Abstract
Proponents of the rational expectations hypothesis (hereafter REH) claim they have developed a general theory of how expectations are formed. To assure that these rational expectations generate efficient, unbiased forecasts which do not display any persistent errors when compared to the actual outcome over time, REH theorists assume that information exists and is available for processing by all decision makers. This information, consisting primarily of quantitative time series data, it is assumed, is a finite realization of a stochastic process; from this data the probability distribution of actual outcomes today and for all future dates can be estimated. Or as John Muth puts it, ‘the hypothesis can be rephrased a little more precisely as follows: that expectations of firms (or more generally, the “subjective” probability of outcomes) tend to be distributed, for the same information set, about the prediction of the theory (or the “objective” probability distribution of outcomes)’ (1961, p. 316).
Journal of Post Keynesian Economics, 5 (2) (Winter) 1982–3. The author is grateful to E. Roy Weintraub, G. L. S. Shackle, Basil J. Moore, Jan Kregel, Don Katzner, Victoria Chick and John Blatt for many helpful comments.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Arrow, K. J. (1978) ‘The Future and the Present in Economic Life’, Economic Inquiry, 16, pp. 157–69.
Arrow, K. J., and Hahn, F. H. (1971) General Competitive Analysis, (San Francisco: Holden-Day).
Blatt, J. M. (1983) Dynamic Economic Systems, (Armonk, NY: M. E. Sharpe).
Davidson, P. (1978) Money and the Real World, (London: Macmillan) 2nd edn.
Davidson, P. (1980) ‘Post Keynesian Economics: Solving the Crisis in Economic Theory’, The Public Interest, (Special Edition) pp. 151–73.
Davidson, P. (1981) ‘Alfred Marshall is Alive and Well in Post Keynesian Economics’, IHS Journal, 5, pp. 53–73.
Davidson, P. (1982) International Money in the Real World, (London: Macmillan).
Ferguson, C. E. (1969) The New Neoclassical Theory of Production and Distribution, (Cambridge: Cambridge University Press).
Hicks, J. R. (1977) Economic Perspectives, (Oxford: Oxford University Press).
Hicks, J. R. (1979) Causality in Economics, (New York: Basic Books).
Keynes, J. M. (1936) The General Theory of Employment, Interest and Money, (New York: Harcourt Brace).
Keynes, J. M. (1972a) The Collected Writings of J. M. Keynes, vol. IX (London: Macmillan).
Keynes, J. M. (1972b) The Collected Writings of J. M. Keynes, vol. XIII (London: Macmillan).
Keynes, J. M. (1973a) The Collected Writings of J. M. Keynes, vol. VIII (London: Macmillan).
Keynes, J. M. (1973b) The Collected Writings of J. M. Keynes, vol. XIV (London: Macmillan).
Keynes, J. M. (1979) The Collected Writings of J. M. Keynes, vol XXIX (London: Macmillan).
Lucas, R. E. (1972) ‘Expectations and the Neutrality of Money’, Journal of Economic Theory, 4, 103–24.
Lucas, R. E. (1980) ‘Methods and Problems in Business Cycle Theory’, Journal of Money Credit and Banking, 12, pp. 696–715.
Lucas, R. E. (1981) ‘Tobin on Monetarism: A Review Article’, Journal of Economic Literature, 19, pp. 558–67.
Lucas, R. E. and Sargent, T. J. (1981) Rational Expectations of Econometric Practices, (Minneapolis: University of Minnesota Press).
Malinvaud, E. (1966) Statistical Methods of Econometrics, (Amsterdam: North Holland).
Muth, J. F. (1961) ‘Rational Expectations and the Theory of Price Movements’, Econometrica, 29, pp. 315–35.
Samuelson, P. A. (1969) ‘Classical and Neoclassical Theory’, in R. W. Clower, (ed,.), Monetary Theory, (Harmondsworth: Penguin), Chapter 12.
Shackle, G. L. S. (1955) Uncertainty in Economics, (Cambridge: Cambridge University Press).
Shackle, G. L. S. (1980) ‘Imaginalism, Unknowledge and Choice’, Greek Economic Review, 2, pp. 95–110.
Tobin, J. (1981) ‘The Monetarist Counterrevolution Today — An Appraisal’, Economic Journal, 91, pp. 29–42.
Wald, H. O. A. (1965) Bibliography on Time Series and Stochastic Processes, (Cambridge, Mass.: MIT Press).
Yaglom, A. M. (1962) An Introduction to the Theory of Stationary Random Functions, (Englewood Cliffs, N.J.: Prentice-Hall).
Editor information
Copyright information
© 1991 Paul Davidson
About this chapter
Cite this chapter
Davidson, P. (1991). Rational Expectations: a Fallacious Foundation for Studying Crucial Decision Making Processes. In: Davidson, L. (eds) Inflation, Open Economies and Resources. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-11516-7_12
Download citation
DOI: https://doi.org/10.1007/978-1-349-11516-7_12
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-11518-1
Online ISBN: 978-1-349-11516-7
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)