Shackle on the Emergence of Uncertainty and Expectations in Modern Economics

From G. L. S. Shackle’s fascinating book The Years of High Theory: Invention and Tradition in Economic Thought 1926–1939 (1967):

“At the opening of the 1930s economic theory still rested on the assumption of a basically orderly and tranquil world. At their end it had come to terms with the restless anarchy and disorder of the world of fact. Partly this transformation was effected by the brutal force of events: by a slump without parallel and the unnerving spectacle of the rise of Nazism in a world cheated of the hope of peace. But partly it was the work of a mere handful of great theoreticians. One thing above all divided the new theory from the old: the discarding of the assumption (which had often been quite tacit) of universal perfect knowledge. What sense did it make to assume perfect knowledge in a world where every morning’s newspaper was opened in fear and scanned with foreboding? But the ferment had been working in the world of theory from the beginning of the 1920s. Frank Knight’s Risk Uncertainty and Profit of 1921 puts entrepreneurship in the forefront of a treatise on value theory which largely sets forth the old orthodoxy. But perhaps its title was a portent. It was in Sweden that expectation was first taken seriously as a prime mover in the economic process. (Marshall, as always, was with the angels, but he did not blow this particular trumpet very loud.) Erik Lindahl and, more incisively and with one brilliant and epoch-marking stroke, Gunnar Myrdal, developed the first ‘economics of expectation’. Myrdal’s essay, published in Swedish in 1931, in German in 1933, and in English only in 1939, would have served very well as the launching-pad for a theory of general output and employment, had the General Theory never been written. 1937 was the year of intensive Keynesian critical debate. In February Keynes himself declared in the Quarterly Journal of Economics that the General Theory was concerned with the consequences of our modes of coping with, or of concealing from our conscious selves, our ignorance of the future. Hugh Townshend, his intellectually most radical interpreter, simultaneously expressed the matter (in the Economic Journal for March) in terms, if anything, even more uncompromising. Uncertainty was the new strand placed gleamingly in the skein of economic ideas in the 1930s.” (Shackle 1967: 5–6).

Myrdal’s “essay” that Shackle refers to here was “Om penningteoretisk jämvikt. En studie över den ‘normala räntan’ i Wicksells penninglära” [“On Monetary Equilibrium. A Study of the ‘Normal Rate of Interest’ in Wicksell’s Monetary Theory”] (Ekonomisk Tidskrift 33 [1931]: 191–302), which was translated into English as Monetary Equilibrium (London, 1939). Myrdal had, according to Shackle, opened the debate about expectations before Keynes.

Later Shackle examines the significance of Gunnar Myrdal’s work Monetary Equilibrium (1931, English trans. 1939):

“In Monetary Equilibrium we have chapter IV. That chapter and its sequel are the battlefield where the decisive action occurs. We have examined their contents and effect in detail. But after them come passages of high interest, confirming and extending the conclusion that, had the General Theory never been written, Myrdal’s work would eventually have supplied almost the same theory.” (Shackle 1967: 124).

I am not sure whether this is a fair assessment, but it is high praise indeed coming from Shackle.

In Monetary Equilibrium, Myrdal seems to have criticised Wicksell’s concept of the “natural rate” and other aspects of the monetary equilibrium approach (Skaggs 1997: 473). Myrdal later advocated countercyclical fiscal policy and even had some understanding of the multiplier process (Skaggs 1997: 474).

Addendum
Philip Pilkington has a fascinating post here analysing Myrdal’s monetary equilibrium theory:

Philip Pilkington, “Gunnar Myrdal’s Monetary Equilibrium Theory: A Summarized Version,” Fixing the Economists, August 12, 2013.

Also, there is another post here on Myrdal and the General Theory:

Philip Pilkington, Gunnar Myrdal’s Prescient Criticisms of Keynes’ General Theory,” Fixing the Economists, August 10, 2013.

BIBLIOGRAPHY
Myrdal, Gunnar. 1931. “Om penningteoretisk jämvikt. En studie över den ‘normala räntan’ i Wicksells penninglära,” Ekonomisk Tidskrift 33: 191–302.

Myrdal, Gunnar. 1939 [1931]. Monetary Equilibrium. W. Hodge & Company, London.

Shackle, G. L. S. 1967. The Years of High Theory: Invention and Tradition in Economic Thought 1926–1939. Cambridge University Press, Cambridge.

Skaggs, Neil T. 1997. “Myrdal, Gunnar (1898–1987),” in D. Glasner and T. F. Cooley (eds). Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York. 473–474.