Common Cause and Special Cause (statistics) - Importance To Economics

Importance To Economics

For more details on this topic, see Knightian uncertainty.

In economics, this circle of ideas is referred to under the rubric of "Knightian uncertainty". John Maynard Keynes and Frank Knight both discussed the inherent unpredictability of economic systems in their work and used it to criticise the mathematical approach to economics, in terms of expected utility, developed by Ludwig von Mises and others. Keynes in particular argued that economic systems did not automatically tend to the equilibrium of full employment owing to their agents' inability to predict the future. As he remarked in The General Theory of Employment, Interest and Money:

... as living and moving beings, we are forced to act ... our existing knowledge does not provide a sufficient basis for a calculated mathematical expectation.

Keynes' thinking was at odds with the classical liberalism of the Austrian school of economists, but G. L. S. Shackle recognised the importance of Keynes's insight and sought to formalise it within a free-market philosophy.

In financial economics, the black swan theory of Nassim Nicholas Taleb is based on the significance and unpredictability of special-causes.