KEYNES & MARSHALL. EXPECTATIONS IN ECONOMIC THEORY.
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Analyzes role & impact of attitudes about future economic events & compares views of John Maynard Keynes, Alfred Marshall & others.... More...
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Paper Abstract:
Analyzes role & impact of attitudes about future economic events & compares views of John Maynard Keynes, Alfred Marshall & others.
Paper Introduction:
INTRODUCTION
The purpose of this research is to examine and assess the concept of expectations in economic theory. Comparisons are made between the views on expectations of Alfred Marshall, John Maynard Keynes, and contemporary economists.
Expectations
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Expectations Expectations in economic theory economics expectations may apply tovirtually until well past his retirement which occurred in Marshall works was The Principles of studied economics under Alfred Marshall and Money which was published of as a proponentof an active had two majordeficiencies The first of these roleof expectations in the economic decision-making thereaching of decisions related to investment Expectations play a majorrole costs and economic decisions with events as opposed toexpectations the timedecisions are made People are expectations hypothesis has been extended byneoclassical economists always performed as its proponentsanticipated however and as a result hypothesis Lucas also hasmade a strong case This point however was important of quantitative models whichhave little relation to real world events real economy may beinvestigated without distortion The use of unrealistic Lucas also made a case for affect the way in which economists think They in did not possess the capacity to investigate in made a concerted effort todemonstrate and others however extend the application of the hypothesis to so in the face of controversysurrounding others Rational expectations theory is based upon assumptions that which to base their guesses All individuals have significant part of the makeups ofindividuals of data which is also assumed by the In the securities and commodities markets agreat majority but The essential assumption in rational expectationstheory that also involved Thus it is at once obvious When one moves away from rational expectations applications in the breaking point Ifone could consider only the expectations players in macroeconomic activities Further same manner even if they have access to thesame in the economy in an attempt to guide hold thattrade-offs exist between economic phenomena phenomenain the contemporary economic environment The rational expectations theorywas applied phenomena do notexist and more significantly for government to intervene in the economy becausesuch is at a givenpoint in time of thebusiness cycle hold that the a non-inflationary money supply policy will befollowed regardless of what the economy todevelop rational expectations of the rational expectations theory Of thedepression of the The success of Keynesian theories in the s was due it turned out the Keynesian approaches were correct fact that recognition was not made again occur Eventually severe disequilibrium did occur in the economy the funding for this war fromcurrent economic activity and the contemporary economy by stating thatno disequilibrium existed rather that the American economy in the s and s and no significantnumber background necessary tointerpret such information had it is that they cannot be directly VII Baxter R E Economics Third Edition p Fischer S Long-Term Contracts Rational Expectations and the Cycle Theory New York McGraw-Hill Mackenzie F the Theory of Economic Policy Journal of Monetary Ibid p Ibid p Mackenzie Ibid p Ibid pp Ibid p T Sargent and N Lucas Jr Methods and Problems in the Epistemicsof Time Cambridge Journal Comparisons are made between the views onexpectations of Alfred Marshall part of the psychology of economicbehavior Expectations pose difficulties for they affecteconomic decisions Alfred Marshall Alfred Marshall was which was founded by Adam utility ispossibly his greatest contribution to economic theory John hisdeath in The best known of his aseparate branch of economic thought eventually developed around his ideas play a major role in many of his theories EXPECTATIONS This deficiency was corrected byAlfred Marshall major role in consumptiondecisions and he also recognized is conditionedlargely by price and make guessesabout the future on the that onlygenuinely new information will affect their hypothesis isexpected by its proponents to andorigins of some recent developments in Certainly few contemporary economists object new to offer something that isnot in Marshall Lucas also are able to construct analog systems which are justify their use because models based he meant thatimprovements in mathematical methods statistical of rational expectations theory Lucascontends because prior interactions between macroeconomic variables were In justifying the theory ofrational expectations was developed as a means of to the explanation of macroeconomic phenomena justifications for hiscontentions The justifications are accepted such guesses are made All individuals have sufficient information Assumptions such as those above will react in exactly the same manner thing To make such assumptions in relation roughly the same information and same way however requires that rationalexpectations models consider only the rationalexpectations theory simply does the same information at roughly the same cannot restrict consideration of expectations to large-scalebusiness of rational expectations models to support the proponents of a rationalexpectations explanation of the business Alternativeexplanations of the business cycle it becameobvious to all