra-logicalrequirements, such as that oftemof cause before the same result. The asymmetry effect, yield poral precedence the of also be result may solely extra-logicalcircumstances, providedthat the the not assumed is sufficient forthe effect, cause,given conditions, tacitly only but necessaryas well. The logicalrelationbetweenthe (complete)cause and the effectis thenbi-conditional, i.e. symmetric.

3. Teleological explanations It mayseemreasonablethata law is requiredto be causal in orderthatit may be consideredas really"scientific"-especiallywhencausal laws are compared to functionalor teleologicallaws. An explanationin termsof cause and effect seems to be morerespectablethan teleologicalexplanationswhich"explain" certainphenomenain termsofthe "function"theyperform in orderthat some "organism"-biologicalor social-may "subsist"properly. In biologicalsciencethe subsistenceor survivalof the organismmay be conceivedof literally.In the social sciencesit oughtto be especiallynoticed thatthesubsistenceofa societyoftenmeansa stationarycontinuanceofcertain social procedures.Because ofthis,value judgementsbecomeinvolvedin teleoofcertain logical explanations.The stationarycontinuanceof thefunctioning social institutionsis easily regardedas desirablewhen those institutionsare "explained" in termsof the-possibly vital-functionsthey are performing in theexistingsociety.As the discussionis confinedto thissole alternative,the impressionis createdthat the vital functionsmay not be properlyperformed unlessall theseinstitutions are retained. The mostannihilatingcriticismof teleologicalexplanationswhichhas been deliveredup to nowis probablystillprovidedby theaccountofthepanglossian preceptsto Candideby Voltaire:1"I1 est d6montrd, que les chosesne peuvent btreautrement: car tout 6tantfaitpourune fin,tout estndcessairement pour la meilleurefin.Remarquezbien que les nez ont t6 faitspourporterdes lunettes, aussi avons nous des lunettes.Les jambes sontvisiblement pour institudes ^tre chaussees,et nous avons de chausses.Les pierresont 6t6 form'espour btretaill6es,et pour en fairdes chateaux, aussi monseigneur a un trbsbeau chateau; le plus grand baron de la provincedolt btrele mieux log6; et, les cochons6tantfaitspour etremangds,nous mangeonsdu poretoute l'annee : par consequent,ceux qui ont avanc6 que tout est bien ont dit une sottise;il fallaitdire que tout est au mieux."Economicdigressions on the "functioning" of competitiveequilibriumfrom"invisiblehand" economicsup to paretian optimalityare examplesof the genreat issue,as has been clearlyestablished by Myrdal.2 1

2

See Voltaire, Candide ou l'optimisme,Chapitre premier. See G. Myrdal, Vetenskapochpolitiki nationalekonomien,Stockholm 1930.

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Causal VersusTeleologicalExplanationin Economics 115 4. Other types of explanation However,it is notnecessarythatscientific explanationmustdegenerateinto if value not judgments everythingis causal in the sense teleologyinvolving definedabove. Nagel specifiesseveralclassesofexplanationin reputablescience thatare by no means causal.1Two of those classesmaybe ofspecificrelevance formoderneconomics. Laws assertingmathematicalfunctionsthat relate a set of variables,such ofideal gas, are not as Boyle's law relatingpressure,volumeand temperature necessarilycausal. Nagel stressesthatthe law does not assertforexamplethat is followed a changein temperature by somechangein the volumeor the presthat in withchangesof asserts a but sure, change temperatureis concurrent wherethe volume,pressureor both. The factthat in laboratoryexperiments, law is tested,a changeof volumeat constanttemperaturemay be arranged is said to expresssomething firstand the changein pressurenotedafterwards about the orderoflaboratoryoperationsand not about the orderofthe actual changes.2 Therehas been a tendencyin economicsto regarddemandand supplyfunctionsas suchnon-causalrelationsbetweenquantityand price.This viewis well forsimultaneous ofdemandand supplyfunctions adjustedto the employment in of and static determination equilibriumprice quantity analysis.If thefunctionswereregardedas causal relations-a view whichwould seem reasonable because of the derivationof demand and supplyfunctionsfromtheoriesof optimalbehaviourof singlesubjects,wherethe decisionsabout quantitiesdemandedand suppliedfurnish responsesto thestimulusofa priceconstellationtheory thingswouldbe muchmorecomplicated.In orderthatstaticequilibrium be an intelligibleexplanationat all, explicitassumptionsabout the processes and about the transactionproceduresmust then be of price determination introduced,somethingwhichis done by, forexample,Walras in the theoryof "t tonnements".However,it seems that just such an explicitstatementof as is necessitatedby the causal conpricefixationand transactionprocedures, demand and is of supplyrelations, somethingverymuchdesirableception this would lead and rightinto evolutorydynamicsas opposedto equilibrium statics. if the theoryof market The case would of coursebe completelydifferent well was a corroborated observational evidence-as is the by equilibrium theory in case withBoyle'slaw (at least someregionsofthedomainsofthevariables). There it is not necessaryto state explicitlythe microprocessesthat actually lead to the co-variationof temperature,volume and pressurein ideal gas, new perspectives.But althougha furtherinvestigationopens up interesting the staticdemandand supplyequilibriumtheoryof priceand quantitydeterminationis not well corroborated. 1 2

