Our remedies oft in ourselves do lie...

JAIDEEP MISHRA

The Economic Times Monday, August 08, 2005

There is both a greater degree of optimism and a marked expectancy of heightened demand, across segments and industries. In fact, the very degree of interventionist policies and regulatory incursions may well depend on how one reads the underlying message in confidence measures. The benchmark was set by Keynes, English aristocrat and economic adviser extraordinary. He called for a loose fiscal policy, of a tax and spend stance, never mind expectations.

Back in the halcyon days of the thirties, Keynes maintained that it was “too complicated” for entrepreneurs to routinely calculate short-term expectations de novo. In practice, the reasoning went, producers’ forecasts are generally modified in the light of day-to-day results rather than in anticipation of prospective changes. And as for the long-term, the guru dismissed all prospects of producers being able to make a list of every possible future outcome, assign a probability to each item on the list, and then calculate an expected value. So, the reasoning went, long-term expectations cannot be rational.

Reliable knowledge of the future cannot be had. We cannot make “calculated mathematical expectations” of future values, preached the great man, who, incidentally, made a killing at the bourses. Of course, firms did invest in fits and starts, broadly anticipating the future, but these would more likely be the result of “animal spirits, a spontaneous urge to action rather than inaction.’’

This can mean a rollercoaster of commitment decisions. Of expectations generating waves of pessimism and optimism, and hence by implication, waves of greater and lesser investment spending with all its attendant economic disruptions and dislocations. It may mean long periods of under-investment and a sheer lack of jobs. Hence the prescription for expansionary budgetary policies and public works.

The fact is that in the decades since Keynes, the Keynesian consensus on expectations and economic policy making has lost its former sacredness. It is now widely accepted that economic actors can be quite rational indeed. Also, expectations, far from being exogenous or outside the system, are actually “embodied” in norms, practices and everyday actions. So expectations, instead of being disrupting and disorienting, actually tend towards coherence and co-ordination. In this scheme of things, the thoughts and actions of economic agents self-select “fit” expectations, and weed out “unfit” expectations. The whole process is inextricably linked to the market.

It may still be the case that big economic agents having discretionary power may have a disproportionate affect on the market and, as a consequence, generate perverse and quite incoherent outcomes. But in the context of competitive scenarios and stable rules for market participants, the case can be made that the correspondence between expectation and realisation can be close. This is why the economic reforms process must continue to deepen and widen the markets for land, labour, capital and knowledge.