Looking back on Athreya's great book on 'Modern Macro'-which basically means Neoclassical Macro-he certainly is very convinced that it is necessary for the success of Macro to believe that agents are rational-in the very special definition of RE.
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What I still never get is what makes RE true. The main answers you get from Athreya as best I can tell are twofold.
1. We should believe that agents are rational in the RE sense because any other believe about them is disrespectful of them as rational agents. For instance Adaptive Expectations was disrespectful as it believed that people could be consistently fooled in their expectations of future government policy.
2. The other argument is utilitarian/pragmatic: basically we get a lot more out of models that assume RE than those that don't.
Note what is missing from these two arguments: any straightforward positive argument for the truth of RE. Number 1 is blatantly normative: Athreya and other NC economist have arrogated to themselves the right to police the way citizens are treated. So it assumes that this job is the job of Macro. However, it presumes that believing that people can be 'surprised' necessarily disrespects them. You could still argue that it doesn't.
Number 2 is a utilitarian argument-maybe you could argue it's a positive argument but it's not about the truth of RE ut simply that models are much more useful if they assume RE than if they don't. Again, this doesn't necessarily follow. I certainly don't know where it was shown that RE is more useful than other assumptions-AE or other. I still don't see that the AE error was disproved on a positive basis. The most you get in pointing this out is that there was a lot of inflation in the 70s and this disproved the Phillips curve, etc.
Interestingly, David Glasner argues that the very economists who seek to shield the public from being disrespected, are actuallyl the arrogant ones.
The question you could ask is why don't people get wise to telemarketing? On an individual level this might seem to happen-but it clearly doesn't happen on an aggregate level because telemarketing remains a big business. So while you defintely see individuals learn overall it always continues.
One explanation might be that its a generational thing. While victims learn there are always others who haven't experience TM yet to fill their places. Yet this would suggest that education is the answer-just teach this in school and everyone should be forearmed in adulthood. Yet this doesn't happen.
In some ways it might seem that it has happened in the US-after things like Enron and the assorted scandals of the 90s people are more wary. Yet, TM not only remains big business is growing and more and more big, established companies open up TM departments-major banks do it now, etc.
So wouldn't RE predict that TM would have died down by now? After all, it claims that you can consistently surprise people, much less continuously trick them. Of course, I'm assuming here that buying over the phone is not rational. As that's my current job, I need there to continue to be people who do so. Sti;l I can't help marvel how long this has worked.
I know that one standard answer of the Neoclasical economist is that advertising more generally actually serves the cause of price discovery even if it tends to exaggerate the differences between products, etc, as people read ads as a sign that the company who did it must believe in its product or it wouldn't have gone to such trouble and expense.
I wonder if a NCer would extend this argument to TM? Does TM somehow enhance price discovery?
P.S. My explanation for the continuance of TM's success might be called 'hetergenous preferences'-there are always a certain amount o people who can be persuaded to buy a new shiny toy on impulse. Whehter this means their irrational, I don't know. There is the old saying You can fool some of the people some of the time but you can't fool all of the people all of the time. However, if you're in TM you just need some of the people. It's never true that 'all of the people can't be fooled.'
The trouble with TM would be that in theory people shouldn't buy over the phone-even if they like what they hear they should wait and learn more while comparing it to other products-this of course, would seldom lead to the one call close looked for in TM. Many people however can be led to buy on impulse. In my mind this fact is problematic for RE but it's possible that some NC economist will insist that it's not a problem for it as it somehow enhances price discovery.
http://diaryofarepublicanhater.blogspot.com/2014/06/rational-expectations-protecting-public.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
What I still never get is what makes RE true. The main answers you get from Athreya as best I can tell are twofold.
1. We should believe that agents are rational in the RE sense because any other believe about them is disrespectful of them as rational agents. For instance Adaptive Expectations was disrespectful as it believed that people could be consistently fooled in their expectations of future government policy.
2. The other argument is utilitarian/pragmatic: basically we get a lot more out of models that assume RE than those that don't.
Note what is missing from these two arguments: any straightforward positive argument for the truth of RE. Number 1 is blatantly normative: Athreya and other NC economist have arrogated to themselves the right to police the way citizens are treated. So it assumes that this job is the job of Macro. However, it presumes that believing that people can be 'surprised' necessarily disrespects them. You could still argue that it doesn't.
Number 2 is a utilitarian argument-maybe you could argue it's a positive argument but it's not about the truth of RE ut simply that models are much more useful if they assume RE than if they don't. Again, this doesn't necessarily follow. I certainly don't know where it was shown that RE is more useful than other assumptions-AE or other. I still don't see that the AE error was disproved on a positive basis. The most you get in pointing this out is that there was a lot of inflation in the 70s and this disproved the Phillips curve, etc.
Interestingly, David Glasner argues that the very economists who seek to shield the public from being disrespected, are actuallyl the arrogant ones.
The question you could ask is why don't people get wise to telemarketing? On an individual level this might seem to happen-but it clearly doesn't happen on an aggregate level because telemarketing remains a big business. So while you defintely see individuals learn overall it always continues.
One explanation might be that its a generational thing. While victims learn there are always others who haven't experience TM yet to fill their places. Yet this would suggest that education is the answer-just teach this in school and everyone should be forearmed in adulthood. Yet this doesn't happen.
In some ways it might seem that it has happened in the US-after things like Enron and the assorted scandals of the 90s people are more wary. Yet, TM not only remains big business is growing and more and more big, established companies open up TM departments-major banks do it now, etc.
So wouldn't RE predict that TM would have died down by now? After all, it claims that you can consistently surprise people, much less continuously trick them. Of course, I'm assuming here that buying over the phone is not rational. As that's my current job, I need there to continue to be people who do so. Sti;l I can't help marvel how long this has worked.
I know that one standard answer of the Neoclasical economist is that advertising more generally actually serves the cause of price discovery even if it tends to exaggerate the differences between products, etc, as people read ads as a sign that the company who did it must believe in its product or it wouldn't have gone to such trouble and expense.
I wonder if a NCer would extend this argument to TM? Does TM somehow enhance price discovery?
P.S. My explanation for the continuance of TM's success might be called 'hetergenous preferences'-there are always a certain amount o people who can be persuaded to buy a new shiny toy on impulse. Whehter this means their irrational, I don't know. There is the old saying You can fool some of the people some of the time but you can't fool all of the people all of the time. However, if you're in TM you just need some of the people. It's never true that 'all of the people can't be fooled.'
The trouble with TM would be that in theory people shouldn't buy over the phone-even if they like what they hear they should wait and learn more while comparing it to other products-this of course, would seldom lead to the one call close looked for in TM. Many people however can be led to buy on impulse. In my mind this fact is problematic for RE but it's possible that some NC economist will insist that it's not a problem for it as it somehow enhances price discovery.
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