Cf. Nagel, op. cit., pp. 75-78. Ibid., p. 77.

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116 Tonu Puu The conclusionis that the conceptionof a set of non-causalmathematical the values functions determining relatinga set ofvariablesand simultaneously of the variablesin equilibriumpresentsat least a dangerin economics.The somerelationsexplicitlywhich causal viewservesas a compulsionto formulate the be because otherwise may ignored procedureis too difficult. "scientific"non-causallaws mentionedby Nagel Anotherclass of perfectly is providedby the laws that do not assertthat the occurrenceofone eventis ofanotherevent,but assertthatin a invariablyaccompaniedby theoccurrence series of the occurrence of one eventis accompanied trials, "sufficiently long The frequency". by the occurrenceof a secondeventwithan invariablerelative relationbetweentwoeventsmaybe impossibleto stateas a causal dependence oftheeventsbecausethe whichmustalwaysholdbetweensingularoccurrences which the conditionsfor circumstances cause make up sufficient jointlywith theeffectmaybe so manyor so difficult thattheymustbe ignored. to identify forsufficiently ofthe events Nevertheless, largeclassesofsingularoccurrences it maybe possibleto statea frequency withwhichthe "effect"followsuponthe "cause", as the effectof the ignoredcircumstancesmay be stabilizedat a fromcalling certainlevel fora sufficiently largenumberof cases.Nagelrefrains suchlaws causal, by reservingthe termforuniversalpropositions only.' However,whetherprobabilisticlaws be called causal, or not,such laws are as importantin the social sciencesas theyare in quantummechanicsor in thermodynamics. Thus, as thereare importanttypesof scientific explanationwhichare not causal in the senseused by Nagel, it wouldbe foolishto insistupon causality forall scientificlaws. Nevertheless,at least teleologicalexplanationsseemto be very unsatisfactory accordingto Reichenbachand oughtto be replaced causal by explanations.2The evolutionaltheoryof Darwinis suggestedas an especiallysuccessfulreplacementof a teleologicalexplanationin termsof a ofinherfinal cause by a causal explanationin termsofaccidentaloccurrences itable mutationsand competition with"survivalof the fittest"as a selective the Because of uneasiness whichteleologicalexplanationsset up in principle. ofthe extent criticalmindsit maybe worthwhileto makea briefinvestigation to whichmoderneconomicsemployssuchexplanations. 5. The optima of individual agents At firstit may seemto be obviousthat the behaviourtheoriesof individual firmsand individualconsumersare teleological,as purposiveactionin orderto is obtain maximumprofitor maximumsatisfactionof consumerpreferences assumed.But an importantpointis that it is not the actualfutureoccurrence of maximumprofitor maximumpreference satisfaction withinthe set ofpos1 Ibid., p. 75. See also Reichenbach, op. cit., pp. 191-214. 2 See Reichenbach, op. cit., pp. 191-197. Swed. J. of Economics 1969

