Since September 2008, a significant number of economists have abandoned scientific scholarship to embrace the technically flawed doctrine of hydraulic Keynesianism. They include Lawrence Summers, Joe Stiglitz, Paul Krugman, Christina Romer and Bradford De Long, all of whom were exposed to adaptive and rational expectations theories, all of whom embraced to some degree, the New Keynesian version of those theories before returning to the economic Stone Age.
Once President Obama entered into office, in January 2009, all these scholars threw away their accumulated learning to join in the progressive bandwagon that would be fired on the long- broken anvil of John Maynard Keynes. For a while, it seemed as though the Swedish academy had also jettisoned hard-learned knowledge and was bent on rebuilding the Keynesian vision.
Well, new evidence has now piled up demonstrating that Maynard Keynes and his disciples have no clothes. With all the political oxygen rushing out of a beleaguered White House, Obama’s Keynesian cronies have deserted his ship and are looking for richer pickings well outside the domain of the Democratic Party.
Thankfully, the Swedish academy has shaken itself loose from the Keynesian corset by awarding the Nobel Prize in Economic Science jointly to Thomas Sargent and Christopher Sims, both of whom have made significant contributions to rational expectations.
According to rational expectations theories, individuals do not respond passively to changes in economic policy or economic conditions. They anticipate future conditions and adjust their own behavior in their best interests. This implies that it is hard for politicians to manipulate individuals into behavior that does not make economic sense. President Obama has learned this lesson the hard way during the first three years of what looks increasingly likely to be a single term in office.
Chistopher Sims yesterday demonstrated that he takes his own models seriously:
“Asked yesterday what he would do with his half of the $1.5 million prize money, Mr. Sims said: ‘First thing I’m going to do is keep it in cash for a while and think.” Editorial, ’The Return of Rational Expectations’, The Wall Street Journal, October 11, 2011
President Obama must really wish that he had appointed Christopher Sims, instead of Larry Summers, to be his chief economic adviser in January 2009. As must a large majority of educated American voters! If only all those trillions of wasted dollars were still in the money market!