Ludwig M. Lachmann, “[Review of Expectations, Investment and Income]” (February 1939)

Lachmann’s review of G. L. S. Shackle’s 1938 book examines whether changing expectations can explain the trade cycle, especially its turning points. It moves from a methodological problem through two competing accounts of crisis, before closing with praise for Shackle’s proposal of an asymmetric multiplier. Its central demand is that a theory explain changes in expectations and their coordination across enterprises, rather than merely invoke optimism and pessimism.

The student of the Trade Cycle, unable to accept the constancy of expectations, thus has to explain “why” expectations change.

Expectations can serve as fixed data over very short periods, but cannot remain fixed throughout a cycle. Lachmann grants that the reinforcing effects of investment, income, and unexpected profits make continued expansion relatively easy to explain. The harder task is accounting for crisis and recovery. He criticizes Shackle for offering both a “technical” and a “psychological” explanation without adequately establishing either their mechanisms or their compatibility.

The technical account treats the end of a boom as a pause needed to consolidate investment and integrate new plants. Lachmann’s objection concerns both synchronization and scope: why should individual enterprises require such pauses together, and how can a theory of improvements to existing businesses explain expansion through new industries?

This theory, germane as it is to investment in already existing plants the number of which is limited, unfortunately has nothing to say about that outstanding feature of the great booms of history, the sudden growth of new industries.

The psychological account locates the reversal in expectations catching up with profits. Profits need not fall: if rising optimism means that they cease to exceed expectations, the stimulus to further increases in investment disappears. Lachmann judges this explanation superior because it can apply to depression as well as boom, and therefore address both turning points. Yet identifying disappointed expectations is only the beginning of an explanation.

We learn nothing about the forces which allow entrepreneurial enthusiasm to become exuberant, nor are we told why all producers should react in the same way.

This objection gives the review its broader methodological relevance: an aggregate cycle requires an account of how entrepreneurs’ judgments develop and why their responses converge. Lachmann also challenges the compatibility of Shackle’s two theories. Businesses supposedly resting after investment would seem insulated from disappointed expectations, while later entrants cannot simply be assumed to be more optimistic.

The closing assessment is distinctly favorable. Shackle suggests that the marginal propensity to consume may differ between income increases and decreases at the same income level, producing different upward and downward multipliers. Lachmann regards this as a valuable proposal deserving fuller investigation. His review thus separates promising analytical innovations from unresolved causal claims: expectations and directional asymmetry matter, but naming them does not yet explain cyclical reversals.