Philip G. Wright, directed acyclic graphs, and instrumental variables

Abstract

This Special Issue celebrates the seminal contributions of Philip G. Wright to causal inference in economics and puts them in a modern perspective.At its core is a reproduction of Appendix B in Wright's 1928 book The Tariff on Animal and Vegetable Oils . 1 This book deals with demand for and supply of oils and butter.In its Appendix B, Wright made several fundamental contributions to causal inference.He introduced a structural equation model of demand and supply, established the identification of demand and supply elasticities via the method of moments and directed acyclical graphs (D A Gs), developed empirical methods for estimating demand elasticities using weather conditions as instruments, and proposed methods for counterfactual analysis of the welfare effects of imposing tariffs and taxes.Moreover, he took all of these methods to data.Wright's (1928) Appendix B was far ahead of, and much more profound than, any contemporary theoretical and empirical developments on causal inference in statistics or econometrics.In the years leading up to its publication, economists had developed an appreciation for the identification problem in economics, with a focus on identifying demand and supply curves from price and quantity data. 2 Wright himself was one early contributor to this literature, with his 1915 re vie w of Henry L. Moore's book Economic Cycles . 3In this book, Moore provided an extensive analysis of one important source of economic fluctuations, rainfall, and subsequently analysed the statistical relations between percentage changes in observed prices and quantities of various goods o v er time.Moore argued that these 'statistical laws of demand' described 'average changes that society is actually undergoing' (page 77) and were therefore more useful for prediction than Marshallian demand curves, with their dependence on abstract ceteris paribus conditions.He moreo v er emphasized that, for some goods, his statistical laws of demand substantially differed from typical Marshallian demand curves (page 126):Unlike the law of demand for the crops, the law of demand for a representative producers' good is such that as the supply increases the price rises, and as the supply decreases the price falls.In his 1915 re vie w of Moore's book, Wright noted that rainfall is likely to shift the supply of crops but, via its effect on business conditions, the demand for a producers' good like pig iron. 4He concluded that Moore's downward sloping statistical laws of demand for crops may well coincide with their Marshallian demand curves, but that Moore's upward sloping law of statistical demand for pig iron may be closer to a ceteris paribus supply curve.Wright also noted 1 Wright, P. G. (1928).