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Causal VersusTeleologicalExplanationin Economics 117 the actionor the decisiontaken by theindividual siblechoicesthatdetermines of maximumprofitor preference satisfaction.The subject,but its expectation determined actual occurrence in the future, is not itself by any expectation but by presentconditionsand previousexperience.The factthat the explanationis notteleologicalis obviousfromthefactthata (single-valued) expectation theaction whichmotivatesa certainactionmaywellbe mistaken.Nevertheless has occurredeven if the expectationis mistaken.It oughtto be noticedthat the case is not alteredby the factthat sometimesthe commoneffectofpurposive behaviourof different individualsubjectswithsimilarexpectationsis the establishmentof just such a state of affairswherethe expectationsturnout to be moreor less true.If the investorsin commonsharesexpectthe pricesto rise,theywill act so as to bringforthan actual rise of shareprices.But the actionsalreadytaken wouldnot be alteredeven if somethingoccurredwhich wouldcause the expectationsto turnout to be wrong. causal evenif Individualdemandand supplyfunctionsseem to be perfectly with the of time behind are not quantities help periodindices. lagged prices the as mathematical functions The tendencyto regard price-quantity relations expressingnothingbut sets ofpossiblepairsofvalues ofthe variables,without has obscuredthings.However,the fundamentally any causal interpretation, wherepricesare causesand causal characterof demandand supplyfunctions, is in my opinionobviousfromthe quantitiesdemandedand suppliedeffects, mean.It is typicalthatPatinkin to explainwhattheinversefunctions difficulty ofa demand makesa mistakewhenhe triesto giveindependentinterpretations functionand its inverse.' The formeris explainedby sayingthat "an individualis confronted witha priceoverwhichhe has no controland askedtoindicatetheamountofcommodity he demandsat that price".The latteris explainedby sayingthatan individual is confronted witha quantityand "asked to indicatethe highestperunitpricehe is willingto pay forthat amount".Even if the latterdescription is not quite clear,because it is not obviouswhichothervariablesare determined exogeneouslybesides the variable mentioned,a little exercise with indifference may not maps and budgetlinesrevealsthat the two formulations of the completeset of explainthe same function.It is truethat a specification exogenousvariablesis failingin the formerdescriptiontoo, but this case is familiarand thereit is self-evident thatincomeand all thepricesareexogenous. But in thelatterdescription, whichvariablesare to be regardedas exogenous and whichvariablesare to be regardedas endogenous,exceptthetwovariables -one priceand one quantity--thathave been classifiedby the formulation? If one decides to regardthe incomeand all prices but one as exogenous togetherwith one quantityand to regardall quantitiesbut one as endogenous togetherwithone price,thereis no answerto the questionwhichis thehighest priceat whichtheindividualis willingto buy the fixedquantity-if not the 1

D. Patinkin, Money, Interestand Prices, New York 1965, p. 388.

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118 T6nu Puu trivial answer merelystatingthe highestpriceat whichthe consumermay affordto buy thefixedquantitywhenhe spendsall hisincomeon it. If, on the otherhand, the incomeand all the quantitiesare regardedas exogenousand all the pricesare regardedas endogenousthe questionis meanare in termsof quantitiesand because thereis ingless,because the preferences no choiceat all witha fixedoption.The benefitofthisoptionis independentof the pricesat whichit is acquired,providedthat no possibilityofbenefitfrom futureexpenditureof savingsis introduced.This would,however,introducea completelynew theoryand it wouldnot help to determinea maximumprice. 6. Market equilibrium It is muchmorereasonableto regardas teleologicalthetheoriesofstaticmarket wherethe moreor less "invisiblehand" ofcompetition establishes equilibrium, an equilibriumconstellationof marketpricessuch that potentialbuyersand by marketexchange. potentialsellersmay obtaintheiroptimasimultaneously Sometimesit seems that static equilibriumtheoryprovidesnothingbut a definitionof equilibrium.But this is not the whole truth,as some kind of "tendency"to equilibriumis assumedto exist in reality.Thus, discourseson static equilibriumpretendto explain something. An interesting analysisof teleologicalexplanations,wherea systemis said to tendto a certainstateand to stayin sucha stateifit is achieved,is presented theoryof by Rudner.1An applicationofhis line ofreasoningto theequilibrium The as follows: constellation determination run equilibriumprice might price as it is the onlyonewhich is the mostinteresting specificpriceconstellation, is such that the systemdoes not displayan internaltendencyto changethe constellationonce it has been achieved.As everynon-equilibrating priceconit would seem reasonable stellationsets up an automatictendencyofchange, to regard the "probability"that the price constellationin any periodis an equilibratingone as greaterthan the probabilitythat the price constellation is any other specificone in that period.But if the possibleconstellationsare verynumerous,thenanyprobabilityfora specificpriceconstellation would be vanishinglysmall-even thegreatestofthem.This seems,unfortunately,to decreasethedegreeofattentionwhichtheequilibriumstatedeserves. The teleologicalcharacterofthe explanations,providedby the statictheory seems to have been regardedas unsatisof equilibriumpricedetermination, "auctioneers"have been in viewofthefactthatfictitious factoryby economists and instantaneemployedby Walras and Patinkinas agentsin (interminable in error and trial of finallyresulting ouslyrapid)processes priceadjustmentby equilibrium.This is at best an obscureanalogyof what actuallyhappensin a very limitednumberof markettypes. Here a causal explanationwould be the agents-in the existenceof whichit oughtto highlydesirable,specifying 1

