Sunday, August 18, 2013

What else could we reasonably do?


On expectations, from Unlearning Economics:

Any attempt at a serious discussion of transmission mechanisms is met with ‘expectations!‘ as if expectations are a magic wand and not simply a reflection of the actual behaviour of the economy.

It's awkward when a great line is buried in such a way that when you quote it, it seems something is missing and you ought to include the part that came before. But anyway what UE says is: Expectations are a reflection of the actual behavior of the economy. Expectations depend on economic conditions. If you want to improve expectations, you have to improve the economy.

I do think it can temporarily work the other way. I think the big boom we had early in the Reagan years was partly expectations-driven. People had big hopes:

Graph #1: The Red Spike Early in the Reagan Years -- A "Brief Interval of Excitement"
It didn't last. And it didn't happen again. Expectations were disappointed because the economy wasn't as good as Reagan promised it would be. As the graph shows. But a lot of economists seem to remember the one impressive aberration and base too much of their work on the presumed power of expectations.


Two paragraphs from Chapter 12 of The General Theory of Employment, Interest and Money by John Maynard Keynes, The State of Long-Term Expectation:

It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain. It is reasonable, therefore, to be guided to a considerable degree by the facts about which we feel somewhat confident, even though they may be less decisively relevant to the issue than other facts about which our knowledge is vague and scanty. For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into the future, modified only to the extent that we have more or less definite reasons for expecting a change.

In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change.


Expectations are a reflection of the actual behavior of the economy. We assume that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change.

What else could we reasonably do?

1 comment:

Jazzbumpa said...

I think it's pretty well established that the natural human tendency is linear extrapolation from the current condition, with some recent history to anchor the line.

It's why we end up surprised so frequently.

I've always felt the expectations idea to be pretty dodgy. Who's expectations? Is there a group consciousness? Does it require a majority or is a plurality a sufficient driver? Who's even paying attention?

Even with favorable answers to all of the above, it strikes me as a concept somewhere between dog-wagging and wishing-can-make-it-so.

But that's just me.

Cheers!
JzB