474 JOURNAL OF POLITICAL ECONOMY best action, given the current situation, will not typically result in the social objective function being maximized. Rather, by relying on some policy rules, economic performance can be improved. In effect this is an argument for rules rather than discretion, but, unlike Friedmans(1948 argument, it does not depend upon ignorance of the timing and magnitude of the effects of policy The reasons for this nonintuitive result are as follows: optimal control theory is an appropriate planning device for situations in which curren outcomes and the movement of the system,'s state depend only upon current and past policy decisions and upon the current state. But,we argue, this is unlikely to be the case for dynamic economic systems. Cur- rent decisions of economic agents depend in part upon their expectations of future policy actions. Only if these expectations were invariant to the future policy plan selected would optimal control theory be appropriate In situations in which the structure is well understood, agents will surely surmise the way policy will be selected in the future. Changes in the social objective function reflected in, say, a change of administration do have an immediate effect upon agents'expectations of future policies and affect their current decisions. This is inconsistent with the assump tions of optimal control theory, This is not to say that agents can fore cast future policies perfectly. All that is needed for our argument is that agents have some knowledge of how policymakers'decisions will change as a result of changing economic conditions. For example, agents may expect tax rates to be lowered in recessions and increased in booms The paradox also arises in situations in which the underlying economic structure is not well understood, which is surely now the case for aggre gate economic analyses, Standard practice is to estimate an econometric del and then, at least informally, to use optimal-control-theory techniques to determine policy. But as Lucas(1976) has argued, since optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker, any change in policy will alt the structure of these rules, Thus cha policy induce changes in structure, which in turn necessitate reestimation and future changes in policy, and so on. We found for some not implausible structures that this iterative procedure does not converge, and, instead, stabilization efforts examples, however, it did converge, and the resulting policy was con- sistent but suboptimal. It was consistent in the sense that at each point in time the policy selected was best, given the current situation. In effect the policymaker is failing to take into account the effect of his policy rule upon the optimal decison rules of the economic agents In this paper, we first define consistent policy and explain for the is suboptimal. The implications of the analysis are then considered for patent policy and