Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

JOCHEN RUNDE AND JÖRG BIBOWinterpretation and elaboration on this count. Our aim, then, is tooutline Lachmann’s conception of expectations and to use this tooffer an account of his distinction between convergent anddivergent expectations. We go on to raise some problems withexplaining equity prices in terms of divergent expectations and,drawing on Miller (1977) and Keynes, attempt to resolve them.ExpectationsLachmann offers various hints about his views on the nature ofexpectations and their emergence. Three themes recur consistentlythroughout his writings. The first is that expectations are incidentalto the ‘mental pictures’ drawn to formulate the plans on whichhuman conduct is based. 1 Expectations thus concern future eventsor states of affairs that exist only in the imagination of the actor atthe time that the expectation is formed. The second theme is thatexpectations are not strictly determined by the ‘data’ of experiencebut are based on experience that is necessarily interpreted and thatis, to this extent, subjective. Lachmann emphasises, in thisconnection, that the ‘act’ of interpretation is never wholly passiveand, accordingly, that economic choice and action are never whollydetermined by the actor’s circumstances. Finally, Lachmann insiststhat it is not possible to have foreknowledge of future events andaccordingly, that expectations tend to be subject to uncertainty.Yet Lachmann’s writings offer few direct statements about thenature and structure of the expectations he has in mind. 2 In his mostexplicit and extended discussion of the topic, Chapter 2 of hisCapital and Its Structure, he begins by comparing what thebusinessman does in forming an expectation with what a scientistdoes in formulating a working hypothesis (Lachmann 1978:23).Business expectations and scientific hypotheses serve the samepurpose in that they both ‘reflect an attempt at cognition andorientation in an imperfectly known world’ and ‘embody imperfectknowledge to be tested and improved by later experience’.Expectations are formed, according to Lachmann, by analysingone’s situation in terms of the impact of possible ‘forces’ ortendencies believed to be operative in the situation. 3 The aim is toidentify and separate dominant or ‘major’ tendencies from randomor ‘minor’ tendencies. Expectations are then a reflection of theanticipated effects of the operation of the major tendenciesidentified. Lachmann seems to suggest that induction plays a majorrole in the formation of expectations:184