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Wednesday, October 12, 2011

Thomas Sargent, Rational Expectations and The Keynesian Consensus

The Nobel Committee has again awarded the Nobel Prize in Economics to an economist who helped shatter the Keynesian consensus. We can now add Thomas Sargent’s name to a growing list of  Nobel laureate Keynesian skeptics. According to my count, we now have eight Nobel Prizes  to economists who cast doubt on the Keynesian model, and zero to economists for advancing the Keynesian agenda.
Whereas Robert Lucas (Nobel Prize 1995) provided the theoretical foundations of rational expectations theory, Thomas Sargent tested rational expectations against real-world data. Lucas’s and Sargent’s seminal research was carried out in the 1970s during the era of stagflation that was ended by Ronald Reagan and Paul Volcker.
Newspaper explanations of the contributions of Nobel laureates in economics leave readers more confused than enlightened. Readers either wonder why a Nobel Prize was awarded for such an obvious idea or their heads spin from the reported complexity of the idea.  The accounts of the Sargent award in both the Wall Street Journal and New York Times are less than clear. This is a shame because Sargent’s work speaks directly to policy issues as relevant today as they were in the 1970s. It is noteworthy that the New York Times account does not mention its anti-Keynesian implications.
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