See R. S. Rudner, Philosophyof Social Science, Englewood Cliffs1966, 84 ff.

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Causal VersusTeleologicalExplanationin Economics 119 be possibleto believe-who fixthe pricesand specifying the conditionswhich determinethe purposiveactions of these agents. This requiresa genuinely of economictheory.Onlyin pure monopolytheorydoes dynamicformulation the static theoryprovidea causal explanationof price determination. Other marketequilibriumtheoriesdo not providecompletecausal explanations,as severalimportantbuilding-blocks are missing. As a parentheticobservationit may be added that it is muchmoreeasily understandablethat natural scientistshave been temptedto introduceequilibriumtheoriesthat apparentlymustbe interpreted as teleological,thanthat social scientistshave done this.Manya processdealt withby naturalscientists shows an astonishingly rapid approach to an equilibriumstate. Oftensuch to seem follow somekindofuniformschemeor "plan". If some processesmay characteristicsof the equilibriumstate are said to prevail "in orderthat" equilibriumbe maintained,merelya poorexplanationis provided. But in moderneconomicsthe case is stillworse,as nobodyhas yet observed any rapidapproachofan economicsystemto an equilibriumstate. It does not helpto say thatsuchan approachwouldoccuriftherewerenodisturbing shocks, as this statementis uncontrollable and as its predictivepoweris diminished to as longas disturbing shocksdo occur.Thus,the conceptionofan insignificance equilibriumstate is not a resultof accurate observation,but is a theoretical construction. This would be different if the imperialedict on pricesissued by Diocletian was in forceto-day,but the changingmoderneconomyis veryremoteas to its structureformthe stationaryeconomyoflate antiquity.

7. Perfect foresight A specificpeculiarityarisesbothin the theoriesofindividualoptimaand in the theoriesof marketequilibriumin connectionwithone typeofexpectationsof the behavingagents.It has been maintainedabove thatexpectationsoffuture eventsas stimulito currentactionsmay well be elementsin perfectlycausal explanations.This is, of course,true only if the agents do not have "perfect foresight".If this assumptionis made, as in theoriesof intertemporal equiin thetheoryis introduced, libria,not onlya dangerof internalinconsistency but the difference betweencausal and teleologicalexplanationsis abolished altogether.This is so because the futurebecomesas knowableas the past to the behavingagents. An embarrassingquestionis why in such a case the economistsdo not themselveshave access to such a perfectforesightof the future,but have to be contentwithimperfect theories.In thiscontextit ought to be noticedthat perfectforesight does not mean single-valuedexpectations, as mightbe concludedfromnot verycarefuluses ofthe termperfectforesight. Genuinelyperfectforesight has, however,been employedby severaleconoSwed.J. ofEconomics1969

