Economics, Economists and Expectations: Microfoundations to Macroapplications

Economics, Economists and Expectations: Microfoundations to Macroapplications

Economics, Economists and Expectations: Microfoundations to Macroapplications

Economics, Economists and Expectations: Microfoundations to Macroapplications

Synopsis

Dealing with the origins and development of modern approaches to expectations in micro and macroeconomics, this work makes use of primary sources and previously unpublished material from such figures as Hicks, Hawtrey and Hart.

Excerpt

In his centenary address to the Royal Economic Society in November 1990, Sir Alec Cairncross said that "of all kinds of human behavior, the forming of expectations seems to me particularly rich in irrational elements" (1991:9). Over three decades after the initiation of the "Rational Expectations Revolution" in macroeconomics most economists who teach and utilize the rational expectations approach would probably question this. For was not the "Gordian knot" - as Simon called it in his 1978 Nobel lecture (1979:505) - of modeling expectations formation in economic models "cut" by Muth's description of expectations as "the same as the predictions of the relevant economic theory" (1961:316). and was not this "revolution" brought about through the "rediscovery" and application - by Lucas and others - of the rational expectations approach as it "first" appeared in Muth's "overlooked" 1961 paper, thereby bringing it into the mainstream of economics in the 1970s and 1980s?

The fact that most economists would accept these statements - which reflect the conventional account of the origin and development of rational expectations - illustrates one of the main problems in modern economics. This consists of a distinct lack of knowledge and interest among many in the economics profession, especially concerning questions of the type "what, when, where, why, and how" regarding the origins and development of the core concepts they teach and utilize daily. Our concern with "what, when, where, why, and how" with respect to the origins of the concept of rational expectations is not merely to set the historical record straight, although that is important. Rather, a reconstruction of the development of rational expectations facilitates a close inspection of the issues at stake in economic theory and practice. Looking backward is far from solely a question of documenting who was first, i.e. who was the originator, but the motives of the researchers for pursuing this line of work, the intellectual problems identified by those who promoted the development of rational expectations and those who resisted its development, the issues that have been forgotten, and the promising paths taken as well as the promising paths that were forsaken. As is well known, there are two fundamental types of expectations formation: exogenous and endogenous.

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