Rails 3.1 Assets - Strange Serving in Development
Try adding the following to development.rb:
config.serve_static_assets = false
...and then clearing your browser cache (update based on comments)
The static assets refer to precompiled assets in public/assets, which is where rake assets:precompile puts them.
What's happening is that anything that exists in public/assets will override anything in app/assets if you are serving them. So public/assets/application.js is being loaded when the js tag is intending to identifiy app/assets/application.js.
Once you get rid of /public/assets, you must also clear browser cache.