|
April 19, 2009
Anatole Kaletsky in Goodby, homo economicus in Prospect says that the scandal of modern economics is that two false theories—the rational expectations and the efficient market hypothesis— are not only misleading but are highly ideological, and that they have become so dominant in academia (especially business schools), government and markets themselves. He says:
While neither theory was totally dominant in mainstream economics departments, both were found in every major textbook, and both were important parts of the “neo-Keynesian” orthodoxy, which was the end-result of the shake-out that followed Milton Friedman’s attempt to overthrow Keynes. The result is that these two theories have more power than even their adherents realise: yes, they underpin the thinking of the wilder fringes of the Chicago school, but also, more subtly, they underpin the analysis of sensible economists like Paul Samuelson.
The rational expectations theory assumes that asserted that a market economy should be viewed as a mechanical system that is governed, like a physical system, by clearly-defined economic laws which are immutable and universally understood. The assumptions of clearly-defined laws and identical expectations were easily translated into simple mathematical models—and this mathematical tractability soon came to be viewed as a more important academic objective than correspondence to reality or predictive power.
Kaletsky adds that the second great merit of rational expectations lay in its key ideological conclusion:
that deliberate policies of macroeconomic stimulus by governments and central banks could never reduce unemployment and would merely exacerbate inflation. That government activism was doomed to failure was exactly what politicians, central bankers and business leaders of the Thatcher and Reagan periods wanted to hear. Thus it quickly became established as the official doctrine of the political and economic establishments in America—and from this powerful position it was able to conquer the entire academic world.
Rational expectations theory gradually merged with the related theory of “efficient” financial markets. The latter (EMH), like rational expectations, assumed that there was a well-defined model of economic behaviour and that rational investors would all follow it; but it added another step. In the strong version of the theory, financial markets, because they were populated by a multitude of rational and competitive players, would always set prices that reflected all available information in the most accurate possible way. Because the market price would always reflect more perfect knowledge than was available to any one individual, no investor could “beat the market”—still less could a regulator ever hope to improve on market signals by substituting his own judgement. If market movements were really like coin-tosses, they might be totally irregular in the short term, but very predictable over longer periods, like the takings of a casino.
His argument is that economics today is a discipline that must undergo a paradigm shift—it must broaden its horizons to recognise the insights of other social sciences and historical studies and it must return to its roots. That means rejecting the principle that economic behaviour could be described by precise mathematical relationships.
|
