The disappointment of expectations and the theory of fluctuations

The role of errors in time (Fanno, 1933) or disappointment of expectations (Hicks, 1933) in the theory of fluctuations was a major object of analysis in the years of high theory (Shackle, 1967) when the paradigm of General Equilibrium Theory was replaced by the new paradigm of the Economics of Uncertainty and Expectations. The scope of this paper is to re-evaluate this object of analysis in the light of the evolution of the theory of fluctuations ever since. The paper is divided in two Parts. Part I provides a unified account of how the main authors of the years of high theory (Keynes, Hayek, Hicks) dealt with expectations and their disappointment in their theory of fluctuations. Part II provides instead a brief account and assessment of the major constructions worked out by the main authors of what is here called the “years of rational expectations”. The paper shows how the focus on errors in time has been replaced in the latter period by a set of assumptions and arguments which either neglect the impact of the disappointment of expectations on macroeconomic disequilibrium and fluctuations or even exclude the very possibility of this disappointment. The paper concludes by highlighting the decreasing scope and relevance of the theory of fluctuations as one moves from the years of high theory to the recent years of rational expectations.