When that pioneering economist David
Hume wrote about the problem of induction, he talked about the
possibility that the sun would not rise one morning. There is no way we can
know ‘for sure’ that it will rise. (In contrast, we know for sure that 1+1=2.)
Just because the theories we have suggest it will rise each morning, and those
theories have been right so far, does nothing to ensure they will continue to
be right.
The problem with this example is that it is very difficult to
imagine the sun not rising every morning. Bertrand Russell had perhaps a better
example.
The chicken that is fed by the farmer each morning may well have a theory that
it will always be fed each morning - it becomes a ‘law’. And it works every
day, until the day the chicken is instead slaughtered.
When I used to lecture about economic methodology, I liked to
say that this chicken was not an economist. Now you might say that no chicken
is an economist, but suppose that chickens were as intelligent as the farmer
who keeps them, so they could be an economist. Economics is at a disadvantage
compared to the physical sciences because we cannot do so many types of
experiments (although we are doing more and more), but we have another source
of evidence: introspection. So if Bertrand Russell’s
chicken had been an economist, they would not simply have observed that every
morning the farmer brought them food, and therefore concluded that this must
happen forever. Instead they would have asked a crucial additional question:
why is the farmer doing this? What is in it for him? If I was the farmer, why
would I do this? And of course trying to answer that question might have led them
to the unfortunate truth.
I thought of this when reading through the fascinating comments
on my post on rational expectations, and posts others had written in response.
You can see why the habit of introspection would make economists predisposed to
assume rationality generally, and rational expectations in particular. (I think
it also helps explain economists’ aversion to paternalism.) It only works to use your own thought
processes as a guide to how people in general might behave, if you think other
people are essentially like yourself. So if your own thoughts lead you to
postulate some theory about how the economy behaves, then others similar to
yourself might be able to do something like the same thing.
But of course this line of reasoning could also be misleading.
An economist who introspects does so with the help of the economic theory they
already have, so their introspection is not representative. A psychologist or
behavioural economist might come to very different conclusions from
introspection - what biases do I bring to this problem, they may ask.
Economists may also be fooled into thinking their introspection is
representative, because they are surrounded by other economists. So this
conjecture about introspection does little to show that assuming agents have
rational expectations is right (or wrong), but it may be one reason why most
economists find the concept of rational expectations so attractive.
