Chapter Ǵ: Why Subjectivism? ȂȄtheir correct hunches, and their good luck. Ļey will be victimized
by seizure of oil stocks, by adverse treatment under rationing schemes,
by price controls, or in other ways. Government reassurances, even if
made, would nowadays not be credible. Ļe benefits of diverse private
responses to diverse expectations about energy supplies are thus partly
forestalled.
Ļis example reminds subjectivists of a broader point about remote
repercussions of particular policies, repercussions remote in time or in
economic sector. A violation of property rights may seem the econom-
ical and expedient policy in the individual case. Yet in contributing to
an atmosphere of uncertainty, it can have grave repercussions in the
long run.
Because expectations influence behavior, a policy’s credibility condi-
tions its effectiveness, as the rational-expectations theorists, and William
Fellner (ȀȈȆȅ) before them, have emphasized. Ļe question of the with-
drawal pangs of ending an entrenched price inflation provides an example.
When money-supply growth is slowed or stopped, the reduced growth of
nominal income is split between price deceleration and slowed real pro-
duction and employment. Expectations affect how favorable or unfavor-
able this split is. If the anti-inflation program is not credible—if wage
negotiators and price-setters think that the policymakers will lose their
nerve and switch gears at the first sign of recessionary side effects—then
those private parties will expect the inflation to continue and will make
their wage and price decisions accordingly; and the monetary slowdown
will bite mainly on real activity. If, on the contrary, people are convinced
that the authorities will persist in monetary restriction indefinitely no mat-
ter how bad the side-effects, so that inflation is bound to abate, then the
perceptive price-setter or wage-negotiator will realize that if he neverthe-
less persists in making increases at the same old pace, he will find himself
out ahead of the installed inflationary procession and will lose customers
or jobs. People will moderate their price and wage demands, making the
split relatively favorable to continued real activity.
It is only superficially paradoxical, then, that in two alternative situa-
tions with the same degree of monetary restraint, the situation in which
the authorities are believed ready to tolerate severe recessionary side-
effects will actually exhibit milder ones than the situation in which the
authorities are suspected of irresolution. Subjectivists understand how
intangible factors like these can affect outcomes under objectively simi-
lar conditions.