rwer | The chicken that is fed by the farmer each morning may well have a
theory that it will always be fed each morning – it becomes a ‘law’. And
it works every day, until the day the chicken is instead slaughtered …
Now you might say that no chicken is an economist, but suppose that
chickens were as intelligent as the farmer who keeps them, so they could
be an economist … So if (the) chicken had been an economist, they
would not simply have observed that every morning the farmer brought
them food, and therefore concluded that this must happen forever.
Instead they would have asked a crucial additional question: why is the
farmer doing this? … And of course trying to answer that question might
have led them to the unfortunate truth …
You can see why the habit of introspection would make economists
predisposed to assume rationality generally, and rational expectations
in particular … It only works to use your own thought processes as a
guide to how people in general might behave, if you think other people
are essentially like yourself. So if your own thoughts lead you to
postulate some theory about how the economy behaves, then others similar
to yourself might be able to do something like the same thing …
Economists may also be fooled into thinking their introspection is
representative, because they are surrounded by other economists. So this
conjecture about introspection does little to show that assuming agents
have rational expectations is right (or wrong), but it may be one
reason why most economists find the concept of rational expectations so
attractive.
Following the greatest economic depression since the 1930s, the grand old man of modern economic growth theory, Nobel laureate Robert Solow,
on July 20, 2010, gave a prepared statement on “Building a Science of
Economics for the Real World” for a hearing in the U. S. Congress.
According to Solow modern macroeconomics has not only failed at solving
present economic and financial problems, but is “bound” to fail.
Building dynamically stochastic general equilibrium models (DSGE) on
“assuming the economy populated by a representative agent” – consisting
of “one single combination worker-owner-consumer-everything-else who
plans ahead carefully and lives forever” – do not pass “the smell test:
does this really make sense?” One cannot but concur in Solow’s surmise
that a thoughtful person “faced with the thought that economic policy
was being pursued on this basis, might reasonably wonder what planet he
or she is on.”
