Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!


Friday, September 25, 2009

 
A short note on Keynes

Lots of people appear to be forgetting this one or getting it wrong; the important difference between "rational expectations" and Keynesian macroeconomics really doesn't have all that much to do with behavioural psychology, stock market bubbles or any such. Keynes did write chapter 12 of the General Theory (the one about the nature of long term expectations formation) and the Post-Keynesians are right to say it was and is very important. But the fact is, the central model of the General Theory of Employment, Interest and Money is a rational expectations model.

I'll repeat that - expectations in the General Theory are rational, and in equilibrium all of agents' forward-looking beliefs are borne out. People are not systematically wrong. You can look it up if you don't believe me. Keynes did actually believe that businessmens' expectations were volatile and driven by non-rational factors[1] but, correctly anticipating criticism on this score, he didn't make this assumption essential to his model. In the Keynesian underemployment equilibrium, people correctly anticipate a low rate of demand, correctly infer that this will result in a low level of profitability and thus correctly make the decision not to invest. It's a rational expectations equilibrium.

The difference with the soi-disant "rational expectations" school is over the expectations-forming process with respect to the effect on price and output of monetary policy, not anything else. Hope that's cleared up now.

[1] The phrase "animal spirits" also terribly abused. It's got nothing to do with evolutionary psychology, or psychology at all.
8 comments this item posted by the management 9/25/2009 01:47:00 AM


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