WEBVTT

NOTE 6. The Role of Expectations

1
00:00:00.000 --> 00:00:09.000
Chapter 6. The Role of Expectations

2
00:00:09.000 --> 00:00:21.000
Chapter 5 of the General Theory, Expectation as Determining Output and Employment, is in the main both sensible and realistic.

3
00:00:21.000 --> 00:00:27.000
Keynes begins by pointing out what ought to be obvious.

4
00:00:27.000 --> 00:00:33.000
All production is for the purpose of ultimately satisfying a consumer.

5
00:00:33.000 --> 00:00:38.000
Time usually elapses, however, and sometimes much time,

6
00:00:38.000 --> 00:00:43.000
between the incurring of costs by the producer with the consumer in view

7
00:00:43.000 --> 00:00:47.000
and the purchase of the output by the ultimate consumer.

8
00:00:47.000 --> 00:00:53.000
Meanwhile, the entrepreneur has to form the best expectations he can,

9
00:00:53.000 --> 00:01:03.000
And he has no choice but to be guided by these expectations, if he is to produce at all by the processes which occupy time.

10
00:01:06.000 --> 00:01:19.000
Keynes then goes on to distinguish short-term expectations, concerned with current production, from long-term expectations, concerned with additions to capital equipment.

11
00:01:19.000 --> 00:01:26.000
After introducing many needless elaborations and complications, he concludes,

12
00:01:49.000 --> 00:01:55.720
for the Previous Change has fully worked itself out, page 50.

13
00:01:55.720 --> 00:02:01.960
There would be little need to devote much attention to this chapter if Keynes's admirers

14
00:02:01.960 --> 00:02:07.400
and disciples had not made so much adieu about it.

15
00:02:07.400 --> 00:02:16.840
Expectations, writes Alvin H. Hansen, commonly regarded as Keynes's leading American disciple,

16
00:02:16.840 --> 00:02:22.200
play a role in all Keynes's basic functional relations.

17
00:02:22.200 --> 00:02:31.040
The British economist J.R. Hicks hails this as a new and vitally significant element.

18
00:02:31.040 --> 00:02:38.120
Once the missing element, anticipation, is added, equilibrium analysis can be used not

19
00:02:38.120 --> 00:02:43.920
only in the remote stationary conditions to which many economists have found themselves

20
00:02:43.920 --> 00:02:58.000
Such a statement makes a reader rub his eyes in incredulity.

21
00:02:58.000 --> 00:03:04.420
It may be true that it has only recently become fashionable for academic economists to lay

22
00:03:04.420 --> 00:03:11.340
a great deal of emphasis on expectations under that specific name.

23
00:03:11.340 --> 00:03:19.560
But most economists since Adam Smith's day have taken them into account if only by implication.

24
00:03:19.560 --> 00:03:26.060
No one could ever have written about the fluctuations in the stock market or in the price of wheat

25
00:03:26.060 --> 00:03:33.860
or corn or cotton without doing so at least implicitly in terms of the expectations of

26
00:03:33.860 --> 00:03:38.740
speculators, investors and the business community.

27
00:03:38.740 --> 00:03:44.700
And most writers on the business cycle have recognized the role that changes of expectations

28
00:03:44.700 --> 00:03:49.520
play in booms, panics and depressions.

29
00:03:49.520 --> 00:03:55.780
It was the practice of the older writers to introduce this element under the names of

30
00:03:55.780 --> 00:04:02.660
optimism and pessimism, or confidence and lack of confidence.

31
00:04:02.660 --> 00:04:11.660
Thus, to cite only a single example, Wesley C. Mitchell, as early as 1913, wrote,

32
00:04:32.660 --> 00:04:42.660
are among the conclusions at which it arrives. This fact gives hopeful or despondent moods a large share in shaping business decisions.

33
00:04:43.660 --> 00:04:51.660
Even if academic economists had entirely neglected the role of expectations in economic changes,

34
00:04:51.660 --> 00:05:02.660
Every speculator, investor and businessman must, from time immemorial, have been aware of the central role that expectations play.

35
00:05:02.660 --> 00:05:16.660
Every sophisticated speculator knows that the level of prices on the stock market reflects the composite expectations of the speculative investment and business communities.

36
00:05:16.660 --> 00:05:31.660
His own purchases or short sales are in effect a wager that his own expectations about future security prices are better than the composite current expectations against which he bets.

37
00:05:31.660 --> 00:05:38.660
Every investor and businessman is inescapably in part a speculator.

38
00:05:38.660 --> 00:05:53.660
The businessman not only has to calculate what consumers will be willing to pay for his product when it is ready for the market, he also has to guess correctly whether they are going to want that product at all.

39
00:05:53.660 --> 00:06:05.660
The chief criticism to be made of Keynes's treatment of expectations, in chapter 5, is not that it gives them too much emphasis but too little.

40
00:06:05.660 --> 00:06:13.660
For that chapter is concerned with the effect of expectations merely on output and employment.

41
00:06:13.660 --> 00:06:21.660
Keynes should have recognized also that expectations are embodied and reflected in every price,

42
00:06:21.660 --> 00:06:30.660
including the price of the raw materials that the individual businessman has to buy and the wage rates that he has to pay.

43
00:06:30.660 --> 00:06:38.660
One further observation, however, must be made on Chapter 5 of the General Theory.

44
00:06:38.660 --> 00:06:48.660
Throughout it, Keynes makes the tacit but never explicit assumption that there is nearly always substantial unemployment.

45
00:06:48.660 --> 00:06:56.120
Unemployment. He assumes that when new workers are demanded in the capital equipment industries,

46
00:06:56.120 --> 00:07:03.460
for example, they are always added to the total volume of employment. They are apparently

47
00:07:03.460 --> 00:07:11.740
drawn out of some unspecified army of unemployed. Keynes never considers the possibility that

48
00:07:11.740 --> 00:07:19.240
The new capital goods workers might have to be recruited from existing consumer goods workers.

49
00:07:19.240 --> 00:07:31.240
He never considers what the effect of this competition for workers might be on raising wage rates rather than merely increasing the volume of employment.

50
00:07:31.240 --> 00:07:36.240
Wage rates are tacitly assumed to remain unchanged.

51
00:07:36.240 --> 00:07:50.240
The limitations and nature of Keynes's assumptions, in short, make his theory of employment at best a special theory, not a general theory, as his title boasts.