No, he’s pointing out that the saltwater people are persuadable by theories which better match the data, while the freshwater (macro) people simply are not.

http://en.wikipedia.org/wiki/Subjective_expected_utility

It’s even more basic than rational expectations. For those of you that don’t know, S.E.U. theory is the brainchild of three mathematicians – Leonard J. Savage, Frank P. Ramsey, and Bruno de Finetti. It was in the 1950ies when S.E.U. gained a strong foothold in the consensus of academic economics.

However, research from scholars like Daniel Ellsberg (see his 1961 article in the Quarterly Journal of Economics and his doctoral dissertation which was finished in 1962 but tragically only published in 2001: Risk, Ambiguity, and Decision), suggest that S.E.U. theory is a very special case. It seems that Daniel Ellsberg’s findings (and the subsequent “ambiguity aversion” literature spawned by his 1961 article in the QJE) point to a more general case.

S.E.U. theory is still in practice, the basic foundation for much of modern macroeconomics. Perhaps it’s time to replace it with a more general theory of decision-making.

BTW, for further reference folks, I recommend reading these articles…

Brady, Michael E. and Howard B. Lee – ‘Dynamics of choice behavior: The logical relation between linear objective probability and Nonlinear Subjective probability’ Psychological Reports, Vol 64(1), Feb 1989, 91-97.

http://www.amsciepub.com/doi/abs/10.2466/pr0.1989.64.1.91

Brady, Michael E. and Howard B. Lee – ‘Theoretical Comparison of the Decision Theories of J. M. Keynes, Kahneman-Tversky, and Einhorn-Hogarth’ – Psychological Reports, Vol 69(1), Aug 1991, 243-251.

http://www.amsciepub.com/doi/abs/10.2466/pr0.1991.69.1.243

Brady, Michael Emmett – ‘J.M. Keynes’s Theoretical Approach to Decision-Making Under Conditions of Risk and Uncertainty’ – The British Journal for the Philosophy of Science 44 (2):357-376 (1993)

http://bjps.oxfordjournals.org/content/44/2/357.full.pdf

Brady, Michael Emmett – ‘On the Application of J.M. Keynes’s Approach to Decision-Making’ – International Studies in the Philosophy of Science 8 (2):99 – 112 (1994)

http://www.tandfonline.com/doi/abs/10.1080/02698599408573487

Brady, Michael Emmett and Rogerio Arthmar – ‘Keynes’s Lower-Upper Bound Interval Approach to Probability’ – SSRN Working Paper Series

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1546726

Diego, Thanks so much for the links.

Joshua, Thanks for your comment. Comments like this one are ample reward for the time and effort that I put in to the blog. But the greatest reward is that I have to figure out what I am really thinking before I can put something out there for others to read.

anon, That’s a good way of saying it, but I am not sure I agree that that’s all ratex is about.

Marcus, I totally agree that economics is not just like physics. I actually don’t remember the correspondence principle. I need to go back and look it up in the Foundations.

choncan, I actually read the Klamer book years ago, and may still have it somewhere. It probably would be worth going back and rereading it, to see how the interviewees and the profession have changed since the mid-1980s. It might also help me get a handle on how much I have changed. I totally agree with your assessment of how Scott Sumner presents an argument.

Scott, I guess one of us will have to write a history of thought paper on ratex. So what exactly caused you to become disillusioned or disinterested in macro before the panic of 2008? What, if anything, do you find objectionable in DSGE models?

“Fed policy has no permanent effect on exchange rates and inflation expectations at the zero bound, but the markets wrongly think QE does have a permanent effect, and hence prices move on new information relating to QE.”

I have no interest in that sort of model.