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120 T6nu Puu mists.Lindahl providesan excellentexample of this kind of reasoning.1The idea of perfectforesight is employedboth under"stationaryconditions"and In the formercase the "individuals'ideas concerning conditions". "dynamic thefutureare suchthat theiractionsbringabout exactlythe conditionswhich theyanticipated".2Here the problematical thingseemsto be the conceptionof a stationaryeconomyitself,because,afterall,it wouldbe extremely astonishing is repeatedperiodafterperiodin an unchanged if,in a societywhereeverything is a natural manner,thebehavingagentsdid notfindthisout. Perfectforesight the in as this of that all ecophenomenon type society.Moreover, knowledge the professional nomicquantitiesare constanthas so simplea structure, economistswouldbe completelysuperfluous. The problemof perfectforesight becomesmoreintriguing in an evolutory the the of role of in this type of discussion economy.In perfectforesight societyLindahlarguesthat"all pricesin all theperiodsincludedin thedynamic process"are "linkedtogetherin a uniformsystem".3This linkingis accomcurrentpricesforeach period, plishedby equilibriumconditionsdetermining conditionsare affected"not onlyofthe pricesruling wheretheseequilibrating duringthe periodin questionbut also ofthoserulingin laterperiods,of which individualstake accountin theireconomicactivity".The pricesoflaterperiods are in turn determinedby equilibratingconditionsfor those later periods. not onlyabout pricesrulingin The agentsare supposedto knoweverything, futureperiods,but about the wholesystemof simultaneousequationsdeterminingthe sequence of pricesrulingin the successiveperiodsincludedin the analysis. Lindahlseemsto regardthe developmentofthe dynamiceconomyas somethingverymuchlike the relativemovementswithinthe solar system,where thelocationsand momentaofits membersat different pointsoftimeare linked mechanics. laws celestial Giventhe locations of the deterministic togetherby and momentaofall componentsofthe solarsystemat one pointoftime,it is possibleto deduce theirlocationsand momentaat any lateror earlierpointof to. In thiscase the past may be regarded timeby the aid ofthe laws referred as determinedby the futureas well as the futuremay be regardedas detereconomiesresemblesuchsolarsystems, minedbythepast. The perfectforesight wherethe sun and the planetsare endowedwithconciousmindsand withpertheirmotion.At the same time fectknowledgeabout the laws determining celestialbodies. actions ofthe different of the results thoselaws are purposive 8. Keynesian macro-economics mixtureof causal and theoryis a veryinteresting Keynesianmacro-economic sake of claritya certain non-causalrelationswithina set ofvariables.For the 1

2 3

See E. Lindahl, Studies in the Theoryof Money and Capital, London 1939. Ibid., p. 330. Ibid., p. 319.

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Causal VersusTeleologicalExplanationin Economics 121 ofkeynesiantheoryin termsofone simultaneoussystem formalinterpretation of equations,familiarfromtext-bookson elementarytheory,is used in spite of the factthatthe formulations by Keyneshimselfadmitseveralformalintervariables pretations.It is obviousthatcausalityfora relationbetweendifferent need not requiredatingofthe variables.Moreover,causalitymay not be read fromthe face of the formalcharacterof the functions,as it is not necessary to a cause and a "dependent that an "independentvariable"mustcorrespond variable" to an effect.Ratherthe causal characteris revealedfromthe verbal discoursesmade in orderto justifytheformulaeset up betweensomevariables. The formulaeof the theorydiscussedare the followingones: (1) The definitionalequality Y = C + I + G assertingthatnationalincomein monetaryterms and government is thesumofprivateconsumption, expenprivateinvestments functionC = C(Y - T) assertingthat privateconditure.(2) The consumption sumptionis a functionof disposablenationalincomeafterdeductionoftaxes. upon (3) The functionI= I(i) assertinga dependenceof privateinvestments rate of interest.(4) The definition the long-term ,+ Ma of the amount M-=M of moneyas composedby transactionmoneyand by inactivemoney,held as an asset. (5) The equalityMt = k Y statingthattheneedfortransactionmoney is proportionalto national income. (6) The liquidity preferencefunction Ma =L(i) statinga dependencebetweenthe demand of asset moneyand the rate of interest.(7) The definitionof monetarynationalincomeas long-term the productofthe priceleveland theaggregateoutput Y-=P.0. (8) The social productionfunction0 = F(N) statinga dependenceof aggregateoutputupon total labour forceemployed.(9) The conditionformaximumprofitW/P= of F'(N) statingthat in optimumreal wage rate and marginalproductivity labour mustbe equal. This systemcontainsnineendogenousvariables,namelyY, C, I, i, Mt, Ma, O, P, and N and fourexogenousvariables,namelyG, T, M, and W. Thus,for each combinationofvalues ofthe exogenousvariables,the systemmay determine all endogenousvariables,providedthat certainmathematicalrequirementsare met by the functionsemployed.Moreover,the firstsix equations may be solvedwithrespectto theendogenousvariablesY, C, I, i, Mt,and Ma, giventhe values ofthe exogenousvariablesG, T, and M. If the values ofthese endogenousvariables are determinedby the six firstequations and if the exogenousvariable W is fixed,thenthe values ofthe threeremainingendogenous variables 0, P, and N are determinedby the last threeequations.This formaldependenceofthe last threeequationsupon the firstsix equationssets up whatSimoncallsa "causal order".'It oughtto be noticedthattheproblems aimedat in thispaper do not concernsuchformal"causality"-no matterhow neat it is. In my opinion the consumptionfunction,the investmentfunction,the See H. Simon, Cau.al Orderingand Identifiability,in Hood-Koopmans (Ed:s), Studies in EconometricMethod,New York 1953.

