About 20 years ago economists began considering the then radical notion that economic actors – producers and consumers – took into account information about the likely future course of the economy in their daily decisions. That simple assumption, that rational actors necessarily act on all that they happen to know, produced the rational expectations revolution. Granting that one assumption had implications that swept aside essentially all of macroeconomic theory as it then existed. The macroeconomic theory of an earlier day presumed that the economy could be manipulated – most particularly by government – and that producers and consumers would then respond to that manipulation after it happened.

The idea that people use all of what they know quickly implies that (1) some of what they know is about the future, informed speculation about the likely course of events and (2) they use that knowledge. That means that people should foresee that part of the future that happens to be readily predictable, and the full rationality postulate implies that when they know it, they should act on it. They should, that is, act on expectations, which of necessity implies that action anticipates predictable events; it does not follow them. The older theories of government intervention were caught in a logical trap. If government action was a sensible response to the conditions that existed, then it should be almost fully predictable. If predictable, then economic actors should foresee it, act on their expectations, and then do nothing in response to the application of what had been predicted.