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Change and Expectations in Macroeconomic Models: Recognizing the Limits to Knowability

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In modern economies, individuals and companies engage in innovative activities, discovering new ways to use existing physical and human capital, and new technologies in which to invest. The institutional and broader social context within which these activities take place also changes in novel ways.

Moreover, market participants search for and occasionally adopt new ways to forecast returns from their activities. Thus, change in capitalist economies is to a significant extent non-routine, for it cannot be adequately represented in advance with mechanical rules and procedures.

Contemporary macroeconomics and finance theory has overlooked the limits to what economists can know – limits that arise from non-routine change. To be sure, economists have developed a variety of models that recognize market participants’ need to cope with imperfect knowledge or incomplete and/or distorted information concerning the process driving outcomes. But, notwithstanding their many differences, all of these models assume away the possibility that participants in real-world markets cope with their imperfect knowledge and information in ways that economists cannot fully foresee.

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