Abstract
In recent years a new and according to some ‘revolutionary’ element has been added to the neoclassical macroeconomic model, the rational expectations hypothesis (REH). Closely associated with the REH is what has been called the new classical economics, which is our primary concern. While it was the members of the new classical economics school who were instrumental in introducing the REH into the economics profession, the REH is no longer theirs alone. It has been taken on board by many who call themselves Keynesians. In order to fully appreciate the implications of the REH, it is necessary to consider other neoclassical treatments of expectations which predated the REH.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Note and References
Friedman’s argument is treated in many places. See, for example, Harris (1981, ch. 21) and G. K. Shaw, Rational Expectations: An Elementary Exposition (Brighton: Harvester Press, 1984). Friedman’s argument is relevant to our discussion of inflation in Chapters 12–15.
The REH is a deterministic theory by the definition employed in the physical sciences. Max Born, the famous physicist, wrote, ‘Determinism postulates that events at different times are connected by laws in such a way that predictions of unknown situations (past or future) can be made.’ He distinguishes determinism from causality, defining the latter as follows, ‘… there are laws by which the occurrence of an entity B of a certain class depends on the occurrence of an entity A of another class, where the word “entity” means any physical object, phenomenon, situation, or event. A is called the cause, B the effect.’ He goes on to argue that causality does not imply predictability (determinism). The REH makes no reference to this fundamental distinction (Max Born, Natural Philosophy of Cause and Chance (Oxford: Clarendon Press, 1949) p. 9).
The defenders of the REH might ponder the following statement by a mathematician. All science is full of statements where you put the best face on your ignorance, where you say: true enough, we know awfully little about this, but more or less irrespective of the stuff we don’t know about, we can make certain useful deductions. Now, my view is that any theory which pretends to comprehend everything breaks down on this point. It will be a uselessly rigid theory because it won’t have a place into which to put new things.… [W]e ought to so shape our theories that new discoveries won’t upset every theory we have and for that purpose we must have plenty of open theories. (H. Bondi, Assumption and Myth in Physical Theory (Cambridge: The University Press, 1967) p. 11). This view directly contradicts the neoclassical obsession with ensuring that all models are ‘closed’, with no loose ends. Hahn takes the sensible and modest view that in economics understanding does not imply precognition. ‘It is plain that we can claim understanding of an event without claiming that we can predict it. Geophysicists, for instance, believe that they understand earthquakes but cannot predict them …’ (Hahn (1984) p. 4).
In one important branch of science, quantum theory, the inherent indeterminancy of the material world is central to the analysis. Referring to the treatment of quantum theory by Heisenberg, Bohm writes, The fact that quantum theory implies that every process of measurement will be subject to the same limitations on its precision led Heisenberg to regard the indeterminancy relationships … as being a manifestation of a very fundamental and all-pervasive general principle, which operates throughout the whole of natural law. Thus, rather than consider the indeterminancy relationships primarily as a deduction from the quantum theory in its current form, he postulates these relationships directly as a basic law of nature and assumes instead that all other laws will have to be consistent with these relationships. (David Bohm, Causality and Chance in Modern Physics (London: Routledge & Kegan Paul, 1957) p. 83,
referring to W. Heisenberg, The Physical Principles of the Quantum Theory (New York: Dover Publications, 1930) p. 3)
Hahn calls ‘the natural rate of unemployment’ an ‘unproven assertion’ (Hahn (1980); and F. H. Hahn, Money and Inflation (Oxford: Basil Blackwell, 1982)).
The difficulties in maintaining an interventionist position while accepting general equilibrium theory is well treated in Murray Milgate and John Eatwell, ‘Unemployment and the Market Mechanism’, in Eatwell and Milgate (eds), Keynes’s Economics and the Theory of Value and Distribution (New York: Oxford University Press, 1983) pp. 260–61.
Author information
Authors and Affiliations
Copyright information
© 1989 John Weeks
About this chapter
Cite this chapter
Weeks, J. (1989). Expectations and Full Employment. In: A Critique of Neoclassical Macroeconomics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-20296-6_9
Download citation
DOI: https://doi.org/10.1007/978-1-349-20296-6_9
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-0-333-49382-3
Online ISBN: 978-1-349-20296-6
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)