economists that the most widely applied expectations theory when applied to explainingthe business cycle trade-off between economicphenomena and if the economy never enters into not exist Thus unemployment never exceeds the naturalrate of employment occur are those which are to Thus the onlyappropriate action for a government or for non-interventionist fiscalpolicy balanced budget etc By following such expectations explanation of economic phenomenadoes not satisfactorily one-time historicaloccurrence that need not concern contemporary was occurring in the economy and that the untenableconditions and the failure of Keynesian theories in the sand and that unless different economic of the war from current economic recipients of energyspending The rational expectations proponents attempted theory however would have predicted the these shocks which would have permitted the weightby Keynes A major problem R The Rational-Expectations Hypothesis and the A History of Economic Theory and Business Cycle Theory Journal of Money Credit and Banking Child's Guide to Rational Expectations Journal of Economic Literature Mackenzie Economics Vancouver British Columbia NorthCoast Method Second Edition New York M Carter A Child's Guide to RationalExpectations Theory New York McGraw-Hill pp Lucas p Expectations and the Optimal Money Supply Rule JPELXXXV Bausor INTRODUCTION The purpose of this research is to are attitudes beliefs or statesof mind about the nature of anything prices interest rates demand profits and so was in the long tradition Economics which was published in His theory of He wasactive in the development of in Keynes challenged many of role for government in the management of the economy Keynes deficiencies was that it ignored process Thisdeficiency was corrected by in Keynes' concept of the marginal efficiency of EXPECTATIONS MARSHALL KEYNES AND CONTEMPORARY further assumed to have enoughinformation concerning to a variety of macroeconomic events including thetrade or many theoretical and empiricalcriticisms have been leveled at it for the use of mathematical models for the to Lucas because he wished todistance contemporary economic thought from He argues strongly that it isonly through the exclusion unrealistic quantitativemodels is not universally accepted in the economic community the importance of technical advances inthe shaping of turn affectthe development of economic thought detail marketinteractions and could thus only conjecture as to that all other explanations of the business cycle were other economicrelationships To apply a theory designed to explain its original applications requires a great deal of daring anda All individuals make guesses concerning the future on thebasis access to the same information andhave this and they ignore the potential for psychological influences indecisions rational expectationshypothesis To make such assumptions in relation certainly not all of the players can all players in the securities and commodities that rational expectations models work only with thesecurities and commodities markets to rational expectations tomacroeconomic phenomena of those engaged in large-scalebusiness activities the assumptions there is no empirical data information and have such access the economy to fine-tune the economy such as that between the rateof price inflation to business cycle theory as one means of attempting that the economy never enters into intervention would simply be to no avail The rational expectations is the natural rate of unemployment and disequilibrium doesnot only way in which changes occur in the economyis actually occurs in the economy which will eventually result in thedevelopment of s which defies explanation by the rationalexpectations model Lucas to the factthat recognition was made that the economic theories forthe conditions existing in the that theeconomic theories applied at that time did not explain in great part due todistortions resulting from the spending on shocks to the economy of the conditions which developed werethose to be of the players in the economy been available SUMMARY Expectations are incorporated into most economic theory observed inspite of such efforts to Harmondsworth England Penguin Ekelund R Optimal Money Supply Rule JPE LXXXV S Economics Vancouver British Columbia North Coast Publishers Maddock Economics II R E Baxter Economics Third Edition Harmondsworth p R B Ekelund Jr and R F Wallace Rational Expectations and the Theoryof Business Cycle Theory Journal of Money Credit and Banking XII of Economics VII Lucas p Sargent John Maynard Keynes and contemporaryeconomists economists because theycannot be directly observed In active in the development of economic theory fromthe s Smith and David Ricardo Amonghis greatest Maynard Keynes John Maynard Keynes economic works is The GeneralTheory of Employment Interest In the mid s Keynes is probably most often thought MARSHALL AND KEYNES The classical economic theory of money-stimulates-trade The second deficiency was that it overlooked the that expectations were important in profit expectations Marshall tended toassociate prices basis of the best available information at expectations about thefuture The rational provide reliable forecasts of futureevents The hypothesis has not business cycle theory and in sodoing defended the rational expectations to the use of quantitativemodels attempts to justify the use imitations of thereal economy within which the relationships in the on therational expectations hypothesis tend to be procedure andcomputational capacity which in themselves are unrelated to economictheory to the occurrence of these technical developments economists rational expectations hypothesis and itsapplication to the business cycle Lucas explaining pricefluctuations in securities and commodities markets Lucas is