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Swed. J. of Economics 1969

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122 Tdnu Puu the socialproductionfunction and the maximum function, liquiditypreference condition be understood as causal relations.This is may profit expressing obvious fromthe way these functionsare justified,albeitthereis no explicit to time-lagsbetweencauses and effects. reference The decisionofa singleconsumerabout how muchto spendon currentconsumptionis understoodto depend causally upon the incomewhichis at his disposalafterdeductionof taxes. This is indeed a verysimpletheoryof consumer behaviourand appears to be oversimplified in view of an alternative theorywherethe supplyoflabouris determined togetherwiththe amountsof consumergoodsto be demandedwhilewagerate,and notincome,is exogenous. In the latter, alternativetheorydisposable income depends upon labour supplyand is thus somethingwhichonlyshowsa co-variationwithconsumptionoutlayas bothdisposableincomeand consumption outlaydependcausally the same tax of factors, rate,prices consumergoods,intenamelywages, upon restrate etc. But the factthat in the lattermoreelaboratetheorythereis no directcausal dependenceof consumptionoutlayupon disposableincomedoes not implythatthe relationin the simplified theorymaynot be conceivedofas a causal dependence.It merelyraisesthe questionofwhichtheorydoes better serveits explanatorypurposeand thisis a quite different question. Theremay be otherargumentsagainstregardingthe consumption function as a causal dependence.Thus, it may be arguedthat this functionmay not definean invariablecorrespondence betweenaggregateconsumption and aggregate disposableincomeas longas it has not been specifiedhow the aggregate consumers.Different disposableincome is distributedbetweenthe different distributionsof a given aggregatedisposableincome may lead to different aggregateconsumptionoutlays. However,it oughtto be noticedthat thisis relations.In micro-economic theoryan nothingspecificformacro-economic illusionofinvarianceis createdby the factthatthetheoryofconsumer behaviour is formulatedfora fictitiousconsumerwithgivenpreferences. The preferencesare not specifiedwithineconomictheory,as theyare admittedto vary consumersand even fora given actual consumerover time. among different But ifwe wanta completelyspecifiedtheoryto holdfora largegroupofdifferent consumersovertimeperiodsofconsiderablelength,we have to admitthat the consumption to a certaindisposableincomemay outlaywhichcorresponds betweendifferent consumers.In orderto avoid this,a convary considerably sumerwithfixedpreferences is considered.Exactlythe samemaybe donewith respectto the aggregateconsumptionfunction.A set of consumerswithfixed of aggregate preferences may be assumedtogetherwitha rule of distribution ofreality,as a probdisposableincome.Againthismaynotbe a gooddescription abilisticlaw mightbetter stand empiricaltest. But the theoryis causal by its natureas long as no probabilisticdeviationsof consumptionoutlayfrom the value predictedby a fixed functionare introducedin the theory.The but this does not concernits causal structure. theorymay be falsified, Swed. J. of Economics 1969

