Shackle’s first-edition monograph develops a Keynesian theory of the business cycle in which expectations change through the consequences of investment decisions themselves. Its central problem is how an economy moves between successive situations, rather than how its variables can be mutually consistent at one moment. Chapters I–II introduce and outline the argument; Chapters III–V develop interest, investment, and invention; Chapters VI–VII explain cyclical turning points and recovery. A mathematical appendix examines the dependence of expansion on investment opportunities and construction lags. Agricultural and international aspects are explicitly left aside.
The decisive departure from a static use of Keynes is to treat expectations as something economic activity transforms:
Before we can use Mr. Keynes's system to explain the economic pattern which emerges with the passage of time, we must release expectations from their status as a datum, and make them depend, at any moment, on the comparison which we may suppose business men to make between their expectations of a slightly earlier moment and what has actually happened in the interval.
Entrepreneurs act separately, without knowing one another’s intentions. Their collective decisions therefore produce outcomes that none need have anticipated. Shackle distinguishes plans made ex ante from results assessed ex post, building dynamics from the repeated discrepancy between them. Investment is a flow of additions to equipment measured in money-value per unit time, not the equipment stock itself. His accounting separates deliberate or anticipated value changes from windfall capital gains and losses caused by revised expectations.
The boom begins with an increase in investment that employs additional resources and creates additional incomes. Consumption spending then rises, initially depleting inventories and subsequently calling forth more production and employment. This multiplier process establishes a higher income corresponding to the higher investment-flow. Shackle’s distinctive move is to ask whether entrepreneurs foresaw that increase in demand when undertaking their projects:
The Multiplier principle appears as one element in the mechanism of the boom.
Because investors generally cannot anticipate their combined actions and their full effects, higher consumption appears as fresh evidence of profitable opportunities. Equipment valuations rise, further construction begins, and another increase in income follows. This is a psychological feedback mechanism, not a rigid mechanical dependence of investment on output. It is reinforced within equipment-producing industries: their expansion increases demand for one another’s products. Payment intervals, production bottlenecks, observation, design, and construction give the cumulative movement its temporal shape.
Chapter III links liquidity preference to interest as the price of loans. Large, intermittent additions to individual businesses’ equipment require borrowing from those currently accumulating unconsumed income. Yet a larger flow of lending need not itself raise interest: money paid out can circulate back to lenders. The relevant pressure is an increased desire to hold cash relative to its available quantity. Speculation adds another source of instability, since even secure fixed-interest securities expose their owners to changing resale prices:
From the two preceding paragraphs the curious fact emerges that uncertainty about the future, expressed in the existence of a positive rate of interest, is itself an autonomous cause of change.
Shackle qualifies this conclusion by acknowledging that changing reasons or changing participants might sustain a stable rate. Chapter IV supplies the investment framework: projected equipment is valued through discounted certainty-equivalents of uncertain future yields, while construction costs rise with pressure on resources. Investment responds to changing expectations, interest rates, and supply conditions. Once construction has advanced, completion may remain worthwhile despite adverse news because only the remaining expenditure must be justified.
Chapter VI offers two compatible explanations of reversal. The first rests on indivisible projects and limited entrepreneurial capacity. After a major extension, managers need time to establish efficient operation, develop sales, observe results, and prepare another scheme. Expansion thus alternates with consolidation within each business. Aggregate investment could remain steady if these phases were evenly distributed, but cumulative prosperity brings investment phases together:
The investment-fever comes to an end, in fact, for exactly the same reason that an influenza epidemic does: because everybody has had it, and has not yet lost a temporary immunity.
The resulting shortage concerns entrepreneurs with mature, executable plans, not necessarily labour, finance, or potentially profitable inventions. Completions outpace new starts, investment falls, and the reverse multiplier amplifies contraction. The second explanation turns on expectations becoming self-falsifying. Once continuing increases in earnings are generally anticipated, their occurrence no longer prompts further investment acceleration. Without acceleration, the income increases supporting those expectations fail to continue. Disappointment reverses expansion; conversely, an anticipated continuing decline can terminate itself and initiate recovery.
Inventions provide an additional recovery mechanism, though their investment effects require analysis rather than assumption. New techniques can stimulate extra capacity and premature replacement, while cheaper equipment and displacement of competing products may offset these gains. New consumables similarly create construction demand exceeding the immediate reduction of replacement elsewhere. Chapter VII explains cyclical asymmetry through spending habits: consumption is increasingly protected as incomes decline, weakening the downward multiplier and moderating contraction. Inventory liquidation must eventually cease, maintenance must resume, and technical opportunities accumulate during depression. Recovery nevertheless depends on restored confidence and business reorganization. The book’s enduring conceptual contribution is to make fluctuations emerge from decentralized decisions, durable equipment, and expectations repeatedly altered by the world those decisions help create.
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