Are Macroeconomic Theorists Rational?

Abstract

Macroeconomics has developed over seventy years from John Maynard Keynes’s General Theory to the currently fashionable mathematical models that feature efficient markets and rational expectations. In shaping a broad overview of that development, the gestation of this paper was contemporaneous with, but independent of, a parallel history and evaluation of macroeconomics (Mankiw 2006). Some comments have been included upon contrasting features of these two representations. 1 Mankiw presents early macroeconomists (engineers) as dealing with practical problems, with the emphasis later shifting to theoretical (scientific) principles. He comments that, even though the new scientific emphasis undermines confidence in what policy can accomplish, business fluctuations continue to be analyzed upon the basis of the ISLM model. Mankiw’s conclusion—that “science” has exposed “the limitations of the large Keynesian macroeconometric models and the policy prescriptions based on these models”—accords with the conclusions drawn here. Mankiw’s positive outlook— that, in regard to macroeconomics as both engineering and science, “the recent emergence of a new synthesis . . . [is] . . . a hopeful sign that more progress can be made on both fronts”—is most definitely not. RATIONAL ECONOMIC MAN In its broadest meaning, the action taken by a rational economic man is guided by some consciously acknowledged purpose; and it allows for differential learning capacities and elements of oversight. In that broad context, while the rationality hypothesis allows for mistakes, it anticipates either errorlearning corrective action and/or greater survival potential for those who make lesser and/or fewer errors. Irrational actions are uneconomic, because