KEYNES & MARSHALL. EXPECTATIONS IN ECONOMIC THEORY.   Term Paper ID:16035 Click to get this paper

Essay Subject: 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 Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. [13]Ibid., p. [21]R. B., Jr., and Hebert, R. Studies in Business Cycle Theory (New York:McGraw-Hill, 1982), pp. REFERENCESBausor, R. 68-69. Bausor, "The Rational-Expectations Hypothesis and the Epistemicsof Time," Cambridge Journal of Economics VII (1983): 1-1 . "A Child's Guide to Rational Expectations." Journal of Economic Literature XX (March 1982): 39-51.Sargent, T., and Wallace, N. [11]Ibid. 1 3-113; S. 499. E. Thus, Lucasmakes an extra effort to justify their use, because models based on therational expectations hypothesis tend to be unrealistic.[21] Lucas also made a case for the importance of technical advances inthe shaping of economic theory. [7]Mackenzie, p. [12]Ekelund, and Hebert, pp. Robert Lucas attempted "to understand and clarify the nature andorigins of some recent developments in business cycle theory," and, in sodoing, defended the rational expectations hypothesis.[18] Lucas also hasmade a strong case for the use of mathematical models for the explanationof economic phenomena and in the application of economic theory.[19]Certainly, few contemporary economists object to the use of quantitativemodels. E., Jr. The war in the 194 s distortedeconomic relationships, and the failure of Keynesian theories in the 195 sand the 196 s was due to the fact that recognition was not made that theeconomic theories applied at that time did not explain what was occurringin the economy, and that, unless different economic theories were applied,significant disequilibrium in the economy would, again, occur. The success of Keynesian theories in the 193 s was due to the factthat recognition was made that the economic theories applied at that timedid not explain what was occurring in the economy, and that the untenableconditions would not likely change, unless different theoretical approacheswere applied. [19]R. EXPECTATIONS: MARSHALL AND KEYNES The classical economic theory of money-stimulates-trade had two majordeficiencies. [15]Ibid., p. [22]Lucas, 198 , p. The essential assumption in rational expectationstheory that all players in the securities and commodities markets will acton this information in the same way, however, requires that rationalexpectations models consider only mean expectations and ignore the factthat probability distributions are also involved. To make such assumptions in relation to the entireeconomy is quite another. 151. No model based upon rational expectations theory,however, would have predicted the occurrences of the three major shockswhich hit the American economy in the 196 s and 197 s, and no significantnumber of the players in the economy had access to the type of informationrelated to these shocks which would have permitted the making of decisionsbased upon rational expectations, and few had the background necessary tointerpret such information had it been available. Alfred Marshall Alfred Marshall was active in the development of economic theory fromthe 187 s until well past his retirement, which occurred in 19 8.[4]Marshall was in "the long tradition of the English classical school ofeconomics, which was founded by Adam Smith and David Ricardo."[5] Amonghis greatest works was The Principles of Economics, which was published in189 . By this contention, he meant thatimprovements in mathematical methods, statistical procedure, andcomputational capacity (which, in themselves, are unrelated to economictheory) affect the way in which economists think. Mackenzie, Economics (Vancouver, British Columbia: NorthCoast Publishers, 1987), p. In the securities and commodities markets, agreat majority (but, certainly not all) of the players can be assumed tohave access to roughly the same information and thus have such access atroughly the same time. Lucas provides justifications for hiscontentions. If, indeed, there is no trade-off between economicphenomena and if the economy never enters into a state of disequilibrium,then there is no reason for government to intervene in the economy, becausesuch intervention would simply be to no avail. A History of Economic Theory and Method. New York: McGraw-Hill, 1982.Mackenzie, F. A major problem with the incorporation of expectations intoeconomic theory, however, is that they cannot be directly observed, inspite of such efforts to do so through such hypotheses as rationalexpectations. [9]Ibid. 2. 116. 697. Expectations Expectations, in economic theory, are "attitudes, beliefs, or statesof mind about the nature of future events."[1] Expectations affecteconomic behavior, and are, thus, a part of the psychology of economicbehavior.[2] Expectations pose difficulties for economists, because theycannot be directly observed.[3] In economics, expectations may apply tovirtually anything--prices, interest rates, demand, profits, and so forth.Expectations are held by both producers and consumers, and they affecteconomic decisions. Lucas and others,however, extend the application of the hypothesis to other economicrelationships. The justifications are accepted by some economists, andrejected by others.[23] Rational expectations theory is based upon assumptions that: 1. [16]T. Thus, unemployment never exceeds the naturalrate of employment, because whatever the unemployment rate is at a givenpoint in time is the natural rate of unemployment, and disequilibrium doesnot occur, because those conditions which occur are those which are to beexpected. He argues strongly that it isonly through the exclusion of realism from quantitative models thateconomists are able to construct analog systems which are imitations of thereal economy, within which the relationships in the real economy may beinvestigated without distortion. When one moves away from rational expectations applications in thesecurities and commodities markets to rational expectations tomacroeconomic phenomena, the assumptions that all players will have accessto roughly the same information at roughly the same time are enough tostretch the credulity of rational individuals to the breaking point. [5]Ibid., p. 437-439. Baxter, Economics, Third Edition (Harmondsworth,England: Penguin, 1984), p. