C. S. Peirce’s theory of abductive expectations

Abstract

Expectations are one of the core theoretical concepts in the history of 20th century macroeconomics and finance. Here another significant theory of expectations in intellectual history is noted – C. S. Peirce’s theory of abductive expectations. Peirce was an American philosopher and scientist with deep interests in economics. The paper begins by reprising important aspects of prominent expectations theories such as rational and adaptive expectations, and the theories of Keynes, Friedman and Cagan. Then the discussion extends to other noted contributors such as Shackle, Coddington, Hayek, Evans, and Brock. C. S. Peirce’s theory of expectations is intertwined with his writings on many subjects. What was important about human thought for Peirce was that inferences were made about the logic of events unfolding towards the future. Such inferences look to the future and their accompanying reasoning processes were interpreted as expectational inferences. Peirce used the term abduction for hypothetically imagining the future. An abductive, conjectural expectation (ACE) is one which incorporates and surpasses known evidence by contingently and hypothetically contemplating the future. For Peirce, abductive expectations are a crucial part of humanity’s most efficient and productive resource, the cognitive processes of the human mind. Also, although Peirce is recognized as a founding influence on American institutional economics, his conception of expectations seems to have been left undeveloped by that school of economic ideas. Peirce’s contribution provides new insights and a more unifying perspective on expectations theories in the history of economics.