G. L. S. Shackle, Expectations and Employment (1939)

Shackle’s journal article develops a provisional explanation of investment fluctuations through the entrepreneur’s changing attitude toward an unknown future. Taking Keynes’s account of unstable equipment valuations as its starting point, it asks why apparently profitable investment opportunities remain unexploited, and how the experience of investment itself alters subsequent willingness to invest. Its five sections move from a vocabulary of expectations, through propositions about postponement and familiarity, to individual financing constraints, equipment valuation, and a possible endogenous explanation of the business cycle. The central distinction is between the content of expectations—what outcomes an entrepreneur envisages—and their clearness: how sharply a relatively unsurprising group of outcomes stands apart from alternatives.

Section I introduces the “expectational vista,” the assemblage of conjectures an individual entertains at a particular moment. It may contain several variants specifying different future situations, distinguished by the surprise their realization would cause. As the horizon extends, possibilities branch until forecasting becomes unmanageable. Shackle does not treat this uncertainty as a distribution of calculable probabilities:

My concept of “potential surprise” is something very different from that of mathematical probability for which I wish to substitute it. It is purely subjective.

Potential surprise permits comparisons of intensity without an absolute scale. A clear vista contains closely resembling variants separated from other possibilities by a large difference in potential surprise. Clearness therefore concerns the organization of uncertainty, not simply confidence that profits will be high. Expectations become more sanguine when their least-surprising variant implies a higher present value for additional equipment.

Section II advances two propositions. Entrepreneurs postpone commitments because they hope that further information will improve their choice; and expectations are clearer under familiar conditions than after rapid changes in their own businesses. These propositions connect the inducement to invest with the entrepreneur’s recent investment history. Optimistic content and increased clearness can substitute for one another in strengthening that inducement, subject to Shackle’s qualification concerning the distribution of possible valuations. The practical force of postponement comes from the scale and indivisibility of durable equipment:

The construction of a new block of durable equipment is a large-scale gamble.

Ships, steel plant, cinemas, and blocks of flats cannot be developed through a succession of independently useful small bets. Choosing one commits resources that might otherwise exploit another opportunity. Consequently, the entrepreneur wants not merely a profitable project but the best available project, selected when the outlook seems most illuminating. Exceptionally sanguine expectations may overcome this persistent reluctance, but an apparently favorable valuation alone need not do so.

Section III supplies the financial reasoning behind delay. Given expected income and consumption, retaining savings as cash or other nonspecific assets preserves the resources available for a later commitment. Borrowing does not abolish this constraint when lenders limit debt relative to assets; resources and borrowing capacity used now cannot simultaneously remain available for a future choice. Shackle draws an important distinction between individual and aggregate possibilities. Investment funds are scarce for the entrepreneur acting alone, while coordinated investment may raise entrepreneurs’ collective receipts and make a larger aggregate outlay feasible. The argument assumes away disinvestment to concentrate on the choice between investing and retaining flexibility.

Postponement sacrifices earlier returns, but Shackle argues that the difference between choosing well and badly can greatly exceed this discounting loss. More fundamentally, inaction depends on anticipated improvement in knowledge, not ignorance by itself:

It is the belief that knowledge, insight, and foresight will improve that causes the so-called apathy.

If no improvement were expected, waiting would lack its particular advantage. This makes delay an intelligible response to the perceived timing of information, rather than merely an absence of enterprise.

Section IV explains how clearness enters valuation. The entrepreneur constructs working estimates of future net yields and discounts them for comparison with the equipment’s cost. These estimates need not equal the yields judged least surprising. If much lower yields would also cause little surprise, the working estimate may be substantially reduced. Conversely, if those adverse outcomes become more surprising, the estimate can rise without any alteration in the range of outcomes envisaged. Shackle thus distinguishes favorable possibilities from the valuation on which action actually rests.

Section V turns this account into a tentative cycle mechanism. During stagnation, familiarity restores clearness, while technical advances and changes in tastes or population increase the attractions of replacement and expansion. Investment eventually accelerates cumulatively. Yet rapid expansion transforms the circumstances entrepreneurs must understand:

The assemblage of equipment which an entrepreneur controls has become to a greater or less extent a different one; it has changed its technical and economic characteristics, and before he can decide in what direction it can most profitably be further developed, he must explore the new circumstances in which the change has placed him.

New organization, uncertain customer responses, and experimentation interrupt further development. With a limited supply of investing entrepreneurs, synchronized bursts can produce synchronized pauses and a cumulative downturn. Shackle does not explain the boom’s end simply by exhausted cash: investment circulates receipts and may enlarge collateral. Its deeper limit is temporarily diminished clearness. A concluding footnote adds that disrupted expectations take time to rebuild, potentially making depression more abrupt than recovery. The article’s distinctive contribution is to make uncertainty partly endogenous to investment itself, while retaining the explicitly tentative status of its cycle explanation.