John Muth 101: The Trailblazer of Rational Expectations

John Muth, born on September 27, 1930, was an esteemed economist from the United States. He is known as the trailblazer of the rational expectations movement in economics, mainly because of his notable work “Rational Expectations and the Theory of Price Movements” published in 1961.

His contributions to the field of economics are highly regarded, and his ideas have left an indelible mark on the discipline. Muth’s passing on October 23, 2005, was a great loss to the economics community, but his legacy lives on through his theories and influential research. If you interested to learn more about John Muth, keep reading this Zatrun.com article.

Who is John Muth?

John Muth, the American economist, received his PhD in mathematical economics from Carnegie Mellon University, where he became the first person to win the Alexander Henderson Award in 1954. He was associated with Carnegie Mellon University as a research associate from 1956 to 1959, an assistant professor from 1959 to 1962, and an associate professor without tenure from 1962 to 1964. From 1964 to 1969, he was a full professor at Michigan State University. From 1969 until his retirement in 1994, he was a full professor at Indiana University.

Muth’s rational expectations principle asserted that expectations are essentially the same as the predictions of relevant economic theory. He introduced this principle in the context of microeconomics. Although, it has become associated with macroeconomics and the works of Robert Lucas Jr., Finn E. Kydland, Edward C. Prescott, Neil Wallace, Thomas J. Sargent, and other economists.

His Academic Works

John Muth’s contribution to economics extends beyond the rational expectations principle. In his 1960 paper “Optimal Properties of Exponentially Weighted Forecasts”, published in the Journal of the American Statistical Association, John Muth expanded on Milton Friedman’s adaptive expectations model for permanent income. Muth’s research showed that the stochastic process being forecast should determine both the distributed lag and the conditioning variables that individuals use to predict the future. This was a significant insight that has had a lasting impact on economic forecasting.

Also, he proposed his hypothesis in his paper “Rational Expectations and the Theory of Price Movements” in 1961. He disagreed with Simon’s belief that expectations were based solely on past events. He argued that “expectations, since they are informed predictions of future events, are essentially the same as the predictions of the relevant economic theory.” Muth further stated that such expectations should be called “rational” despite the risk of confusing the descriptive hypothesis with a prescriptive statement about what firms should do.