Rational expectations — a theory without empirical content

6 September, 2015 at 11:23 | Posted in Economics | 1 Comment

Cassidy: What about the rational-expectations hypothesis, the other big theory associated with modern Chicago? How does that stack up now?

Heckman: I could tell you a story about my friend and colleague Milton Friedman. In the nineteen-seventies, we were sitting in the Ph.D. oral examination of a Chicago economist who has gone on to make his mark in the world. His thesis was on rational expectations. After he’d left, Friedman turned to me and said, “Look, I think it is a good idea, but these guys have taken it way too far.”

CarriedAwayIt became a kind of tautology that had enormously powerful policy implications, in theory. But the fact is, it didn’t have any empirical content. When Tom Sargent, Lard Hansen, and others tried to test it using cross equation restrictions, and so on, the data rejected the theories. There were a certain section of people that really got carried away. It became quite stifling.

Cassidy: What about Robert Lucas? He came up with a lot of these theories. Does he bear responsibility?

Heckman: Well, Lucas is a very subtle person, and he is mainly concerned with theory. He doesn’t make a lot of empirical statements. I don’t think Bob got carried away, but some of his disciples did. It often happens. The further down the food chain you go, the more the zealots take over.

John Cassidy/The New Yorker

[h/t Noah Smith]


1 Comment

  1. Very interesting!. If you make a theory that has empirical support, you’re breaking the principles of scientific method. So: you are looking for ?. Obvious: you want to accommodate what is real in your own interest. Is that doing science?

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