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule." JPE LXXXV (1977): 263- 275.Lucas, R. To make such assumptions in relation to securities and commoditiesmarkets is one thing. That this rational expectations explanation of economic phenomenadoes not satisfactorily explain past developments in the economy does notbother the proponents of the rational expectations theory. Assumptions such as those above discount the impacts of pastbehavioral patterns which may be a significant part of the makeups ofindividuals, and they ignore the potential for psychological influences indecisions made by individuals. Hebert, A History of Economic Theoryand Method, Second Edition (New York: McGraw-Hill, 1983), p. Second Edition. E. In general, rational expectations theory, when applied to explainingthe business cycle, holds that trade-offs between economic phenomena do notexist, and more significantly, that the economy never enters into a stateof disequilibrium. F. The proponents of the rational expectations explanation of thebusiness cycle hold that the only way in which changes occur in the economyis for changes in the expectations of the players to occur. 165. Keynes,however, cemented the role of psychology in economic behavior.[7]Expectations play a major role in many of his theories. 272. In the 197 s, it becameobvious to all economists that the most widely applied theoretical modelsdid not satisfactorily explain the relationships between economic phenomenain the contemporary economic environment. Thus, the onlyappropriate action for a government or for a central monetary agency totake is to announce that a non-inflationary money supply policy will befollowed (regardless of what actually occurs in the economy) and thatgovernment will follow only a conservative, non-interventionist fiscalpolicy (balanced budget, etc.) By following such policies, centralmonetary agencies and governments will cause all players in the economy todevelop rational expectations which will, eventually, result in thedevelopment of some sort of economic Shangri-la. "Rational Expectations and the Theory of Economic Policy." Journal of Monetary Economics II (1976): 1 3-113.----------------------- [1]R. All individuals have sufficient information concerning thecauses of future events upon which to base their guesses. 271. The rational expectations model of the business cycle holds thatexcess supply does not exist. [1 ]Ibid. To do so in the face of controversysurrounding its original applications requires a great deal of daring--anda great deal of justification. F. To apply a theory designed to explain price movement in securitiesand commodities markets to the explanation of macroeconomic phenomena is,in itself, somewhat presumptuous. [17]R. [8]R. Economics. [24]Bausor, p. S. Thus, it is, at once,obvious that rational expectations models work only with centraltendencies, and the unity in expectaitons assumed by the rationalexpectations theory simply does not exist in the real world. 9.----------------------- 13 444-445. The rational expectations theorywas applied to business cycle theory as one means of attempting to providea satisfactory explanation. Ifone could consider only the expectations of those engaged in large-scalebusiness activities, the assumptions would not be quite so absurd.However, one cannot restrict consideration of expectations to large-scalebusiness activities when macroeconomic phenomena are involved, becauseordinary consumers are major players in macroeconomic activities. Economics. [18]R. Rational expectations theory assumes thatall individuals will react in exactly the same manner, if they have accessto the same set of data, which is also assumed by the rational expectationshypothesis. Carter, "A Child's Guide to RationalExpectations," Journal of Economic Literature XX (March 1982): 39-51. Harmondsworth, England: Penguin, 1984.Ekelund, R. S. This point, however, was important to Lucas, because he wished todistance contemporary economic thought from that of Marshall, becauserational expectations theory has something new to offer--something that isnot "in Marshall."[2 ] Lucas also attempts to justify the use of quantitative models whichhave little relation to real world events. New York: McGraw- Hill, 1983, p. E. All individuals have access to the same information, andhave this access at approximately the same point in time. Comparisons are made between the views onexpectations of Alfred Marshall, John Maynard Keynes, and contemporaryeconomists. 439. E. 3. [2 ]Lucas, 198 , p. Lucas, Jr. As it turned out, the Keynesian approaches were correct forthe conditions existing in the 193 s. 143. John Maynard Keynes John Maynard Keynes studied economics under Alfred Marshall. He wasactive in the development of economic theory from the early-19 s until hisdeath in 1946.[6] The best known of his economic works is The GeneralTheory of Employment, Interest and Money, which was published in 1936.Keynes challenged many of the theories of classical economics, and aseparate branch of economic thought eventually developed around his ideas.In the mid-198 s, Keynes is probably most often thought of as a proponentof an active role for government in the management of the economy. E., Jr. The use of unrealistic quantitativemodels is not universally accepted in the economic community. 