Chapter 2: Indeterminate Decisions
The assumptions that macroeconomists make about the state of knowledge are crucial and central to their theories, and yet they are almost never fully explained. This is probably because macroeconomic theory always abstracts from one of the foremost features of experience, which is the essentially non-quantitative nature of much economic knowledge. In reality investors and firms know something, but not enough, about any situation; the future is almost never totally unknown, but they are never able to quantify all the circumstances. The same can be said of the government policy makers, who almost always have some incomplete and nonquantitativeknowledge when they make their decisions. Finally, this partial knowledge can be transmitted within the markets and between the markets and the authorities, although such transmission tends to be imperfect. Whereas real economic knowledge is often vague, macroeconomic theories are always clear cut. The assumptions which the Traditional Keynesian system makes about knowledge are (1) policy makers can act 'as if' they knew the exact location of the aggregate demand and supply curves and solve the general equilibrium system; and (2) the markets are unable to anticipate inflation because they cannot solve the general equilibrium system. It would be possible to make less simplistic assumptions, but these or something like them are an essential part of the theory. If the markets were perfectly informed then the economy would remain in equilibrium at full employment, and if the policy makers were significantly less than 19 20 The Economics o Indeterniinacy f omniscient then...
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