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Causal VersusTeleologicalExplanationin Economics 123 The corresponding argumentsmay be repeatedforthe otherfunctions.An interestingcase is provided by the maximumprofitcondition.A social difficult aggregation productionfunctionrequiresthat a lot of prohibitively have been but the function is then it is obvious solved, if accepted, problems that the explicitfunctionmay well be writtenso that the dependentvariable is the cause and the independentvariablethe effect.This is shownby the fact thatit is thereal wageratethatis theexternalstimulusforthefirmswhenthey decide how much to produceand how much to employof the labour force that the causal characterof somerelations available. This again demonstrates is revealedby theverbalargumentsbehindtheformalrelationsand not by the merestructuresof the formalrelationsthemselves. to decidewhetherthe relationassertingthattransIt is muchmoredifficult to nationalincomeis causal or not. This proposiactionmoneyis proportional tion is a remnantof the quantitytheoryof money.Sometimesthis theory involvthata certainsetoftransactions was said to expressthemerepossibility the with double services be made of and fixed might ing quantities goods amountof moneyif the pricesof all goodsand servicesweredoubledtoo and the paymentpracticewas completelyunchanged.As long as moneywas rethe quantitiesofgoodsand services gardedas a "veil", incapableofinfluencing it natural to was regardchangesofthe amountofmoneyas causes exchanged, of changesof the pricelevel and thus of monetarynationalincome.But as Keynes was not exactly a "quantitytheorist"it seems morereasonableto regardthe demandof transactionmoneyin his systemas causallydependent upon nationalincome. Even moretroublesomeare the threedefinitional relations.It does not help to say that they are fulfilledby definition.Nevertheless,they pose certain the whole restrictions upon the remainingcausal relationsand thustransform systemto somethingwhichis no longera simplecausal explanation.It is of coursepossibleto resolvethe systemwithrespectto the endogenousvariables in orderto obtain the "reduced" form,wherethe endogenousvariablesare explicitfunctionsof the exogenousvariables.But thesenine "reduced"functionsof fourargumentvariablesare no simplecausal dependences. This is obviousifone wantsto tracethe effectsof,forexample,an increase in the amount of money. Initially there must then be more money than wishedfortransactionsand to be held as an asset at the prevailingvalues of the nationalincomeand the rate of interest.The greateramountof money would be desiredif the national incomewas increased,the rate of interest lowered,or both. But how will these changesbe broughtabout? The theory does not containany assumptionsofa mechanismwhichdetermines thechanges of these variables.Againit is the same problemas in the discussionofmarket equilibria.Is therealso an "invisiblehand" ofmacro-economic dimensions whichbringsit about that the variablesassume certainvalues "in orderto" make it possiblethat everybodymay attain his optimumaccordingto the Swed. J. of Economnics1969

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124 Tanu Puu behaviouralfunctions, whichexpressthe jointeffectsofindividualattemptsto attain optimalpositions?Or is therea macro-economic "auctioneer"?If not, the dynamicchangemechanismsmustbe explicitlystated. It oughtto be noticedthatnothingis wrongwiththe behaviouralfunctions, as theyare perfectly if one wantsto trace causal, but theyare not sufficient the effectsof an increasein the amountof moneyand of otherchangesof a similar character.Assumptionsabout the behaviour of the system,when simultaneousoptimumis not obtained,must be added and this transforms the wholesystemintoa dynamicone. This discussionis closelyrelatedto the econometricdiscussionabout "recursive"and "interdependent" is thatthe econometrisystems.The difference cians are concernedwith mathematicalestimationdifficulties, whereasthe ofdifferent structures. presentdiscussionconcernstheexplanatoryfunctioning Againstthe criticismof statictheoriesmay be objectedthat dynamictheories, when stable, establishthat staticequilibriumis approachedaftera sufficiently longintervaloftime.But thisis reallyno objection,becausejust such a complementation with assumptionsabout the developmentof the system, whennotin equilibrium, is all thatis desired.But ofcourse,thoseassumptions as well as those borrowedfromstatic analysis have to be corroboratedby empiricalevidence. 9. Concluding remarks on causality The concept of causalityseems to have enteredscientificterminology from RomanLaw.1Theretheterm"causa" refersto thevoluntaryactionofa person, who may be held responsibleforthe occurrenceof an event.This originmay in earlyuse ofthe termin physicalsciences. explain the anthropomorphisms cases at issue are for to the "horrorvacui" and Typical examplethe references to othersimilar"voluntaryactions"ofnature.Lateron theconceptofcausality was formulatedmore sharply,so that teleologicalexplanation,in termsof finalcauses,was clearlydistinguished fromreallycausal explanations,in terms ofefficient in a referred to. causes, way already Causalitywas importantin Newtonianmechanics,and still in relativistic mechanicsit servesto determinethe timeorderof occurrencesindependently of the metricsystemfortime measurements.2 As scientificphilosophypretty wellreflectsthe changesin the physicalsciences,it is understandable that causalitywas untilrecentlyheld importantby philosophers.Likewise,the later quantum mechanics,as formulatedespeciallyby Heisenberg,has induced modernphilosophersto abandon the requirementthat all explanationsmust have a purelycausal character.Instead the probabilisticcharacterofthelaws ofnatureis acceptedas something fundamental. Thus,it is acceptedas a matter 1 See the article on causality in Encyclopaedia Britannica, referredto above. Cf. Reichenbach, op. cit., pp. 147 ff.

