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The Importance of Diminishing Returns - Econlib

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In graduate school, I recall a professor suggesting that the rational expectations revolution would eventually lead to much better models of the macroeconomy. I was skeptical, and in my view, that didn’t happen. This is not because there is anything wrong with the rational expectations approach to macro, which I strong support. Rather I believe that the advances coming out of this theoretical innovation occurred very rapidly. For instance, by the time I had this discussion (around 1979), people like John Taylor and Stanley Fischer had already grafted rational expectations onto sticky wage and price models, which contributed to the New Keynesian revolution.  Since that time, macro seems stuck in a rut (apart from some later innovations from the Princeton School (related to the zero lower bound issue.) In my view, the most useful applications of a new conceptual approach tend to come quickly in highly competitive fields like economics, science and the arts. In the past few years, I’ve

The Importance of Diminishing Returns 16 Scott Sumner Categories: Microeconomics Technology By Scott Sumner, Nov 13 2024 SHARE POST: --> In graduate school, I recall a professor suggesting that the rational expectations revolution would eventually lead to much better models of the macroeconomy. I was skeptical, and in my view, that didn’t happen. This is not because there is anything wrong with the rational expectations approach to macro, which I strong support. Rather I believe that the advances coming out of this theoretical innovation occurred very rapidly. For instance, by the time I

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