The disappointment of expectations and the theory of fluctuations

Meacci, Ferdinando (2010): The disappointment of expectations and the theory of fluctuations. Forthcoming in: History of Economic Ideas No. forthcoming

Abstract

The role of errors in time (Fanno, 1933) or disappointment of expectations (Hicks, 1933) in the theory of fluctuations was a major object of analysis in the years of high theory (Shackle, 1967) when the paradigm of General Equilibrium Theory was replaced by the new paradigm of the Economics of Uncertainty and Expectations. The scope of this paper is to re-evaluate this object of analysis in the light of the evolution of the theory of fluctuations ever since. The paper is divided in two Parts. Part I provides a unified account of how the main authors of the years of high theory (Keynes, Hayek, Hicks) dealt with expectations and their disappointment in their theory of fluctuations. Part II provides instead a brief account and assessment of the major constructions worked out by the main authors of what is here called the “years of rational expectations”. The paper shows how the focus on errors in time has been replaced in the latter period by a set of assumptions and arguments which either neglect the impact of the disappointment of expectations on macroeconomic disequilibrium and fluctuations or even exclude the very possibility of this disappointment. The paper concludes by highlighting the decreasing scope and relevance of the theory of fluctuations as one moves from the years of high theory to the recent years of rational expectations.

• Item Type: MPRA Paper
• Language: English
• Keywords: Expectations, Disappointment, Errors, Fluctuations
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models

References

Arena R. (1998), “Marco Fanno”, in Meacci F. (ed.) (1998), Italian Economists of the 20th Century, Aldershot: E. Elgar, pp.114-132

Cagan P. (1956), “The Monetary Dynamics of Hyperinflation,” in Friedman M. (ed.), Studies in the Quantity Theory of Money, Chicago: University of Chicago Press, pp. 25–117

Caldari K. and Meacci F. (2007), “Errors in Time as Causes of Economic Fluctuations: An Introduction”, in Il Pensiero Economico Italiano, pp.127-146

Fanno M. (1931), “Cicli di produzione, cicli del credito e fluttuazioni industriali” in Giornale degli Economisti e Rivista di Statistica [Engl. trans.: “Production Cycles, Credit Cycles and Industrial Fluctuations”, Structural Change and Economic Dynamics, 1993, 4, pp.403-37]

Fanno M (1933), “Irrtümer in der Zeit als Ursachen wirtschaftlicher Schwankungen” in Zeitschrift für Nationalökonomie, [Engl. trans.: “Errors in Time as Causes of Economic Fluctuations”, in Il Pensiero Economico Italiano, pp. 147-163.]

Farmer R.E.A. (1999), The Macroeconomics of Self-fulfilling Prophecies, Cambridge, MA: MIT Press

Friedman M. (1968), “The Role of Monetary Policy”, American Economic Review, 58, pp.1-17

Friedman M. (1977), “Nobel Lecture: Inflation and Unemployment”, Journal of Political Economy, 85, pp.451-472

Frydman R. and Phelps E.S. (eds) (1983), Individual Forecasting and Aggregate Outcomes: ‘Rational Expectations’ Examined, Cambridge: Cambridge University Press

Frydman R. and Goldberg M.D. (2007), Imperfect Knowledge Economics, Princeton: Princeton University Press

Garrison R.W. (1989), “The Austrian Theory of the Business Cycle in the Light of Modern Macroeconomics”, Review of Austrian Economics, 3, pp.3-29

Haberler G. (1946), Prosperity and Depression, New York: United Nations

Hayek F. (1928 [1984]), “Intertemporal Price Equilibrium and Movements in the Value of Money”, in R. McCloughry (ed.) (1984), Money Capital & Fluctuations, London: Routledge, pp.71-117

Hayek F. (1931[1935]), Prices and Production, London: Routledge

Hayek F. (1933), “Price Expectations, Monetary Disturbances and Malinvestments”, in Hayek F. (1939), pp.135-156

Hayek F. (1937), “Economics and Knowledge”, Economica, 4, pp. 33-54

Hayek F. (1939), Profits, Interes, and Investment, London: Routledge

Hayek F., (1941), The Pure Theory of Capital, London: Routledge

Hicks J. (1933), “Gleichgewicht und Konjunktur”, in Zeitschrift für Nationalökonomie, [Engl. transl.: “Equilibrium and the Cycle”, in Economic Inquiry, 1980. Reprinted in Collected Essays on Economic Theory, 1981-1983, Vol. II, Chapter 3]

Hicks J. (1936), “Mr. Keynes’s Theory of Employment”, Economic Journal, 46, pp.238-253

Hicks J. (1939), Value and Capital, Oxford: Clarendon Press

Hicks J. (1956), “Methods of Dynamic Analysis”, in Collected Essays on Economic Theory, 1981-1983, Oxford: Blackwell, Vol. II, Chapter 18

Hicks J. (1967), “The Hayek Story”, in Critical Essays in Monetary Theory, Oxford: Clarendon Press, Chapter XII, pp.203-15

