"It is now clear that two foundations of anti-Keynesianism—rational expectations and the efficient-markets hypothesis, both of which are embraced by mainstream economics despite the absence of empirical support—are simply wrong. Market actors do not efficiently and hyper-rationally process all available information in the context of well-defined risks and with a shared knowledge of the correct underlying model. Instead, they have what could be called “realistic” expectations. They do the best they can to process information guided by the psychology and instincts that Keynes called “animal spirits,” making guesses about the sentiment of the crowd in an environment characterized by uncertainty. And asset prices are not always and everywhere “accurate.” Rather, as Johnson and Kwak explain, it turns out “prices could wander far away from fundamental values for indefinite periods of time.” Stiglitz and Roubini, too, are Keynesian in their thinking, and particularly worth tracking down is Posner’s clear-eyed and admirably open-minded essay “How I Became a Keynesian,” in which the dyed-in-the-wool conservative concludes that Keynes was “the best guide we have to the crisis.”"
Via Andrew Sullivan
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