Archive for February 2010
Real Business Cycle (RBC) and Rational Expectations Hypothesis (REH) contributing to the Global Financial Crisis (GFC) and the Dynamite Prize
This article discusses how neoclassical economics has contributed to the Global Financial Crisis (GFC). In particular, how two neoclassical theories, the Real Business Cycle (RBC) and the Rational Expectations Hypothesis (REH) contributed to the GFC and how these theories are false and unscientific.
Edward C. Prescott and Finn E. Kydland were awarded the 2004 Nobel prize in economics for their work in developing the RBC and Robert E. Lucas Jr. was awarded the 1995 Nobel prize in economics for developing the REH. They have been nominated for The Dynamite Prize in Economics that is to be awarded to the three economists who contributed most to enabling the GFC. The Dynamite Prize in Economics nominates Prescott and Kydland ‘for jointly developing and popularizing “Real Business Cycle” theory, which by omitting the role of credit greatly diminished the economics profession’s understanding of dynamic macroeconomic processes’ and nominates Lucas for ‘his development of the rational expectations hypothesis, which defined rationality as the capacity to accurately predict the future, both served to maintain Friedman’s proposition that monetary factors do not affect the real economy and, in the name of “rigor”, distanced economics even further from reality than Friedman had thought possible.’ Read the rest of this entry »