If inelastic expectations are really as frequent and important as some writers would have us believe, an interesting problem arises with regard to the interpretation of Wicksellian theory, more particularly in its Austrian version. According to this doctrine booms and slumps are engineered by banks lowering the “money rate of interest” below its “natural level,” or raising it above it. Whatever the precise meaning of these terms, we now know that if banks are to succeed in altering the long-term rate of interest, expectations have to be very elastic. Seen from this angle, the Wicksellian theory appears to be based on a very special assumption, viz. of a capital market without a very strong mind of its own, always ready to follow a lead on the spur of the moment, and easily led into mistaking an ephemeral phenomenon for a symptom of a change in the economic structure. Without fairly elastic expectations there can therefore be no crisis of the Austro-Wicksellian type. But again, before we can accept this theory we are entitled to hear an explanation why elastic expectations should be prevalent. Such a gullible capital market we should expect to find in an economy the structure of which is still highly fluid and in which long-run forces have not yet had time to take shape. We tentatively suggest that such a state of expectations may be typical of an economy in the early stages of industrialisation, or of an economy undergoing “rejuvenation” owing to rapid technical progress.
—Ludwig M. Lachmann, “The Role of Expectations in Economics as a Social Science,” in
Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy, ed. Walter E. Grinder (Kansas City: Sheed Andrews and McMeel, 1977), 78-79.
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