Lars P. Syll — Rational expectations — the triumph of ideology over science

Includes Stiglitz quote, "there is no invisible hand."

Lars P. Syll’s Blog
Rational expectations — the triumph of ideology over science
Lars P. Syll | Professor, Malmo University

Bill Mitchell — Mainstream macroeconomics in a state of ‘intellectual regress’

At the heart of economic policy making, particularly central bank forecasting are so-called Dynamic Stochastic General Equilibrium (DSGE) models of the economy, which are a blight on the world and are the most evolved form of the nonsense that economics students are exposed to in their undergraduate studies. Paul Romer recently published an article on his blog (September 14, 2016) – The Trouble With Macroeconomics – which received a fair amount of attention in the media, given that it represented a rather scathing, and at times, personalised (he ‘names names’) attack on the mainstream of my profession. Paul Romer describes mainstream macroeconomics as being in a state of “intellectual regress” for “three decades” culminating in the latest fad of New Keynesian models where the DSGE framework present a chimera of authority. His attack on mainstream macroeconomics is worth considering and linking with other evidence that the dominant approach in macroeconomics is essentially a fraud.…

Bill Mitchell – billy blog
Mainstream macroeconomics in a state of ‘intellectual regress’
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

David Glasner — A Primer on Equilibrium

Good summary of equilibrium in economics and rational expectations.

Uneasy Money
A Primer on Equilibrium
David Glasner | Economist at the Federal Trade Commission

Cameron K. Murray — Time to revisit how we calculate expectations?

Is rational expectations theory irrational?

Fresh economic thinking

Time to revisit how we calculate expectations?

Cameron K. Murray

Also

Lars P. Syll’s Blog
Flimflam Chicago economics
Lars P. Syll | Professor, Malmo University

Noah Smith — A great critique of Rational Expectations

So why does everyone and their dog use Rational Expectations? Manski says that, basically, it's because A) it's easy, and B) there's no obviously better alternative:

Another part of the reason must be the data used in empirical research. As illustrated in Section 2, choice data do not necessarily enable one to infer the expectations that decision makers hold. Hence, researchers who are uncomfortable with rational expectations assumptions can do no better than invoke some other unsubstantiated assumption. Rather than speculate on how expectations actually are formed, they follow convention and assume rational expectations.

I'd add a third, more cynical reason: Rational Expectations can't be challenged on data grounds. If you measure expectations with surveys, people can poke holes not just in your theoretical model, but in the expectations data that you gathered and the econometric methods that you used to extract a signal from it. But if you assume Rational Expectations, they can only poke holes in the model itself. Basically, substituting theoretical assumptions for empirical results makes a model a more hardened target. If it makes the model less able to fit the data at the end of the day, well..."all models are wrong", right?

Anyway, everyone should go read Manzi's entire paper. Very interesting stuff, even if a decade old.

Why do economists so often assume that they and the decision makers they study share rational expectations? Part of the reason may be the elegant manner in which these assumptions close an economic model. A researcher specifies his own vision of how the economy works, and he assumes that the persons who populate the economy share this vision. This is tidy and self-gratifying.

Noahpinion

A great critique of Rational Expectations
Noah Smith | Assistant Professor of Finance, Stony Brook University

Lars P. Syll — Rethinking expectations

How Rational Expectations Theory involves fitting stylized "reality" to model rather than model to observed reality.

More keeper quotes.

Lars P. Syll’s Blog
Rethinking expectations
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Macroeconomic ad hocery

Lars gives new meaning to "Lucas critique." Smackdown.

Lars P. Syll’s Blog
Macroeconomic ad hocery
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Economic methodology

More commentary from Lars about economic assumptions including methodological, pointing out that this is really not about economics as such, but rather about scientific method, or better, its misuse in order to convey the impression of objective truth. This is not only "mathiness" but also "truthiness." It's a rotten foundation for formulating economic policy that will affect the lives of millions domestically and billions internationally.

Lars P. Syll’s Blog
Shackle on rational expectations

Solow on the need to filter nonsense economicsLars P. Syll | Professor, Malmo University

Brad DeLong — Robert Lucas Rejects the “Microfoundational” Project

Humans are not atoms. But Robert Lucas saying it is hugely important for the impact.

We’re not going to build up useful economics… starting from individuals…

WCEG — The Equitablog
Robert Lucas Rejects the “Microfoundational” Project
Brad DeLong

Lars P. Syll — Arrow on flawed markets, involuntary unemployment and rational expectations

Quote by Kenneth Arrow on the good society, involuntary unemployment and rational expectations that you may wish to have for future reference.

