Improving Expectations Won't Improve the Reality of Economic Conditions

IMG Auteur
Published : April 06th, 2018
830 words - Reading time : 2 - 3 minutes
( 0 vote, 0/5 )
Print article
  Article Comments Comment this article Rating All Articles  
[titre article pour referencement]
Our Newsletter...
Category : Today's Article
24hGold - Improving Expectatio...

Given the popular view that expectations are the key driving force of an economy, many economists hold that "positive" thinking and large dosages of "good" news can prevent bad expectations from developing.  This, in turn, will prevent a fall in economic activity.

This is why, when the economy falls into a recession, economists quoted by the press are often very guarded in their speech.

On this Rothbard wrote,

After the disaster of 1929, economists and politicians resolved that this must never happen again. The easiest way of succeeding at this resolve was, simply to define "depression" out of existence. From that point on, America was to suffer no further depressions. For when the next sharp depression came along, in 1937-38, the economists simply refused to use the dread name, and came up with a new, much softer-sounding word: "recession". From that point on, we have been through quite a few recessions, but not a single depression.

But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957-58. For since then, we have only "downturns", or, even better, "slowdowns", or "sideways movements". So be of good cheer, from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns". Such are the wonders of the "New Economics"1

Again, this gentle talk stems from the fear that harsh language will upset people's confidence, and thus expectations about future economic conditions. If people’s confidence is kept stable then stable economic activity will follow, so it is held.

Given that stable expectations are said to imply stable future economic conditions, many economists strongly recommend that government and central bank policies must be "transparent."

Let us assume that the government presents a plan to raise personal taxes. How can the mere fact that this plan is made known to everybody will prevent an erosion of individual's living standards and economic instability?

Even if politicians could succeed in convincing people that the tax increase is good for them, they cannot alter the fact that individuals’ after-tax incomes will be reduced, all other things being equal.

Or let’s say that the central bank makes it public knowledge that it will dramatically increase the money supply.

How can the simple publication of this information prevent capital consumption and the development of a boom-bust economic cycle?

What is to be gained if every individual has been brainwashed to believe that things are fine while in reality the economy is falling apart?

So called “stable expectations” can’t undo the damage caused by loose monetary policies or by higher taxes — opinions about facts do not change the facts themselves.

Hence, what matters is not whether government and central bank policies are transparent, but whether these policies hurt individual’s wellbeing.

Expectations in Free versus Not-Free Market Economy

Consumer expectations do not emerge in a vacuum but are part and parcel of every individual’s evaluation process, which is based on his views regarding the real world.

In a free and unhampered market economy, whenever individuals form expectations that run contrary to the facts of reality, this sets in place incentives for a renewed evaluation and different actions. The market will not permit prolonged mistaken evaluations.

Let us assume that as a result of incorrect evaluation, too much capital was invested in the production of cars, and too little invested in the production of houses.

The effect of the over-investment in the production of cars is to depress profits, because the excessive quantity of cars can only be sold at prices that are low in relationship to costs that went into making them.

The effect of under-investment in the production of houses on the other hand, will lift its price in relation to cost, and thus will raise its profit.

This process will lead to a withdrawal of capital from cars and a channeling of it toward houses, implying that if investment goes too far in one direction, and not far enough in another, counteracting forces of correction will be set in motion.2

In a free market, the facts of reality will assert their dominance quickly through peoples’ evaluation and therefore their actions.

This is, however, not so in a distorted market economy. By enforcing their policies, governments and central banks can in motion a prolonged deviation of expectations from the facts of reality.

Neither the government nor the central bank can indefinitely defy these facts, however. A classical case of this is the artificial lowering of interest rates by the central bank that results in boom-bust cycles.

We can conclude that in a free, unhampered market economy, individual’s expectations will have a tendency to change in tandem with true market conditions.

  • 1. Murray N.Rothbard, “Economic Depression: Their Cause and Cure”, Mises Institute p. 65-66.
  • 2. George Reisman, The Government Against the Economy (Ottawa, ILL: Janeson Books, 1985), p.5.
Source :
<< Previous article
Rate : Average note :0 (0 vote)
>> Next article
Comments closed
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
“Collapse Of Civilisation Is On The Horizon” – Attenborough Warns W...
11 DecJ.0
The Climate, it's complicated. Look up the 100,000 year problem. Basically, the Earth has been in an Ice Age about 70 - 80 % of the last one m...
“Collapse Of Civilisation Is On The Horizon” – Attenborough Warns W...
06 DecS W.0
It is difficult to argue with a person like D Attenborough. Who doesn't like his shows? In saying that I am wondering if he, and probably 99% o...
Columbia University Promotes Letting Students Grade Themselves
03 Decvictoriashores
Really who cares
Scientists: The Globe’s Food Supply System Is Broken
04 DecJ.
People need to stop following academics as if they know everything. Science is about continuously evolving your knowledge based on a process of te...
Scientists: The Globe’s Food Supply System Is Broken
02 DecS W.
Oh no! Wheeze all doomed. It is not a matter of eating less meat it is simply a matter of eating less. and eating less of garbage food in part...
How Private Banks Create Bubbles — with the Help of Central Banks
02 Decsneezy67
It appears that we as consumers pay a price for convenience. It is very difficult to haul 10 acres to market on your back or cart. Pieces of gold a...
Why It's Important to Define Money Correctly
29 NovACarr
Great quote!! This is incredibly true. Too many people get so caught up in fiat currency, when it's all about gold if you really look at it. I've g...
Thanksgiving - And Deliver Us From Evil
23 NovBarnsey
Dear Jesse, As much as I admire your journeys down biblical roads, I consider you have missed the point of that mystical journey. Beyond...
Most commented articlesFavoritesMore...
World PM Newsflow