The Rational Expectations model in economics assumes that each economic agent (whether an individual or a company) can predict the future as perfectly as the modelers themselves. To anyone living outside the rarified bubble of mathematical economics, this is simply ridiculous. It is clear that no one associated with that theory has ever made any real business decisions, or suffered their consequences.
Here is non-mainstream economist George Shackle, writing to Bryan Hopkins on 1980-08-20:
‘Rational expectations’ remains for me a sort of monster living in a cave. I have never ventured into the cave to see what he is like, but I am always uneasily aware that he may come out and eat me. If you will allow me to stir the cauldron of mixed metaphors with a real flourish, I shall suggest that ‘rational expectations’ is neo-classical theory clutching at the last straw.
Observable circumstances offer us suggestions as to what may be the sequel of this act or that one. How can we know what invisible circumstances may take effect in time-to come, of which no hint can now be gained? I take it that ‘rational expectations’ assumes that we can work out what will happen as a consequence of this or that course of action. I should rather say that at most we can hope to set bounds to what can happen, at best and at worst, within a stated length of time from ‘the present’, and can invent an endless diversity of possibilities lying between them. [Italics in original]
Of course, unlike John Muth or Robert Lucas, Shackle had actual real-world experience of investment decision-making from his experience during WW II on national infrastructure planning.
George L. S. Shackle : Letter to Bryan Hopkins. Quoted in: Stephen L. Littlechild : Reflections on George Shackle: Three Excerpts from the Shackle Collection. The Review of Austrian Economics, 16 (1): 113-117.
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