Rational expectations — the triumph of ideology over science
from Lars Syll
For more than 20 years, economists were enthralled by so-called “rational expectations” models which assumed that all participants have the same (if not perfect) information and act perfectly rationally, that markets are perfectly efficient, that unemployment never exists (except when caused by greedy unions or government minimum wages), and where there is never any credit rationing.
That such models prevailed, especially in America’s graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science. Unfortunately, students of these graduate programmes now act as policymakers in many countries, and are trying to implement programmes based on the ideas that have come to be called market fundamentalism … Good science recognises its limitations, but the prophets of rational expectations have usually shown no such modesty.
Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies and institutions are those based on rational expectations and representative actors. As yours truly has tried to show in On the use and misuse of theories and models in economics there is really no support for this conviction at all. On the contrary. If we want to have anything of interest to say on real economies, financial crisis and the decisions and choices real people make, it is high time to place macroeconomic models building on representative actors and rational expectations microfoundations in the dustbin of pseudo-science.
For if this microfounded macroeconomics has nothing to say about the real world and the economic problems out there, why should we care about it? The final court of appeal for macroeconomic models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic modelbuilding is little more than hand-waving that give us a rather little warrant for making inductive inferences from models to real world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around.
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.
Leave a Reply
—– look inside —– $5.94 / $20.00
—– look inside —– $4.90 / $8.00
—– look inside —– $15.99
—– look inside —– $5.99 / 12.99
—– look inside —– $5.93 / $12.99
—– look inside —– $4.97 / $9.90
—— Ugarteche, Puyana and Madi ——
Gerson Lima / Maria Alejandra Madi
Edward Fullbrook and Jamie Morgan
————— Michael Hudson ————–
Maria Alejandra Madi / Jack Reardon
————- Edward Fullbrook ————-
—————— Steve Keen —————–
————— Richard Smith —————
————– Gustavo Marques————
– Victor Beker and Beniamino Moro –
————– Lars Pålsson Syll ————-
—————– Stuart Birks —————-
Edward Fullbrook and Jamie Morgan
———— Armando Ochangco ———-
Shimshon Bichler / Jonathan Nitzan
————— Mauro Gallegati ————–
————— Herman Daly —————-
————— Asad Zaman —————
—————– C. T. Kurien —————
————— Robert Locke —————-
Real-World Economics Review Blog 
Steve Keen’s _Debunking Economics_ (2011, 205-206) in a section titled _Macroeconomics and the reductionist fallacy_ addresses what is already widely known in evolutionary biology (aside from those who spoof biology for shallow appeals to authority); that _methodological reductionism_ only takes science so far and that _philosophical reductionism_ (aka _strong reductionism_) frequently blinds its adherents to the limitations of the former. Modern scientists worth their salt, whether in biology or physics or economics, are aware of “The discovery that higher-order phenomena cannot be directly extrapolated from lower-order systems is a commonplace conclusion in genuine sciences today: it’s known as the ‘emergence’ issue in complex systems (Nicolis and Prigogine, 1971; Ramos-Martin, 2003).” (Keen 2017, 31-32, in Can We Avoid Another Financial Crisis?)
As Keen notes (2017) “macroeconomics cannot be derived from microeconomics”:
How do smart people fall into the reductive ad absurdum trap? Keen recounts an interesting comment made by Solow when he commented on how his own ‘real business cycle’ models was stretched beyond what he intended. Solow noted about his “roughly ‘Keynesian.’” understanding of Keynes, “I use that label for convenience; I have absolutely no interest in ‘what Keynes really meant.’ To be more specific, the framework I mean is what is sometimes called ‘American Keynesianism’ as taught to many thousands of students by Paul Samuelson’s textbook and a long line of followers. (Ibid.: 21)” (Keen 2011, 258)
I cannot help but juxtapose Keen’s insight about the irony of Solow complaining how his scholarship was misunderstood, yet himself, poorly understanding Keynes by his own admission, and recent comments made on RWER:
Keen et. al., like Lars and other authors on RWER, have not misinterpreted Keynes. And the weight of history is evidence of this fact and truth. Keynes in his philosophical insights articulated the limits of probability theory based solely upon “logic” (i.e., mathematics), thereby using the real deep human experience (aka wisdom) to provide the “right weight” to the degrees of confidence we should allow ourselves to give to “pure theory” in the face of real human experience to the contrary.
Lars Syll is again attempting to mislead readers of this blog. I wonder how many readers are mislead in reality, because most of them are highly critical minded persons who are well versed of the actual situation of both mainstream and heterodox economics.
Lars Syll does not mention that there are many macroeconomics of heterodox conviction. Does his repeated criticism contribute in any positive way to advance even one of many macroeconomics in heterodox orientations? I would like to say no. He may not bother with this fact, because it seems he is satisfied only by accusing mainstream economics. I cannot understand why he does not consider contributing to heterodox economics.
Here is my recent paper The Principle of Effective Demand: A new formulation, just made public. As it is an open access paper, everyone can download it. Please compare, dear readers, my humble microfoundational contribution and Lars’s sweeping criticism. Which contribute better to change actual state of economics to a better situation?
I quote from a recent article by an American central banker, “Mainstream economics is replete with ideas that ‘everyone knows’ to be true, but that are actually arrant nonsense…..I leave aside the deeper concern that the primary role of mainstream economics in our society is to provide an apologetics for a criminally opressive, unsustainable and unjust social order.” I could not say it any better.
It is agreed that mainstream economics is totally misleading and ideological. What we need is a true economics that may orient in a good way our thinking over how economy works.
I believe post-keynesian economics turbo charged with stock flow consistent and/or agent based modeling, and backed up with relevant econometrics can provide all we need.
A citation reference would be wonderful. That one worth keeping.
Rudd. Jeremy B. (2021). “Why Do We Think That Inflation Expectations Matter for Inflation (And Should We ?). Finance and Economics Discussion Series 2021-062. Washington: Board of Governors of the Federal Reserve System.
Thank you. Archived away.
Great paper. One good quote deserves another:
I’ll reword your title from “Rational expectations — the triumph of ideology over science” to ‘Rational expectations — the triumph of one ideology over another.’ After all, science itself is an ideology. Each science is ‘a system of ideas and ideals which form the basis of a study discipline.’ Each science focuses on empirical and conceptual understanding of events and objects people find of interest. Religious ideologies focus on stating and elaborating the tenets of supernatural foundations for humans and the world. Political ideologies focus on presenting and explaining governing principles for human societies.
Ideologies are more or less useful for people in constructing their ways of life and in making these ways sustainable. While not leading to harmful results that directly or indirectly harm the efforts. In the end these are all judgments by people. Over which people do and always will struggle. And that’s human history. And unavoidable.
Fair enough, but trying to live our lives and trying to explain the world we live in are two very different things. We need science not ideology for the latter.
Dear reallifeeconomics,
I agree with you. Please read my comment on Ken Zimmerman’s post on December 11, 2021.