On the Very Severe Logical, Epistemological, Methodological and Philosophical Deficiencies in J. Muth’s Concept of Rational Expectations

Abstract

J. Muth’s 1961 article on rational expectations was written without any knowledge on Muth’s part about what a subjective theory of probability entails and is based on, or what an objective theory of probability entails and is based on. Muth’s disbelief, that the individual, subjective probability distributions of firms and consumers are distributed around an objective, true, probability distribution, is not supported by any acknowledged scholar who has written on the application of the theory of probability to conduct from either a subjectivist theory of probability perspective (Ramsey, de Finetti, Savage) or an objectivist theory of probability perspective (Venn, R. von Mises, H. Reichenbach, K Popper) in history. Muth’s confusions extend to his analysis of optimizing behavior at the level of the firm and consumer. His choice of exposition used expected utility maximization. Muth implicitly must have been using the Von Neumann-Morgenstern approach under risk, which was based on the application of the relative-limiting frequency interpretation of probability, which is an objective theory of probability. The use of expected utility directly conflicts with Muth’s initial claim that the probability distributions were subjective. Muth needed to have used the Ramsey-de Finetti-Savage Subjective Expected Utility (SEU) approach to support his claims about subjective probability distributions being used by individual consumers and producers. Savage’s principle of stable estimation then shows that, as a sufficient amount of relevant evidence becomes available over time, the individual, different subjective probability distributions will gradually converge toward one subjective, probability distribution. However, there is no such “thing” in the Subjectivist theory of probability as convergence to an objective, true probability distribution or a situation where the subjective probability distributions are distributed around a true, objective, probability distribution. R. Muth’s paper is incomprehensible, as well as being incoherent and contradictory. It is inconsistent with any known theory of objective or subjective probability.