Home > The Economics Profession > Stiglitz and Syll on Ricardian equivalence and Rational expectations

Stiglitz and Syll on Ricardian equivalence and Rational expectations

from Lars Syll

Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.

Joseph E. Stiglitz, twitter 

[On Ricardian equivalence, see here, here, here, here, and here.]

Rational expectations is taught in every graduate school all around the world. It is also sheer nonsense.

Lars P. Syll, twitter 

[On Rational expectations, see here, here, here, here, and here.]

  1. Ken Zimmerman
    November 13, 2013 at 12:51 pm

    This whole thing is becoming ridiculous. Economists posting here may know economics, or not. I am not the best to judge. But they don’t know beans about science. They treat science as if it was just a matter of citing some hypothesis about the world, and then filling a glass with “empirical content” to see if what was in the glass was consistent with what was in the hypothesis. Not only is this impossible to do in practice, but it is wholly inconsistent with how scientists function. Take a physics example. I’m sure most of you learned in Physics 101 that the Michelson/Morley experiment crushed the Aether theory in Physics. It did not. Einstein in his Special Theory suggests there might be some non-material space filling medium enabling the observed physical processes, an Aether. And Aether is there in Quantum Physics, sub-atomic physics, etc. There is no corresponding theory of this substance so far. But it remains an ongoing search in physics. “Rational Expectations” may be the same I think in economics, a substance or actions that allow other actions to occur as they do. So if works to make understanding easier or more complete this “rational expectations substance” may continue to evolve and be used by economists, or it may go the way of the Copernican solar system – dropped by scientists as of no more use in understanding or explaining the objects scientists study. But careful, even Copernicus may return.

  2. November 13, 2013 at 4:27 pm

    unfortunstely Ken you do not seem to underst5and thast the properties required or rational expectations are incompatible with the empirical data of economics.

    Rational expectations requires the ergodic axiom as even their propoents admit. but , we find that most macroeconomic data are not homogenous over tie (i.e., no9nstationary) and therefore nonstationatirty is a suffci8ent condition for a nonergodic stochastic system. Ergo rational expectations can not be a useful tool, i.e., a substance that allows other actions (in the world of experience) to occur.

    Itis not dropped by the mainstream mainly because it allows them to “explain” behavior in a fictional world where the future is PREDETERMINED from the moment Adam and Eve left the Garden of Eden.

    So Ken take a bite of thepple of knowledge and emerge into our world where economic problems that destroy or at leasst severely damage many lives( and that could be avoided) by proper policy) are being justified by a mainstream economic theory that presumes the problems are caused by policies that interefere with us reaching the already predetermined economic heaven on earth of efficient markets.

    • Ken Zimmerman
      November 14, 2013 at 12:08 am

      Paul, show me some empirical data and I will show you other empirical data that contradict it. Empirical is like science, we think we know what it is until we look and then what we thought goes away. In simple terms this whole thing you’re talking about is much more complex than you treat it. And I don’t just mean our latest fascination with Chaos and quantum theory. You say rational expectations is not a useful tool. But Callon has shown in “The Laws of the Markets” that is not correct. Framed in certain fashions rational expectations can be used to depict all sorts of actions, actual actions by actors, not imaginary or merely “modeled” actions. And one of the worlds physicists have always considered is the world of perfect and complete predictability. It’s a very useful model for understanding the universe. Why would it not be useful in understanding the economics parts of that universe? Even the much reviled (by you guys at least) EMH is useful in describing and understanding actions, so long as it’s not used as replacement for the multidimensional world made by the actors involved. And please get off your soapbox. Economic problems have destroyed or damaged human lives for the entire history of human kind. And most of this damage and death was the result of purposeful actions, not accidents (in the ergodic sense). If you want to be a scientist then act like one, in the best sense of that directive. Try out everything as most will add a little to our understanding of what interactions among actors has made. As things stand now both you and the EMH folks are acting more like kids throwing rocks on adjacent street corners. You’re only angry it seems because the EMH rock throwers are better at it and are thus winning the fight. But who’s to say that if the anti-EMH folks got better with the rocks and won the fight that their winning theories might not cause an equal amount of human suffering and death.

  3. Norman L. Roth
    November 14, 2013 at 1:59 am

    November 13, 2013
    Please refer to THE KEYNES SOLUTION and scroll down to threads # 6, #10 and especially #12 by Norman L. Roth.

    Paul Davidson must be getting rather frustrated in dealing with sophomoric off-topic rants, masquerading as coherent criticism. Typified by the author of # 1 and #3 above. When it comes to “actual actions by actors” what role is he playing ?[1] Quantum physicist ? [2] Historian of Astronomy ? [3] Philosopher-statesman of Science ? [4] Chaotically Positivistic Empiricist ?
    [5] Born again quasi-Marxist -crusading moralist ? [6] Mathematician of the multi-dimensional ?
    Perhaps Paul Davidson’s would-be eviscerator should ponder the following from # 12 of THE KEYNES SOLUTION of August 09, 2013.
    .”..A ‘nacht und nebel’ cocktail of directionless polemical critique; Mixed with [histrionic] appeals for yet more mimicry of the physical sciences; In order to bring economics into the kingdom of real “SCIENCE”.

