Debunking Economics - Revised and Expanded Edition: The Naked Emperor Dethroned? by Steve Keen

Author:Steve Keen [Keen, Steve]
Language: eng
Format: epub, mobi, pdf
ISBN: 9781780322209
Publisher: Zed Books
Published: 0101-01-01T00:00:00+00:00

Such an ‘axiom’ is transparently nonsense – something that might have led a sensible person to stop at this point. But instead Lucas immediately moved on to an equivalent way of stating this ‘axiom’ that wasn’t so obviously absurd: ‘or to assume that expectations are rational in the sense of Muth’ (ibid.).

Thus neoclassical macroeconomics began its descent into madness which, thirty-five years later, left it utterly unprepared for the economic collapse of the Great Recession.

Expectations and rationality Decades before, when the Great Depression also forced economists to consider reality rather than their largely verbal models of equilibrium, Keynes made a similar point to Lucas’s, that expectations about the future affect decisions today, and he pilloried the neoclassical theorists of his day for ignoring this.

Keynes welded the role of expectations in economics with uncertainty about the future, and considered how people still manage to make decisions despite uncertainty. Thirty-five years later, Lucas reintroduced expectations into macroeconomics, but with the assumption that people could accurately predict the future and thus eliminate uncertainty – an even more absurd position than that of his pre-Great Depression predecessors, whom Keynes merely accused of ‘abstracting from the fact that we know very little about the future.’

It is one of the greatest abuses of language committed by neoclassical economists that a proposition which in any other discipline would be deemed as insane – that on average, people’s expectations about the future are accurate – goes under the name of ‘rational expectations’ in economics. That the idea could even be countenanced shows the extent to which neoclassical economics is driven by a teleological desire to prove that capitalism is fundamentally stable, rather than by a desire to understand the empirical record of the actual economy.

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