Prosperity and Depression.pdf

Chap. 6 CC Pfych%gi&aJ TheorieJ " 147that, while it is true that developments are not determined whollyby the objective factors with· which the,non-psychological theoriesare concerned, the: introduction of the determinants " optimism"and " pessimism" •makes no positive contribution·to the explanationof the cycle so long as the optimism and pessimism remainpurely psychological phenomena-i.e., states of mind of the entrepreneurs(or other members of the economic community withwhose behaviour the theory is concerned). We cannot observestates ofmind; but it is possible to make certain observations fromwhich states of mind or changes of mind can be inferred. It isat this poitlt that the "psychological" theories have a positivecontribution to make.What observable factors are there (other than" Irrational" those which have already been taken into accountinfluences by the "non-psychological " theories) that go tostressed ~'Y make people optimistic or pessimistic-i.e., that"pfYcholo- stimulate or discourage investment? There is ingical " the first place the fact that, in a period when demandtheorists. and production are rising in many branches ofindustry, producers in branches which have notyet felt an increase in demand are inclined to expect one. Theconnection between the objective factors (interest rate, etc.) withwhich the non-psychological theories are concerned and thevolume ofinvestment is, as it were, loosened. The response oftotal investment to changes in the objective factors becomesstronger than " rational" economic considerations would suggest.Professor PIGOU, in this connection, speaks of cc errors ofoptimism ".LAVINGTON likens business-men who infect eachother with confidence and optimism to skaters on a pond." Indeed,·the confidence of each skater 'in his own safety is likelyto be reinforced rather than diminished by the presence ofnumbersof his fellows. . . . The rational judgm~t th~t the greatertheir numbers the greater will be the risk is likely to be submergedby the mere contagion of confidence which persuades him thatthe greater the numbers the more safely he himself may venture. "1! op. cit., pages 32 and 33.