Business cycle theorists have recognized that there is a long history to contemporary procedures whereby expectations figure prominently in the analysis of economic fluctuations. Thus, for instance, Robert Lucas has remarked that ‘a commonplace in the verbal tradition of business cycle theory at least since Mitchell’ has been that ‘speculative elements play a key role in business cycles, [and] that these events seem to involve agents reacting to imperfect signals in a way which, after the fact, appears inappropriate’ (1981, p. 286). Recent research (Cass and Shell 1983) resurrects Keynes’s phrase, ‘animal spirits’, to describe expectations, and even more recent work has focused on ‘sunspots’ involving purely extrinsic uncertainty that influences expectations (Woodford 1990).
In fact, the ‘inappropriate actions’ argument originates with the recognition of periodic economic fluctuations early in the nineteenth century, and achieves prominence in Jevons’s analysis of fluctuations. This chapter focuses first briefly on the work and influence of John Mills (1821-1896), a Manchester banker who succeeded Jevons as President of the Manchester Statistical Society in 1871, and whose work formed a basis for Jevons’s theory of fluctuations. Mills’s emphasis on expectations was applauded by Jevons. But while he fully accepted Mills’s characterization of fluctuations as well as the common cause explanation for the cycle, Jevons—unlike Mills—was unwilling to endorse the theory that moods varied cyclically for no apparent reason. Mills was content to compare the cyclical variation of moods to the inevitable course of a disease, but Jevons insisted that the analyst seek out a cause for mental fluctuations within the ‘industrial environment’. While he used Mills’s descriptive phrases for the cycle freely and he relied on Mills’s characterization of the common features of fluctuations, Jevons therefore distanced himself from Mills’s medical metaphors when analysing the role of ‘moods’ in the cycle. 1