Mainstream Macroeconomics in the Light of Popper

Abstract

Macroeconomics has been dominated over the last four decades by the Rational Expectations Hypothesis (REH) which implies that economies are inherently stable. REH is a key element of the New Neoclassical Synthesis (NNS) macroeconomic model which has also played a dominant role in theory and policy analysis over the last two decades. We analyse REH in light of Popper´s evolutionary theory of knowledge and learning. We claim that the latter provides macroeconomics with an epistemological and ontological foundation that, unlike REH, takes full account of human fallibility and upon which economists can build a more useful macroeconomic theory.