Trygve Haavelmo and the Emergence of Causal Calculus

Abstract

Haavelmo was the first to recognize the capacity of economic models to guide policies. This paper describes some of the barriers that Haavelmo’s ideas have had (and still have) to overcome, and lays out a logical framework that has evolved from Haavelmo’s insight and matured into a coherent and comprehensive account of the relationships between theory, data and policy questions. The mathematical tools that emerge from this framework now enable investigators to answer complex policy and counterfactual questions using embarrassingly simple routines, some by mere inspection of the model’s structure. Several such problems are illustrated by examples, including misspecification tests, nonparametric identification, mediation analysis, and introspection. Finally, we observe that economists are largely unaware of the benefits that Haavelmo’s ideas bestow upon them and, to close this gap, we identify concrete recent advances in causal analysis that economists can utilize in research and education.