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[Posted on behalf of Tony Brewer. -- RBE]
From: Tony Brewer <[log in to unmask]> Subject: Re: HES: QUERY -- neoclassical knowledge
What is this 'perfect knowledge' assumption that is under
discussion? That is intended as a serious question. Perhaps
someone could try to answer it. But here are a few sceptical
thoughts.
I do not believe that a clearly defined perfect knowledge
assumption popped into existence in the early twentieth century
and remained unchanged thereafter, nor do I believe that this
mythical assumption is the property of a single school of
economists.
I asked in my previous post - perfect knowledge of what? Surely we
should distinguish (at least) between full information about
contemporaneous conditions and perfect foresight about the future.
People have constructed perfect foresight models, but I don't
believe anyone has ever thought they captured everything
important, still less that they were descriptively true. For example,
Marshall's short-run/long-run apparatus implicitly deals with the
effects of unanticipated changes, and is thus inconsistent with
perfect foresight. The rational expectations revolution of the late
twentieth century did much to clarify what was involved in
assumptions about expectations of future events - we cannot
unlearn what was learned from that episode. Until then, I suspect,
mainstream economists mostly worked with only two assumtions
about foresight - either perfect foresight or complete myopia (as, for
example, in cobweb models). They shifted back and forward
between them according to the problem under discussion, which
may have been a perfectly sensible thing to do with the methods
available to them.
What happened in the early twentieth century, I think, is that an
implicit assumption was made much more explicit as a result of
formalization. Marshall (as we have heard), criticised the
assumption of perfect knowledge, but full information about
contemporaneous events seems to me to be implicit in the whole
of his framework. If demand and supply depend on price, then
agents have to be assumed to know what the price is, else how
could they react to it? And so on. Marshall's style involved hidden
mathematics with strong simplifying assumptions, wrapped up in a
cocoon of reassuring words designed to avoid frightening his
readers. As I argued before, classical profit rate equalization
requires strong assumptions about perfect knowledge of future
profit opportunities.
Tony Brewer ([log in to unmask])
University of Bristol
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