Tuesday, November 10, 2009

Eulogy To The Rational Expectations Hypothesis

Dr Madsen Pirie writes in the Adam Smith Institute Blog (10 November) HERE: a trenchant expose of the failings of the rational expectations hypothesis:

One of the few good things to come out of the financial crisis is a re-examination of the fundamentals of Austrian Economics. One of them is that value is entirely subjective, residing in the mind of the individual, not in the object contemplated, and that it changes over time and is different between individuals. This is light years away from the REH-based models that have dominated academic economics, and treated it as practically a subset of mathematics. For some years now most academic economists have talked only to each other, describing in ever more detail a fantasy world that never touches reality. If the crisis undermines the heresy of Rational Expectations, at least some good will have come from it.”

I agree entirely with Madsen Pirie and commend his Blog article to all readers. It is the best, clear and explicit statement on the dead-end, black hole into which most modern economists has slid into that I have read for a long while.

[Disclosure: I am a Fellow of the Adam Smith Institute.]



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