2

Swed. J. of Economics 1969

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Causal VersusTeleologicalExplanationin Economics 125 of definitionthat probabilisticexplanationsare never causal.' Some statisticians seem to maintain,that, on the contrary,certainprobabilisticexplanationsare causal.2This discrepancyis of courseonlya terminological one. the if that refined of even it is But, highly concept causalityhas accepted lost its importancein the physicalsciences,it is not necessarilytruethat the in the difference betweencausal and teleologicalexplanationsis unimportant is a vital one in the social sciences.It seemsto the authorthat the difference oftheactionsofindisocialsciences.These sciencesdeal withtheinterrelations viduals and groupsof individuals.These agentsmay,accordingto a rationalisticview of humanaction,be assumedto behave in such a way as to obtain certainpurposes.But, as it has been maintainedabove, such purposiveaction causes are not actual causal, becausethe efficient may be regardedas perfectly futureoccurrences, but presentexpectationsabout such occurrences. in highlycomplexsocietiesare explained If, however,certaininstitutions to exist"in orderthat" certainpurposesbe obtained,a teleologicalexplanation is provided,as thereis no physicalagent whichmay have expectationsabout the futureto motivate"its" actions.This involvesobscureanalogiesbetween societies and "organisms"and may serve to conceal conflictsof interests betweendifferent groupsand individualsunder"social purposes".This means that valuationsare easily smuggledinto scientific theorieswhentheyemploy teleologicalexplanations. Moreover,causal explanationsprovidemoreintellectualsatisfactionas it is easierto understandthe motivesofactual agentsin quitea different way than it is to understandwhya "society"functions"in orderthat" certaingoals be obtained,unlesstheterm"society"standsfora government deliberately acting in accordancewith certainpoliticalvaluations.This is why it is muchmore to deal withfirmsthat act in such a way as to obtainmaximum satisfactory withcompetitive than markets,wherepricesare merelyfixedin sucha profits, Thus,ineconomway that all agentsmay obtaintheiroptimasimultaneously. ics causalitymay simplybe takento meanintelligibility ofpurposiveactions of existingagents. For this purposea conceptionof causalityprettyclosely to the unsophisticatedconceptionof Roman Law will suffice. corresponding What has been said applies to deterministic theories.Whetherprobabilistic theoriesin the social sciencesmay be called causal is, as alreadymentioned, matter. mainlya terminological Summary The aim of this paper is to investigatebrieflythe extentto whichcurrenteconomic theoryinvolves causal and teleologicalexplanations.First,the distinctionbetween these two types of explanations is stated in some detail. Some hints are given as 1

See note 10 above.

See H. Wold, On the Definitionand Meaning of Causal Concepts,Entretiende Monaco en scienceshumaines, Session 1964. 2

Swed. J. of Economics 1969

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126 Tinu Puu to where othertypesofexplanations-such as probabilisticones and thoseasserting functionalrelationshipsbetween simultaneouslymeasured values of variables-fit into the picture. In this context, it is suggested that the usual requirementof spatial and temporalcontiguityforphysicalcausality be replaced by a requirement of communicationbetweenindividualagents,as faras economictheoryis concerned. It is pointed out that teleologicalexplanation in the social sciences introducesa specificdangerof valuations being smuggledin (withoutbeing stated explicitly),in the way Myrdalhas described. One of the great meritsof causal explanation is the way in which it elucidates the theoryby making everythingthat happens in an idealized "model economy" intuitivelyunderstandable.This is said to be especiallyvaluable whenthe theoryis as difficultto controlempiricallyas it is in economics. A summarydiscussionof some typical examples fromeconomic theorydemonstratescases of causal as well as of teleologicalexplanation.The optimal behaviour theoryof a singlefirmor consumeris said to be purelycausal-even when no time lags are specified.The equilibriumtheoryof marketprice formationis said to be teleological-especially when some kind of "invisiblehand" is involved. From the viewpointof causality,simultaneousequations determiningequilibria, where several behaving agents with differentobjectives participate, present a problem. What makes investmentsand savings equal in Keynesian economics, where they are results of differenteconomic actions and motivated by different factors?This paper shows that the quest forcausality in such cases requiresthat the dynamicsmakingup the transitionfromone equilibriumto another,be stated explicitlyand intelligiblyas a causal chain of events. The case of perfectforesighteconomicsis discussedin some detail because of the specificpeculiaritythat the distinctionbetweencausal and teleologicalexplanation is impossibleto sustainin this case.

Swed. J. of Economics 1969

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