The writer is a public policy professor at the University of Cambridge
Economists think people’s expectations are important in shaping their decisions, from whether to invest in expanding a business to buying a house or spending years studying to gain a qualification. Keynes labelled the role of expectations “animal spirits”. Mainstream economics has often assumed “rational expectations”, whereby people do not make systematic errors in foreseeing what will happen.
Whichever theory applies, what we think will happen to the economy in the future determines what we decide today — and thus shapes the future. That is especially important in 2021 as much of the developed world prepares for a vaccinated reopening of their economies.
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