I think the idea that a society has to be responsible for all of its citizens, those who do well and those who do not, is really a precondition of a good society.

Lars P. Syll’s Blog

Arrow on flawed markets, involuntary unemployment and rational expectations
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Rational expectations — the triumph of ideology over science

Excellent quote by Joseph Stiglitz that you may want to bookmark for future use.

Lars P. Syll’s Blog
Rational expectations — the triumph of ideology over science
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Kaldor on rational expectations metaphysics

Like I've been saying, conventional economics is philosophy, not science, and bad philosophy at that. in that the key assumptions are not even reasonable. Philosophers call it gobbledygook — disguising nonsense with jargon.

Lars P. Syll’s Blog
Kaldor on rational expectations metaphysics
Lars P. Syll | Professor, Malmo University

Brad DeLong — Is Choosing to Believe in Economic Models a Rational Expected-Utility Decision Theory Thing?

This is a good one. I won't spoil it.

OK, I can't resist.

The fact that so few economists are in the third camp–and that any economists are in the second camp–makes me agree 100% with Andrew Gelman’s strictures on economics as akin to Ptolemaic astronomy, in which the fundamentals of the model are “not [first-order] approximations to something real, they’re just fictions…”

WCEG — The Equitablog
Is Choosing to Believe in Economic Models a Rational Expected-Utility Decision Theory Thing?
Brad DeLong

Lars P. Syll — Life After Rational Expectations

The real macroeconomic challenge is to accept uncertainty and still try to explain why economic transactions take place – instead of simply conjuring the problem away by assuming rational expectations and treating uncertainty as if it was possible to reduce it to stochastic risk. That is scientific cheating. And it has been going on for too long now.

Back to the high ground.

Lars P. Syll’s Blog

Life After Rational Expectations

Lars P. Syll | Professor, Malmo University

Judy Klein — New Classical Economics as Modeling Strategy

Good critique of rational expectations as the standard for modeling social behavior.

Judy Klein emails a response to a recent post of mine based upon Simon Wren Lewis's post “Rereading Lucas and Sargent 1979”.

Economist’s View
New Classical Economics as Modeling Strategy
Posted by Mark Thoma | Professor of Economics, University of Oregon
Guest post by Judy L. Klein, Professor of Economics, Mary Baldwin College, Virginia

See also Lars Syll, ‘Rational expectations’ — nonsense on stilts

Ramanan — Nicholas Kaldor On Rational Expectations

This [revision of] rational expectations theory goes beyond the untestable basic axioms of the theory of value, such as the utility-maximising rational man whose existence can be confirmed only by individual introspection. The assumption of rational expectations which presupposes the correct understanding of the workings of the economy by all economic agents—the trade unionists, the ordinary employer, or even the ordinary housewife—to a degree which is beyond the grasp of professional economists is not science, nor even moral philosophy, but at best a branch of metaphysics.

The Case For Concerted Action

Nicholas Kaldor On Rational Expectations
Ramanan

Guest Post: Ralph Musgrave — Scott Sumner, MMT, and irrational expectations

Scott Sumner, MMT, and irrational expectations

Ralph Musgrave

Sumner and MMTers don’t see eye to eye. He criticises MMT on his blog from time to time. And Randall Wray had a go at Sumner recently here and here. Anyway, I want to demolish an idea put by Sumner (and indeed many other economists). It’s that rational expectations / Ricardian nonsense. Bill Mitchell described Ricardianism as an idea from La-la land, and quite right. And Joseph Stiglitz said “Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.”

One nonsensical element in “rational” expectations is that economists like Sumner ascribe to households and firms expectation type ideas that are sometimes completely IRRATIONAL. Plus, more often than not, those economists don’t provide any empirical evidence that households and firms actually adhere to those ideas or expectations. A classic example of this is where Sumner claims that helicopter drops will be ineffective because everyone expects the policy to be reversed at some stage via tax increases. As he puts it, “the injections are not expected to be permanent”. Thus the private sector will supposedly hoard it’s helicopter money so that it can pay those taxes. Thus, so Sumner claims, heli-drops have no effect.

