Prosperity and Depression.pdf

Chap. 6With the introduction of the element of expecta­Expectations tion, uncertainty enters the field. Future eventsare lIflCertain. cannot be forecast with absolute precision; and thefarther they are distant in the future, the greaterthe uncertainty, and tile greater the possibility of unforeseen andunforeseeable disturbances. Every economic decision is part ofan economic plan which extends into the more or less distantfuture. In principle, there is therefore always an element ofuncertaintyin every activity. There are, however, certain cases wherethe element of uncertainty is especially great and conspicuous,such as the case of investment of resources in long processes anddw:able plant and the provision of funds for these purposes. Thelonger the processes in which capital is to be sunk, and the moredurable the instruments and equipment to be constructed, thegreater the element of uncertainty and risk of loss.Naturally, economic actions and reactions in such cases are lessrigidly determined by observable facts than in other cases. It istherefore mainly here that the "psychological" theories maketheir essential contribution. Optimism and pessimism are introducedas additional determinants. An attitude of optimism is anattribute of the prosperity phase of the cycle, and an attitude ofpessimism an attribute of the depression; and the turning-pointsare marked by a change from optimism to pessimism and vice versa.What do these new elements add to the pictureOptimism of the expansion and contraction process which hasand emerged from the analysis of the "non-psycholopessi",isM.gica1" theories reviewed so far? H the psychologicalargument that during the upswingpeople take a more optimistic, and during the downswing a morepessimistic, view meant no more than that people invest morefreely during the upswing and are reluctant to invest during thedownswing, it would add nothing at all to the picture of theupswing and downswing as drawn by the monetary over-investmenttheory. But the psychological theories mean, of course,more than that. Optimism and pessimism are regarded as causalfactors which tend to induce or intensify the rise and fall ofinvestmentwhich are characteristic of the upswing and downswingrespectively. But are optimism and pessimism really separate