Common sense

Monetary policy as a tool for expectations management is believed to be most effective if it can coordinate the beliefs and expectations of the economic agents. The optimal communication policy is in an environment where central bank announcements are common knowledge and abundant information is complete transparency. The above conclusion is altered in the more realistic situation where economic agents face uncertainty regarding underlying economic fundamentals combined with strategic complementarity between player’s actions. The optimal communication policy in a case with imperfect common knowledge is incomplete transparency or a degree of opacity. Uncertainty about the underlying economic state in the presence of strategic complementarity is the origin for the emergence of imperfect common knowledge. We further develop these issues in the context of a Lucas-island model. Full policy transparency in this setting leads to an economic distortion residing in a wedge between economic agent’s expectations and optimal fundamental-based allocations—dubbed as over-reaction to the central bank announcements. JEL Classifications: E50, E58, E59, G11, G12, G13, G14

This paper advocates a realist position with respect to science and common sense. It considers the question of whether science provides knowledge of reality. It presents a positive response to that question. It rejects the anti-realist claim that we are unable to acquire knowledge of reality in favour of the realist view that science yields knowledge of the external world. But it remains to be specified just what world that is. Some argue that science leads to the rejection of our commonsense view of the world. If so, the world about which science informs us is not the world of common sense. Common sense is “stone-age metaphysics”. It is false theory inherited from our primitive ancestors that is to be eliminated in favour of science. Against such an elimination of common sense, it is argued that science both preserves and explains our commonsense experience of the world. Science may well lead to the overthrow of some of our most deeply held beliefs. But common sense reflects a more basic and durable level of experience. Commonsense beliefs are well-confirmed beliefs that are vindicated by their role in successful practical action each and every day. Common sense provides a firm basis on which to base a realist philosophy of science.