Published online by Cambridge University Press: 05 June 2012
The application of the theory of correlation to economic phenomena frequently presents many difficulties, more especially where the element of time is involved; and it by no means follows as a matter of course that a high correlation coefficient is a proof of causal connection between any two variables, or that a low coefficient is to be interpreted as demonstrating the absence of such connection. In many cases, indeed, the existence of a causal connection between two phenomena is more clearly deduced from mere inspection of diagrams than from mathematical calculation. But simple inspection will not enable us to measure the degree of correspondence, and many points will often remain hidden which may be revealed by a judicious use of correlation.
Comparatively little use has as yet been made in the domain of economics of the methods elaborated chiefly by Mr F. Galton and Professor K. Pearson; the most noteworthy contributions to the Statistical Journal being perhaps those of Professor Edgeworth and Mr Yule. One of the chief difficulties encountered in determining whether the movements of two sets of variables may be attributed to a particular cause arises from the fact that, especially in economics, phenomena which can be completely explained by the action of a single cause are extremely rare. And although there may actually be one, or more than one, cause affecting two phenomena, yet these may frequently be influenced by several other conditions which are not common to both.
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