Introduction
The police chief called a gathering of members of the police force to make an important announcement. It took a while for the entire force, including office staff, to congregate in the conference room. The chief felt that this announcement was so important that he had the 911 operators redirect their calls to an answering service.
The chief entered the conference room, which instantly grew quiet. He had indicated in his memo calling this meeting that its importance overshadowed the brevity of the announcement.
The chief began, “I will make this brief. After extensive research, followed by lengthy debate, I finally convinced the city council to ban the sale of ice cream within the city limits during the months from May through October inclusive.
“We have decided to enact this ordinance because of the close correlation between the sale of ice cream and the rate of crime. You can see the relationship in this chart.”
Cause and Effect
Cause and effect in systems
People intervening in market systems frequently commit the error of equating proximity of events with cause and effect. Human systems share the fundamental characteristic that cause and effect do not occur closely in time and space. We may not see the results of the actions we take today either in the same time or the same place. What appears like a sound expenditure now, may prove catastrophic when the effect finally reaches the market.
Comment
I think the story I recount above was originally told as a joke, but if you stop in a small town and discover the absence of ice cream, don’t be surprised.
Does the rise in oil prices really cause price inflation, or do separate events converge to cause the price of gas and the general level of prices to rise at the same time?
The Federal Reserve buys a large amount of government securities from national banks and pays for them by increasing bank reserves; shortly after that, “loan” volume and the quantity of “money” increase. Is this evidence of the “money pumping” they accuse the Fed of doing, or is it the result of the pent-up demand for credit already present in the system?
It’s your turn to come up with an example.
Conclusion
The next time you see an expert present two curves and state the chart proves the causal connection between the two sets of data, ask yourself, “Does this correlation evidence causation or coincidental results from separate causes?
Only an examination of the systemic structure can provide a meaningful answer.