Pearl before economists: the book of why and empirical economics

Abstract

ABSTRACT Structural Causal Modeling (SCM) is an approach to causal inference closely associated with Judea Pearl and given an accessible instroduction in [Pearl, J., & Mackenzie, D. (2018). The book of why: The new science of cause and effect. Basic Books]. It is highly popular outside of economics, but has seen relatively little application within it. This paper briefly introduces the main concepts of SCM through the lens of whether applied economists are likely to find marginal benefit in these methods beyond standard economic approaches to causal inference. The most promising areas are those where SCM's causal diagrams alone offer significant value: covariate selection, the development of placebo tests, causal discovery, and identification in complex models.