Hicks J. (1973), “Recollections and Documents”, Economica, pp.2-11

Hicks J. (1976), “Time in Economics”, in Collected Essays on Economic Theory, 1981-1983, Oxford: Blackwell, Vol. II, Chapter 21

Hicks J. (1985), Methods of Dynamic Economics, Oxford: Clarendon Press

Hicks J. (1991), “The Swedish influence on Value and Capital”, in Jonung L. (ed.) 1991, The Stockholm School of Economics Revisited, Cambridge: Cambridge University Press, pp.369-76

Hoover K. D. (ed.) (1992), The New Classical Macroeconomics, Aldershot: E. Elgar

Keynes J. M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan

Keynes J. M. (1937a), “The ‘Ex Ante’ Theory of the Rate of Interest”, Economic Journal, pp.663-9

Keynes J. M. (1937b), “Alternative Theories of the Rate of Interest”, Economic Journal, pp.241-52

Kregel J. (1976),: “Economic Methodology in the Face of Uncertainty: the Modelling Methods of Keynes and the Post-Keynesians”, Economic Journal, pp.209-225

Lawson T. (2009), “The current economic crisis: its nature and the course of academic economics”,Cambridge Journal of Economics, 33, pp.759-777

Leijonhufvud A. (1968), On Keynesian economics and the economics of Keynes, Oxford: Oxford University Press

Leijonhufvud A. (1984), “Hicks on Time and Money”, Oxford Economic Papers, 36(supp.), pp. 26-46

Leijonhufvud A. (2009), “Out of the corridor: Keynes and the crisis”, Cambridge Journal of Economics, 33, pp.741-757

Lucas R. E. (1972), “Expectations and the Neutrality of Money”, Journal of Economic Theory, 4, pp.103-124

Lucas R. E. (1973), “Some International Evidence on Output-Inflation Trade-Offs”, American Economic Review, LXIII (3): 326-334

Lucas R. E. (1996), “Nobel Lecture: Monetary Neutrality”, Journal of Political Economy, 104, pp.661-82

Lundberg E. (1955), Studies in the Theory of Economic Expansion, New York: Kelley & Millman

Machlup F. (1976), "Hayek's Contribution to Economics", in Machlup (ed.) (1976), Essays on Hayek, Hillsdale Michigan, Hillsdale College Press

Meacci F. (1994), “Hayek and the Deepening of Capital”, in Colonna M., Hagemann H., Hamouda O. (eds.) (1994), Capitalism, Socialism and Knowledge, Aldershot: Edward Elgar, Volume II, pp. 26-44

Meacci F. (2009), “Uncertainty and Expectations in Shackle's Theory of Capital and Interest”, Metroeconomica, 60, pp.302-323

Metzler L. A. (1941), “The Nature and Stability of Inventory Cycles”, The Review of Economics and Statistics, 23, pp.113-129

Muth J.F. (1961), "Rational Expectations and the Theory of Price Movements", Econometrica 29, pp.315–335

Ohlin B. (1937), “Some Notes on the Stockholm Theory of Savings and Investments”, Economic Journal, 47, pp. 53-69; pp. 221-240

Pesaran M. H. (1987), The Limits to Rational Expectations, Oxford: Basil Blackwell

Phelps E. S. (1967), “Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time”, Economica, 34, pp.254-81

Phelps E. S. (1968), “Money Wage Dynamics and Labour Market Equilibrium”, Journal of Political Econmomy, 76, pp.678-711

Phelps E. S. et al. (1970), Microeconomic Foundations of Employment and Inflation Theory, New York: Norton

Phelps E. S. (1990), Seven Schools of Macroeconomic Thought, Oxford: Clarendon Press

Phelps E. S. (2003), “Reflections on Parts I and II”, in Aghion P. et al. (eds) (2003), Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, Princeton: Princeton University Press, pp.271-281

Phelps E. S. (2007), “Macroeconomics for a Modern Economy”, American Economic Review, 97, pp.543-561

Sargent T. J. and Wallace N. (1975), “’Rational’ Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule”, Journal of Political Economy, 83, pp.241-254

Sargent T. J. and Wallace N. (1976), “Rational Expectations and the Theory of Economic Policy”, Journal of Monetary Economics, 2(2): 169-18

Schumpeter J. A. (1954), History of Economic Analysis, London: Allen & Unwin

Shackle G. L. S. (1967), The Years of High Theory, Cambridge: Cambridge University Press

Shackle G. L. S. (1969), Decision, Order, and Time in Human Affairs, Cambridge: Cambridge University Press

Snowdon B. and Vane H. R. (2004), Modern Macroeconomics. Its Origins, Development and Current State, Cheltenham, Edward Elgar

Stigler G. J. (1961), “The Economics of Information”, Journal of Political Economy, 69, pp.213-225

Woodford M. (2003), Interest & Prices, Princeton: Princeton University Press