John Muth facts for kids

John Fraser Muth (born September 27, 1930 – died October 23, 2005) was an American economist. He is known as the "father of the rational expectations revolution" in economics. This is mainly because of his important article from 1961, called "Rational Expectations and the Theory of Price Movements."

Muth earned his advanced degree, a PhD, in mathematical economics from Carnegie Mellon University. In 1954, he was the very first person to receive the Alexander Henderson Award. He worked at Carnegie Mellon as a researcher and professor from 1956 to 1964. Later, he became a full professor at Michigan State University (1964-1969) and then at Indiana University (1969-1994), where he worked until he retired.

Muth believed that what people expect to happen in the future is very similar to what economic theories predict. He first developed his idea of rational expectations for small-scale economic decisions (microeconomics). However, it later became very important in understanding larger economic trends (macroeconomics). Other famous economists like Robert Lucas, Jr., Finn E. Kydland, and Thomas J. Sargent also used his ideas.

Understanding Economic Predictions

Before John Muth, some economists like Milton Friedman used a simple rule called adaptive expectations to guess future economic conditions. This rule meant that people would adjust their future guesses based on past mistakes. For example, if prices were higher than expected last year, people would expect even higher prices this year.

In 1960, Muth wrote a paper called "Optimal Properties of Exponentially Weighted Forecasts." In this paper, he showed how Friedman's adaptive expectations model could be explained more deeply. Muth figured out that the way people make forecasts should depend on the specific patterns of the economic information they are trying to predict. His method for finding the best way to predict hidden economic trends was similar to the Kalman filter, another important idea developed around the same time.

The Idea of Rational Expectations

In his famous 1961 paper, "Rational Expectations and the Theory of Price Movements," Muth introduced his main idea. He argued that people's expectations about the future are basically the same as the predictions that come from good economic theories.

Muth called these expectations rational. He explained that this idea is about how people actually make predictions. It's not about what they should do.

One way to think about it is that even expert economists can't predict the future much better than a regular person, like a farmer or a business owner. This is because people are generally smart and use all the information they have to make their best guesses. This common sense approach to predicting the future is what Muth called "rational expectations."

Muth's Lasting Impact

John Muth's work had a huge influence on almost every part of economics that deals with how things change over time. Many economists, including Nobel Prize winners, later built on his ideas.

For a while, Muth's idea of rational expectations wasn't widely recognized. However, in the 1970s and 1980s, it became a central part of modern economics. His contribution was truly unique and wasn't something that other economists were thinking about at the same time. It was a new and clever idea that completely changed how economists thought about testing and understanding economic models.

Key Writings

• Charles C. Holt, Franco Modigliani, John F. Muth, and Herbert A. Simon (1960). Planning Production, Inventories, and Work Force.
• John F. Muth. (1960). "Optimal Properties of Exponentially Weighted Forecasts", Journal of the American Statistical Association, 55(290), pp. 299–306.
• John F. Muth. (1961). "Rational Expectations and the Theory of Price Movements", Econometrica 29, pp. 315–335.