Now if government behaves in a rational manner, it won’t withdraw those “injections” at any old random point in time: the injections will be left in place as long as they’re needed. In fact the only reason to withdraw the injections, i.e. run a surplus, is when the private sector gets too confident, and inflation looks like becoming excessive. Put another way, if government behaves rationally, it will withdraw surplus monetary base from the economy only when that withdrawal controls inflation rather than actually reduces demand in real terms, or reduces incomes in real terms. So the typical private sector agent, if they’re 100% rational, and 100% clued up on central bank operations, deficits, etc will not hoard helicopter money. Quite the reverse: they’ll up their spending.

Of course the idea that the typical household or small firm is “100% clued up on central bank operations, deficits, etc is straight out of cloud cuckoo land. But it’s something of that sort that pro-Ricardian economists presumably have in mind when they refer to “rational expectations”. So let’s run with this cloud cuckoo land idea for bit. (I’ll abandon the idea shortly.)

Another point that 100% clued up private sector agents will understand is that it’s impossible for the private sector in the aggregate to get rid of monetary base until the government / central bank machine decides to withdraw it from the private sector. Thus the average or typical private sector entity will realise that when they do up their spending, they won’t actually lose their stock of monetary base because everyone else will be upping their spending as well, so the net effect is that the typical private sector entity’s stock of base remains constant.

Conclusion so far: 100% rational households and firms will not hoard their stock of helicopter money to such an extent that heli-drops are ineffective.

Of course, and to repeat, the idea that the typical household or firm is 100% clued up on central bank operations, deficits, fiscal stimulus, etc is straight out of La-la land, to use Bill’s phrase. And the empirical evidence seems to be pretty much in line with common sense, namely that when households and firms notice an increase in their incomes, they immediately up their spending by a significant amount. Certainly the evidence in relation to tax rebates is that households spend a significant proportion within a year. E.g. see here, here and here.

Of course tax rebates are not exactly the same as distributing helicopter money. But they’re FAIRLY SIMILAR. Plus at least I’ve provided SOME SORT OF evidence to back my points, which is more than most Ricardian enthusiasts do.

And finally there’s a technical point on monetary base I’d better address, as follows. I referred above to non-bank private sector’s stock of base, which conflicts with the popular belief that non-bank private sector entities don’t have access to monetary base. The reality is that if I get helicopter money in the form of a check for $X, I deposit that at my commercial bank, which in turn has it’s account at the Fed credited. And I can do whatever I want with that money. So in effect I do have access to monetary base: it’s just that some commercial bank acts as agent for me when I want my stock of base paid to someone, or if I want to withdraw it in the form of physical cash.

Lars P. Syll — Mark Buchanan on Wren-Lewis and alternatives to rational expectations

So again, it seems as if the purpose of the [rational expectations] model is to see how we can get the conclusion we want, not to explore the kinds of things we might actually expect to see in the world. This is what makes people angry and I think rightfully about the RE idea.
I suspect that the REAL reason for this is that, if one uses more plausible learning behavior (not the silly naive kind of adaptive expectations), you find that your economy isn’t guaranteed to settle down to any kind of equilibrium, and you can’t say anything honestly about the welfare of any outcomes, and so most of what has been developed in economics turns out to be pretty useless. Economic theory loses its authority and most economists find that too much to stomach. — Mark Buchanan

Mark Buchanan on Wren-Lewis and alternatives to rational expectations
Lars P. Syll | Professor, Malmö University

Robert Waldmann — Rational Vs Adaptive Expectations

I note that the assumption of naive expectations leads to the belief that there will be irrational speculative bubbles in which agents assume some asset price will increase because it has in the past. This is one of they key features of the data. It is possible to reconcile this witih the rational expectations assumption, because anything at all can be reconciled with the assumption (note I never assert that the rational expectations hypothesis is false since we all agree that there is no falsifiable rational expectations hypothesis).

Angry Bear
Rational Vs Adaptive Expectations
Robert Waldmann

See also:

Real-World Economics Review Blog
Are ‘rational expectation’ economists right and does everybody have the same concept and perception of inflation?
Merijn Knibbe

Lars P. Syll — Are economists rational?

Lars quotes über-statistician Nate Silver suggesting NOT! Just when the market was suffering from "irrational exuberance" (Robert Shiller), most economists were "overconfident" even though they were in the favorable position of being able to acquire relevant data and presumably knowing how to use it. Prediction success? Abysmal.

Lars P. Syll's Blog
Are economists rational?

Lars P. Syll | Professor of Social Studies and Associate Professor of Economics, Malmo University