The Economics Book

244

YOU CAN’T

FOOL THE

PEOPLE

RATIONAL EXPECTATIONS

T

he rise of government

intervention and spending

after World War II provided

an important new way for

economists to think about the

whole economy. In particular

they believed that the government

could boost the economy by using

monetary and fiscal (tax and

spend) policies to achieve

permanently higher output

and lower unemployment.

Early criticisms of these

Keynesian models involved a

closer examination of the idea of

“expectations.” Expectations

matter because what people think

will happen in the future affects

their behavior in the present.

IN CONTEXT

FOCUS

The macroeconomy

KEY THINKERS

John Muth (1930 –2005)

Robert Lucas (1937– )

BEFORE

1939 British economist

John Hicks analyzes the

way that expectations of

the future change.

1956 US economist

Philip Cagan uses

“adaptive expectations”

to explain forecasts based

on the past.

AFTER

1985 US economist Gregory

Mankiw contributes to the

emergence of the “New

Keynesian” economics,

which uses new models that

incorporate people’s rational

expectations of the future into

their calculations.