2023 FUTURE OBSERVATORY

5088 HYPOTHESES RELATING TO EXPECTATIONS

A number of existing hypotheses refer to ‘expectations’ of future outcomes. Perhaps the most important of these, and the most directly related to the new hypothesis in the specific field of macro-economics, has been adopted by a number of economists as rational expectations. This was typically adopted by those graduating from monetarist theory, in order to explain why simple monetarist theories do not accurately predict real-life outcomes. By that time, its predecessor, adaptive expectations, had failed to explain the accelerating inflation experienced in the 1970s. Although the rational expectations hypothesis also deals with aggregated expectations, it is a more specific hypothesis, which is normally described in terms of the (economic) actors in the 'market' (usually a financial market) immediately recognising, and discounting, the expected effects of any outside intervention in that market; so that - apart from a role for short-run stabilisation policies - any such intervention, by government in particular, is bound to be ineffective. As such, it also has political overtones, in terms of the debate between those who are committed to market economics and those who advocate more direct intervention.

It is quite specific, since in the Rational Expectations Hypothesis the emphasis has most often been placed on the first and last words; with expectations accordingly used in a tightly defined context. The key assumption, as in much of recent economics, is that the actor/agent (usually in a financial market, but almost always influential in macro-economic outcomes) is rational. Further, development of the hypothesis is (mathematically) rigorous, and the outcomes are determined by the exact form of the equations chosen for the model. Indeed, based upon Lucas’s original work, which took Muth’s  work in a single market and extended it to macro-economic models, the  many subsequent developments have typically revolved around the details of the mathematics involved.

1 April 2003

Other pages you might like to consider are:

5155 LEGITIMATION, 5037 CORRUPT GOVERNMENT, 5069 THE EMPEROR'S NEW CLOTHES, 5128 WESTERN REACTIONS TO POLITICAL CHANGE, 5150 MANAGEMENT FOCUS, 5022 ESTABLISHMENT GROUPTHINK, 5138 THE SCENARIOS, 5199 SHAPING THE FUTURE, 5086 EXPECTATIONS, 5198 RATIONAL EXPECTATIONS AND LIMITED INFORMATION , 5088 HYPOTHESES RELATING TO EXPECTATIONS, 5001 INDIVIDUAL PERSUASION, 5224 USE OF THE AGGREGATED EXPECTATIONS HYPOTHESIS

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