Information, Equilibrium and Rational Expectations

On Pluto motorists were required to obey two laws of the road. On the one hand they were required to drive in such a way as to give themselves maximum satisfaction. On the other hand, they were also required to obey a speed limit. In pre-rational-expectations days, firms and households were assumed to know the shapes of their supply and demand curves. This assumption is therefore related to information at what Patinkin calls the individual experiment level. The rational expectations approach proposes that the agents in the model possess the same information as the model-builder or behave as if they do. Practitioners emphasized that the rational expectations approach was concerned with equilibrium positions and left unexplained the process whereby equilibrium might be achieved. For those who practise rational expectations the relevant economic theory is invariably some type of supply and demand model.