One of John Maynard Keynes’ alleged contributions to economic science is a focus on “expectations.” What is meant by expectations is how individuals predict the uncertain future to be; expectations will influence what actions individuals will undertake in the present (since all action is intertemporal). Keynes, of course, considered these expectations to be one of the facets of the instability of capitalism. It was an emphasis on expectations that led Ludwig Lachmann to consider Keynes a radical subjectivist; Lachmann, in fact, lamented that Austrians had not spoken of expectations (at least, more overtly) during the debates of the 1930s (Lachmann, The Market as an Economic Process [Oxford, United Kingdom: Basil Blackwell Ltd., 1986], p. 24).
In my reading of John Hicks’ chapter on Ralph Hawtrey (in Economic Perspectives [Oxford, United Kingdom: Clarendon Press, 1977]), I found an interesting tidbit on Keynes’ supposed “radical subjectivism.” Writes Hicks,
When I reviewed the General Theory, the explicit introduction of expectations was one of the things which I praised; but I have since come to feel that what Keynes gave with one hand, he took away with the other. Expectations do appear in the General Theory, but (in the main) they appear as data; as autonomous influences that come in from outside, not as elements that are moulded in the course of the process that is being analysed.
This seems to me as a remnant of the Neoclassical theory Keynes had set out to refute. To Walras and the Neoclassical School that he and (more directly) Alfred Marshall bred, prices are data exogenously provided to the market. This is an important difference between Neoclassical and Austrian price theory, where the latter focuses on price formation as a result of the actions of individuals. In other words, to Austrians, prices are an endogenous phenomena; expectations, likewise, are also an endogenous phenomena. It is the Austrian approach (methodological individualism) that gives the school a distinct advantage in understanding economic phenomena, since markets (and the phenomena which characterize it) are constructs designed by individuals partaking in the division of labor.
It seems that the primacy of the individual was even beyond Keynes.
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So you’ve explained Hicks’s impression of Keynes. Do you think Hicks is accurate? And if he is accurate, can we at least say that Keynes was more advanced than most at the time in taking these things seriously?
I seem to remember quite a bit of discussion of the impact of changes on expectations – not just taking them as data – but I’d honestly have to revisit it myself.
I had to laugh at your concluding sentence. Did you have to add that bit of red meat to your own blog post to get this on LvMI?
Wow, you really had to add that last one, did you? Yes, Keynes was more advanced on the road to nowhere than others. Those “others” had the decency to stop when things went crazy. Keynes had no decency.
You think subjective value and expectations are a road to nowhere?!?!?!?!
Herbert Spencer introduced rigorous concept of expectations as feed-forward in 1860′s. Clerk Maxwell introduced feed-back respectively in 1860′s.
Biologists and engineers know about closely related concepts. They made use of them since then. They make use of them now in their respective journals. Franz Cuhel and Ludwig Mises made rigorous use of subjective value and its expected or speculative nature back in 1907-1922 in their books and articles.
Keynes has no innovations in anything. How was he advanced, exactly? He is advanced only to people who are too lazy to read scientific literature in general.
What did he do? Well, he wrote general theory without using “marginal” productivity, but discussed only physical productivity. Which is not important. I can be very physically productive in making things nobody wants. Then my marginal productivity is zero.
He did not understand this. Then, he intentionally misquoted Mandeville, claiming Mandeville supported him when in fact Mandeville in next sentence after 4 pages of block quotes called this whole idea (making wealth by sinking a ship) a bunch of nonsense and frivolous. Keynes deleted last sentence and included everything before that. So much for Keynes.
http://en.wikipedia.org/wiki/Control_theory#History
Precisely, Leo, you nailed the scoundrel JMK. And no one has nailed the Baron of Tilton more thoroughly for his economic legerdemain than did Henry Hazlitt in his 1959 book, THE FAILURE OF THE “NEW ECONOMICS,” and his subsequent anthology as editor of, THE CRITICS OF KEYNESIAN ECONOMICS, a compilation of articles by the then (1960) world’s leading economists demonstrating where, how and why Keynes erred in one respect or another.
In THE FAILURE, Hazlitt famously put to rest Keynes’ outrageous claim to have refuted Say’s law, which if valid makes every one of Keynes’ important economic-policy prescriptions (inflation, stimulus, multiplier effect, etc.) visibly flawed and readily seen as doomed to failure. The version of Say’s law Keynes pretended to refute was a straw man, fashioned by K out of whole cloth by snipping out of its context a portion of an essay by John Stuart Mill that referred to Say’s law in order to flail it with grandiose Keynesian rhetoric. Had Keynes honestly quoted the very next few lines of Mill’s essay, his so-called refutation would have fallen flat on its face and fooled no one.
Of Keynes “glorious discovery” of the role of expectations in economics, Hazlitt points out:
“[M]ost economists since Adam Smith’s day have taken them [expectations] into account, if only by implication. No one could ever have written about the fluctuations in the stock market, or in the price of wheat or corn or cotton, without doing so, at least implicitly, in terms of the expectations of speculators, investors, and the business community. And most writers on the business cycle have recognized the role that changes of expectations play in booms, panics, and depressions. It was the practice of the older writers to introduce this element under the names of “optimism” and “pessimism,” or “confidence” and “lack of confidence.” Thus, to cite only a single example, Wesley C. Mitchell, as early as 1913, wrote:
“‘Virtually all business problems involve elements that are not precisely known, but must be approximately estimated even for the present, and forecast still more roughly for the future. Probabilities take the place of certainties, both among the data upon which reasoning proceeds and among the conclusions at which it arrives. This fact gives hopeful or despondent moods a large share in shaping business decisions.”‘–http://mises.org/books/failureofneweconomics.pdf, p.67
So much for Keynes’ brilliant discovery.
Hazlitt? LOL. Robert Vienneau takes him to task for not understanding anything here:
http://robertvienneau.blogspot.com/2006/07/can-one-respect-henry-hazlitt.html
Also, in your final quotes he clearly demonstrates his lack of understanding of Keynes’ distinction between risk and uncertainty.
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