INET published a paper, written by John Kay, that deals with the relationship between economics and the world we live in. The Map Is Not the Territory: An Essay on the State of Economics spells out methodological critiques of economic theory in general, and of DSGE models and rational expectations in particular.
INET forwarded Kay's paper to a handful of economists and invited them to respond. Here we offer a perspective by Roger Guesnerie, Professor of Economic Theory and Social Organization and Chairman of the Board of the Paris School of Economics.
Guesnerie, as Michael Woodford before him, takes issue with rational expectations. To Guesnerie, rational expectations is a hypothesis, but “dominant economic discussion and practice have most often transformed the Hypothesis into an unavoidable and supposedly uncontroversial modeling axiom.” The optimism embedded in the efficient market hypothesis, Guesnerie continues, “has been one of the main sources of the recent turmoil: it has opened the floodgates to overconfidence, and weakened regulatory forces everywhere.” Read more