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Principles and Public Policy Decisions: the Case of Monetary Policy" mimeo 7 For Online Publication: Appendix of Proofs Let Ei( ) and e i denote, respectively, agent Ai’s expectation of and his optimal action to maximize the expected utility, conditional

By Michael Woodford

Abstract

Economics is a discipline that is centrally concerned with the nature and consequences of rational choice. However, the economist’s characteristic conception of rational decisionmaking is somewhat different from that of other disciplines that also weigh the rationality of decisions. For a philosopher or a jurist, rationality is above all a matter of the way in which a decision is arrived at, or, more precisely, the way in which it can be explained or defended--- it means that reasons can be given for the decision. In economics, instead, the rationality of decisions is a relation between their consequences and the decisionmaker’s goals; a rational decision is one that achieves the decisionmaker’s objectives to the greatest extent possible. 2 The divorce between the economist’s conception of rationality and any process of reasoning is illustrated by Milton Friedman’s celebrated analogy, in his essay on “The Methodology of Positive Economics ” (Friedman, 1953), between the kind of rationality assumed in economic models and the play of a skilled billiards player. There exists a useful theory, based on Newton’s laws of motion, that can predict the movements of the billiard balls the cue is struck in a particular way, and that can as a consequence be used to predict how one ought, in principle, to wish to play any given position; but the expert player need not understand this theory, let alone be able to explain his actions in terms of it, in order to be able to play skillfully, and indeed in ways that are successful for reasons that the theory can explain. Similarly, Friedman argued, the hypothesis of individua

Year: 2008
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