Financial Crisis and Causation

One issue with understanding what caused the financial crisis is that there’s surprisingly little clarity out there about what constitutes a cause. So one thing that makes this Barry Ritholz post on the causes of the financial crisis valuable is that he spells out what he thinks a cause is, appealing to the idea of “but-for causation,” which I believe is what they teach people in law school (emphases in the original):

Understand that this is a theoretical discussion based on counter-factuals — what is likely to have occurred if various elements leading up to the crisis were different. We are trying to discern the differences between primary and secondary factors, separating the causes from the exacerbators.

Whenever someone asserts as a cause an event or force relative to a particular outcome, you should always ask: “Is this a “BUT FOR cause of that outcome?” In terms of a specific result or outcome, “But for” this factor, how would the outcome have changed? Would the result have been the same or different?

I’m broadly sympathetic to that account, but it’s worth emphasizing that there are a lot of complications. Consider this example from L.A. Paul and Ned Hall, “Causation and Preemption” (PDF):

Suzy and Billy, two friends, both throw rocks at a bottle. Suzy is quicker, and consequently it is her rock, and not Billy’s, that breaks the bottle. But Billy, though not as fast, is just as accurate: Had Suzy not thrown, or had her rock somehow been interrupted mid-flight, Billy’s rock would have broken the bottle moments later.

So you can’t say that the “but for Suzy’s toss, the bottle wouldn’t have broken.” But I think a normal person would want to say that Suzy broke the bottle. There’s a lot of work done on this and other philosophical topics. But I would note that in a politics/policy context it often just depends on what we care about.


Imagine I’m in the elephant house at the zoo on a crowded day. A couple of elephants get loose and start stampeding through the crowd. I have a gun on me, and spot some dude I don’t like and decide to take advantage of the chaos by shooting him in the end. Eventually, it turns out that 80 percent of the people who were in the elephant house that day wind up dead as a result of the stampede. From a “but-for” perspective, it’s not clear that I actually caused the dude’s death. But from a legal perspective, it’s clear that I’m a murderer. The point of the statute is precisely to punish people who shoot other people in the head. But from a policy perspective, the bigger issue here is arguably elephant stampedes rather than guns at the zoo. At a minimum, elephant stampedes are killing more people.

What does this have to do with the financial crisis? Well, two points.

One is that when something very large-scale and bad happens, we probably have a few different interests. One is in punishing perpetrators and one is in preventing recurrence. These aren’t necessarily the same thing, and it’s not totally clear that looking for “the cause” is going to get us what we want.

The second is that when something complicated happens, it’s plausible that you’ll see confusing webs of preemption that defy simple counterfactual analysis. Imagine that A, B, C, D, E, F, and G all happened. And suppose that to produce a crisis you need A, plus either B or C, plus any two of E, F, and G. If you try to do a “but-for” analysis on all seven factors, you’re going to reach the conclusion that “A caused the crisis” while B, C, D, E, F, and G all may have contributed in some way but didn’t actually cause it. But it’s not clear that that’s the right thing to say. And it’s definitely not clear that the correct policy response is to focus on A. Maybe A had lots of really beneficial effects, while B and C are both useless.