Introduction and Summary

Abstract

The problem of expectations is one of the central issues of economic theory. Every human action aims at a more or less distant future. Thus, expectations guide all action. For this reason, expectations matter in any economic argument. John Maynard Keynes (1936) helped to make expectations a separate and vital problem of economic theory. He explained unemployment as a product of deficient foresight. No one knows the future. F. A. Hayek (1937) argued that a tendency toward equilibrium exists only if “the expectations of the people and particularly of the entrepreneurs … become more and more correct” over time. (1937, p. 45). “The only trouble,” Hayek lamented, “is that we are still pretty much in the dark about (a) the conditions under which this tendency is supposed to exist and (b) the nature of the process by which individual knowledge is changed” (1937, p. 45).

Much of this chapter draws on Koppl (1998).