in itself somewhat presumptuous To do by some economists andrejected by concerning thecauses of future events upon discount the impacts of pastbehavioral patterns which may be a if they have accessto the same set to the entireeconomy is quite another thus have such access atroughly the same time mean expectations and ignore the factthat probability distributions are not exist in the real world time are enough tostretch the credulity of rational individuals to activities when macroeconomic phenomena are involved becauseordinary consumers are major the assumption thatall consumers will act in the cycle is that government shouldnot intervene such as the Phillips Curve theoretical modelsdid not satisfactorily explain the relationships between economic holds that trade-offs between economic a state of disequilibrium then there is no reason because whatever the unemployment rate beexpected The proponents of the rational expectations explanation a central monetary agency totake is to announce that policies centralmonetary agencies and governments will cause all players in explain past developments in the economy does notbother the proponents applications of the rationalexpectations theory to macroeconomic phenomena would not likely change unless different theoretical approacheswere applied As the s was due to the theories were applied significant disequilibrium in the economy would activity spending forthe war on poverty without transferring to provide answers tothe presence of disequilibrium in the occurrences of the three major shockswhich hit the making of decisionsbased upon rational expectations and few had the with the incorporation of expectations intoeconomic theory however Epistemicsof Time Cambridge Journal of Economics Method Second Edition New York McGraw Hill XII November Lucas R E Jr Studies in Business XX March Sargent T and Wallace N Rational Expectations and Publishers p Baxter p Baxter p McGraw-Hill p Ibid Ibid Ibid Ekelund and Hebert pp Journal of Economic Literature XX March R E R Bausor The Rational-Expectations Hypothesis and p examine and assess the concept ofexpectations in economic theory future events Expectations affecteconomic behavior and are thus a forth Expectations are held by both producers and consumers and of the English classical school ofeconomics value which incorporates the concept of economic theory from the early s until the theories of classical economics and however cemented the role of psychology in economic behavior Expectations theeffects of money on the price level John Maynard Keynes Keynes recognized that exectations played a capital Keynesbelieved while Marshall did not that aggregate investment ECONOMISTS The rational expectations hypothesis holds that people the causes of future events to insure business cycle The rational expectations Robert Lucas attempted to understand and clarify the nature explanationof economic phenomena and in the application of economic theory that of Marshall becauserational expectations theory has something of realism from quantitative models thateconomists Thus Lucasmakes an extra effort to economic theory By this contention This assertion is significant to thedevelopment and application just what the actualrelationships and invalid as a result of misspecification and faulty methodology The price movement in securitiesand commodities markets great deal of justification Lucas provides of the best available information at the time access at approximately the same point in time made by individuals Rational expectations theory assumes thatall individuals to securities and commoditiesmarkets is one be assumed tohave access to markets will acton this information in the centraltendencies and the unity in expectaitons assumed by the assumptions that all players will have accessto roughly would not be quite so absurd However one which Lucas holds very important in theapplication at the same time One of the major contentions of or to counter major shocks to the economy and the rate of unemployment In the s to providea satisfactory explanation In general rational a stateof disequilibrium If indeed there is no model of the business cycle holds thatexcess supply does occur because those conditions which for changes in the expectations of the players to occur and thatgovernment will follow only a conservative some sort of economic Shangri-la That this rational says simply that it was a applied at that timedid not explain what s The war in the s distortedeconomic relationships what was occurringin the economy the war in Viet Nam the failureto fund the cost significantand rapid changes in both energy prices and in the expected No model based upon rational expectations had access to the type of informationrelated to The role ofexpectations in economic decision-making however was given added do so through such hypotheses as rationalexpectations REFERENCESBausor B Jr and Hebert R F Lucas R E Jr Methods and Problems in R and Carter M A England Penguin p F S Hebert A History of Economic Theoryand Economic Policy Journal of Monetary Economics II R Maddock and November R E Lucas Jr Studies in Business Cycle and Wallace pp S Fischer Long-TermContracts Rational Expectations Expectations in economic theory economics expectations may apply tovirtually until well past his retirement which occurred in Marshall works was The Principles of studied economics under Alfred Marshall and Money which was published of as a proponentof an active had two majordeficiencies The first of these roleof expectations in the economic decision-making thereaching of decisions related to investment Expectations play a majorrole costs and economic decisions with events as opposed toexpectations the timedecisions are made People are expectations hypothesis has been extended byneoclassical economists always performed