The disappointment of expectations and the theory of fluctuations

The role of “errors in time” (Fanno, 1933) or “disappointment of expectations” (Hicks, 1933) was a major object of analysis in the years of high theory when it contributed to the replacement of the paradigm of General Equilibrium Theory by the new paradigm of the Economics of Uncertainty and Expectations that took place in those years. The scope of this paper is to re-evaluate this object of analysis in the light of the evolution of the theory of fluctuations to which it belongs. The paper is thus divided in two Parts. Part I provides a unified account of how the leading authors of those years (Keynes, Hayek, Hicks) dealt with expectations and their disappointment in their theory of fluctuations. Part II provides instead a brief account of the major constructions worked out by some leading 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 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 more recent years of rational expectations.