99. The first of these deficiencies was that it ignored theeffects of money on the price level.[8] This deficiency was corrected byAlfred Marshall.[9] The second deficiency was that it overlooked the roleof expectations in the economic decision-making process.[1 ] Thisdeficiency was corrected by John Maynard Keynes.[11] Keynes recognized that exectations played a major role in consumptiondecisions, and he also recognized that expectations were important in thereaching of decisions related to investment.[12] Expectations play a majorrole in Keynes' concept of the marginal efficiency of capital.[13] Keynesbelieved, while Marshall did not, that "aggregate investment is conditionedlargely by price and profit expectations."[14] Marshall tended toassociate prices, costs, and economic decisions with events, as opposed toexpectations.[15] EXPECTATIONS: MARSHALL, KEYNES, AND CONTEMPORARY ECONOMISTS The rational expectations hypothesis holds that people make guessesabout the future on the basis of the best available information at the timedecisions are made.[16] People are further assumed to have enoughinformation concerning the causes of future events to insure that onlygenuinely new information will affect their expectations about thefuture.[17] The rational expectations hypothesis has been extended byneoclassical economists to a variety of macroeconomic events, including thetrade, or business, cycle. Maddock, and M. Of thedepression of the 193 s, which defies explanation by the rationalexpectations model, Lucas says, simply, that it was a one-time historicaloccurrence that need not concern contemporary applications of the rationalexpectations theory to macroeconomic phenomena. Ekelund, Jr., and R. His theory of value, which incorporates the concept of utility, ispossibly his greatest contribution to economic theory. B. The role ofexpectations in economic decision-making, however, was given added weightby Keynes. The hypothesis has not always performed as its proponentsanticipated, however, and, as a result, many theoretical and empiricalcriticisms have been leveled at it. Lucas, Jr., "Methods and Problems in Business Cycle Theory,"Journal of Money, Credit, and Banking XII, 4 (November 198 ): 713. All individuals make guesses concerning the future on thebasis of the best available information at the time such guesses are made. Eventually,severe disequilibrium did occur in the economy--in great part, due todistortions resulting from the spending on the war in Viet Nam, the failureto fund the cost of the war from current economic activity, spending forthe "war on poverty," without transferring the funding for this war fromcurrent economic activity, and the shocks to the economy of the significantand rapid changes in both energy prices and in the recipients of energyspending. [3]Baxter, p. [14]Ibid., pp. Vancouver, British Columbia: North Coast Publishers, 1987.Maddock, R., and Carter, M. [6]Ibid., p. [4]Baxter, p. Wallace, "Rational Expectations and the Theoryof Economic Policy," Journal of Monetary Economics II (1976): 1 3-113. Third Edition. Fischer, "Long-TermContracts, Rational Expectations, and the Optimal Money Supply Rule," JPELXXXV (1977): 263-275. INTRODUCTION The purpose of this research is to examine and assess the concept ofexpectations in economic theory. This assertion is significant to thedevelopment and application of rational expectations theory, Lucascontends, because prior to the occurrence of these technical developments,economists did not possess the capacity to investigate "in detail marketinteractions" and could, thus, "only conjecture" as to just what the actualrelationships and interactions between macroeconomic variables were. 1 . Further,there is no empirical data (which Lucas holds very important in theapplication of rational expectations models) to support the assumption thatall consumers will act in the same manner, even if they have access to thesame information and have such access at the same time.[24] One of the major contentions of the proponents of a rationalexpectations explanation of the business cycle is that government shouldnot intervene in the economy, in an attempt to guide the economy, to "fine-tune" the economy, or to counter major shocks to the economy. "Methods and Problems in Business Cycle Theory." Journal of Money, Credit, and Banking XII, 4 (November 198 ): 696-715.Lucas, R. "The Rational-Expectations Hypothesis and the Epistemicsof Time." Cambridge Journal of Economics VII (1983): 1-1 .Baxter, R. [22] In justifying the rational expectations hypothesis and itsapplication to the business cycle, Lucas made a concerted effort todemonstrate that all other explanations of the business cycle were invalid,as a result of misspecification and faulty methodology. Sargent, and N. The theory ofrational expectations was developed as a means of explaining pricefluctuations in securities and commodities markets. [2]F. 116.Fischer, S. The rational expectations proponents attempted to provide answers tothe presence of disequilibrium in the contemporary economy, by stating thatno disequilibrium existed; rather, that the conditions which developed werethose to be expected. They, in turn, affectthe development of economic thought. [23]Sargent, and Wallace, pp. Studies in Business Cycle Theory. SUMMARY Expectations are incorporated into most economic theory. 697. The rational expectations hypothesis isexpected, by its proponents, to provide reliable forecasts of futureevents. Alternativeexplanations of the business cycle, such as the Phillips Curve, hold thattrade-offs exist between economic phenomena--such as that between the rateof price inflation and the rate of unemployment. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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