Expectations and the Meaning of Institutions: Essays in Economics

By Don Lavoie; Ludwig Lachmann | Go to book overview

8

A NOTE ON THE ELASTICITY OF EXPECTATIONS [1945]

INTRODUCTION

In recent years the Elasticity of Expectations has come to occupy a prominent place in dynamic theory. Economists, baffled by the apparent intractability of expectations, which cannot be treated as determined by other 'data' although it is clear that they are susceptible to economic experience, 1 were duly grateful for an analytical tool which enabled them somehow to grapple with the matter. In creating the concept Professor Hicks 2 has provided us with a convenient criterion of classification of the modes of a relationship, which we can use even though we may know nothing about the causes and conditions of the various modes. More recently, Professor Lange, in his admirable investigation of the effects of flexible prices on the volume of output and employment, 3 has made ample use of the concept. Naturally, it has the defects of its virtues. As the most elaborate thermometer can tell us nothing about the causes of the fever from which the patient is suffering, so the elasticity of expectations, being a measure, can tell us nothing about what causes the magnitude of our object of measurement.

But where, then, are we to turn for information about the factors on which the magnitude of the elasticity of expectations depends? Professor Hicks, it is true, has attempted to find an explanation in 'the psychological condition of the individuals trading', 4 in the greater or smaller 'sensitivity' with which different individuals react to identical price changes. But this attempt to explain an economic phenomenon by reducing it to one of “group psychology' remains unconvincing, if for no other reason than that it would commit us to the assumption that the same individual, confronted at different times with price changes of equal magni-

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