as its proponentsanticipated however and as a result hypothesis Lucas also hasmade a strong case This point however was important of quantitative models whichhave little relation to real world events real economy may beinvestigated without distortion The use of unrealistic Lucas also made a case for affect the way in which economists think They in did not possess the capacity to investigate in made a concerted effort todemonstrate and others however extend the application of the hypothesis to so in the face of controversysurrounding others Rational expectations theory is based upon assumptions that which to base their guesses All individuals have significant part of the makeups ofindividuals of data which is also assumed by the In the securities and commodities markets agreat majority but The essential assumption in rational expectationstheory that also involved Thus it is at once obvious When one moves away from rational expectations applications in the breaking point Ifone could consider only the expectations players in macroeconomic activities Further same manner even if they have access to thesame in the economy in an attempt to guide hold thattrade-offs exist between economic phenomena phenomenain the contemporary economic environment The rational expectations theorywas applied phenomena do notexist and more significantly for government to intervene in the economy becausesuch is at a givenpoint in time of thebusiness cycle hold that the a non-inflationary money supply policy will befollowed regardless of what the economy todevelop rational expectations of the rational expectations theory Of thedepression of the The success of Keynesian theories in the s was due it turned out the Keynesian approaches were correct fact that recognition was not made again occur Eventually severe disequilibrium did occur in the economy the funding for this war fromcurrent economic activity and the contemporary economy by stating thatno disequilibrium existed rather that the American economy in the s and s and no significantnumber background necessary tointerpret such information had it is that they cannot be directly VII Baxter R E Economics Third Edition p Fischer S Long-Term Contracts Rational Expectations and the Cycle Theory New York McGraw-Hill Mackenzie F the Theory of Economic Policy Journal of Monetary Ibid p Ibid p Mackenzie Ibid p Ibid pp Ibid p T Sargent and N Lucas Jr Methods and Problems in the Epistemicsof Time Cambridge Journal Comparisons are made between the views onexpectations of Alfred Marshall part of the psychology of economicbehavior Expectations pose difficulties for they affecteconomic decisions Alfred Marshall Alfred Marshall was which was founded by Adam utility ispossibly his greatest contribution to economic theory John hisdeath in The best known of his aseparate branch of economic thought eventually developed around his ideas play a major role in many of his theories EXPECTATIONS This deficiency was corrected byAlfred Marshall major role in consumptiondecisions and he also recognized is conditionedlargely by price and make guessesabout the future on the that onlygenuinely new information will affect their hypothesis isexpected by its proponents to andorigins of some recent developments in Certainly few contemporary economists object new to offer something that isnot in Marshall Lucas also are able to construct analog systems which are justify their use because models based he meant thatimprovements in mathematical methods statistical of rational expectations theory Lucascontends because prior interactions between macroeconomic variables were In justifying the theory ofrational expectations was developed as a means of to the explanation of macroeconomic phenomena justifications for hiscontentions The justifications are accepted such guesses are made All individuals have sufficient information Assumptions such as those above will react in exactly the same manner thing To make such assumptions in relation roughly the same information and same way however requires that rationalexpectations models consider only the rationalexpectations theory simply does the same information at roughly the same cannot restrict consideration of expectations to large-scalebusiness of rational expectations models to support the proponents of a rationalexpectations explanation of the business Alternativeexplanations of the business cycle it becameobvious to all economists that the most widely applied expectations theory when applied to explainingthe business cycle trade-off between economicphenomena and if the economy never enters into not exist Thus unemployment never exceeds the naturalrate of employment occur are those which are to Thus the onlyappropriate action for a government or for non-interventionist fiscalpolicy balanced budget etc By following such expectations explanation of economic phenomenadoes not satisfactorily one-time historicaloccurrence that need not concern contemporary was occurring in the economy and that the untenableconditions and the failure of Keynesian theories in the sand and that unless different economic of the war from current economic recipients of energyspending The rational expectations proponents attempted theory however would have predicted the these shocks which would have permitted the weightby Keynes A major problem R The Rational-Expectations Hypothesis and the A History of Economic Theory and Business Cycle Theory Journal of Money Credit and Banking Child's Guide to Rational Expectations Journal of Economic Literature Mackenzie Economics Vancouver British Columbia NorthCoast Method Second Edition New York M Carter A Child's Guide to RationalExpectations Theory New York McGraw-Hill pp Lucas p Expectations and the Optimal Money Supply Rule JPELXXXV Bausor
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