    Norman L. Roth, Toronto, Canada
    Please GOOGLE: [1] Economics of Technos, Norman Roth [2] Origins of Markets, Norman Roth [3] Telos & Technos, Roth

  4. Lyonwiss
    November 14, 2013 at 6:15 am

    What is more important is to know is that Keynes was wrong whether rational expectation is true or false. The proof of this statement follows.

    Suppose rational expectation is true: humans are rational and their decisions are fully predictable so that the economy can be forecast. This assumption contradicts Keynes’ belief in human irrationality under uncertainty. So if the rational expectation assumption is true then Keynes was wrong.

    Suppose rational expectation is false: humans are irrational and their decisions are not predictable so that the economy cannot be forecast. But Keynes asserted that the government can implement policies to direct the economy. This assumption is inconsistent with rejection of rational expectation.

    The impact of government policy on the economy is unpredictable because human’s decisions in response to government policies are unpredictable by assumption. For example, it is unpredictable whether individuals are indifferent to government deficits or greater taxes (Ricardian equivalence). Hence the government has no rational basis for steering the economy.

    Regardless of whether rational expectation is true or false, Keynesian economics is false because it is based on a logical contradiction. If rational expectation is false, as most seem to believe, then Keynesian economics is not the answer either.

    • Oliver
      November 14, 2013 at 8:24 am

      But at least the assumption of irrationality allows actors to correct their ‘mistakes’ instead of requiring them to double down.

      The real problem is the definition of rationality though, imo. It’s with the mathematization of a philosophical concept that determination and ergodicity creep in. It’s not a problem inherent in the concept itself. It is perfectly perceivable, for example, to define rationality a process in which actors change their minds in indeterminable ways as new information comes in. It’s just impossible to model.

      Having said that, I’m sure models can help us understand small, confined problems that in some way resemble the models used to explain them. It’s a question of scale, scope and, in the end, claims of universality. And thus also between micro and macro economics. What to be sceptical of, is when someone claims to have found some natural law that governs all human actions. The only ‘laws’ worth studying in economics are man-made and can also be changed. All else is probably best left to philosophers, anthropologists and psychologists.

      • Ken Zimmerman
        November 14, 2013 at 9:37 am

        Thank you Oliver. Now we’re opening up some useful discussion. Actors invent the ways they act. One of these is to act rationally. No matter what we as observers may want or believe we need to focus on what actors in interactions have created, including rational actions. If we are scientists and the objects of our science are the assemblies of things actors (human and nonhuman) put together under the heading economic, then we cannot ignore that some of these the actors label as rational and some as irrational. It is our job to understand and describe these both as fully as we can, including how the actors do their work and to what ends.

      • Oliver
        November 14, 2013 at 10:50 am

        I was following a blog discussion the other day between two economists and one of them (the one I usually find myself in agreement with), said something interesting. He claimed that economics, as most commonly defined, is the only science that hasn’t actually defined an object of study for itself.

        Most of what passes as economics these days, including its derivatives such as econometrics, rests on this definition by Lionel Robbins: Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

        First, there is the often criticized a priori asumption of scarcity that lends itself well to mathematics. But, more importantly, this definition in no way distinguishes economic enquiry from, say psychology, neuro science, sociology etc.. Instead, it defines a set of tools by which economic logic can be applied to each and every human and non-human interaction. The tools and thus the results are neatly confined by that initial assumption of (rationality &) scarcity (= limited set of possible outcomes!). Economics, so defined, is a hammer that sees nails everywhere when it should be the nail in search of its rightful hammer.

      • Ken Zimmerman
        November 14, 2013 at 11:16 am

        Oliver, your economist friend is clear minded. It’s clear that actors all around, human and nonhuman, including economists of all sorts participate in inventing something called economics. I argue this ought to be the object of any science of economics. I think, however that most “professional” economists would disagree with that.

      • Oliver
        November 14, 2013 at 11:54 am

        Well, as a follower of the school of monetary emissions (a sub-division of Post-Keynesianism, I would say) he argues that it is the payment system that ought to be the starting point of scientific economic enquiry. It is the self-imposed numerical system by which we measure that which we call economic activity. As such it is a precise and confined field of study that, once understood, can be used as a building block together with the other social sciences. Most importantly though, behavioural assumptions are NOT part of that enquiry. But, due to the positive / negative (i.e. balance sheets balance) logic of accounting, it can be used to falsify many claims that come from outside of economics. That’s a much more modest definition than most others, but more promising in my view in that it at least produces less shit.

  5. November 14, 2013 at 11:58 am

    I came across a nice definition of science the other day by Feynman (who was a physicist, which may be a science)—he said ‘science is the belief in the ignorance of experts’.
    something interesting. He claimed that economics, as most commonly defined, is the only science that hasn’t actually defined an object of study for itself.
    Most of what passes as economics these days, including its derivatives such as econometrics, rests on this definition by Lionel Robbins: Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

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