[The Editors' Verdict] Economics Is About People

One of the revolutions in economics in the late 20th century concerns the way people predict (expect) the future. The essence of the 'rational expectations revolution' that began in the early 1970s is that economic agents form expectations by looking at the future rather than the past. If one looks back at the past and predicts the future, there is bound to be a large expectation error if the future is not similar to the past, which can lead to failure. However, if predictions are made with a forward-looking perspective that considers the future, such major failures can be avoided.

Just because expectations are formed 'rationally' does not mean that seemingly irrational phenomena or choices do not occur. Speculation and bubbles are representative examples. Bubbles frequently appear in capitalist economies. For example, if people expect the price of a certain stock to rise, market participants will buy that stock to gain capital gains in the future. Therefore, the stock price actually rises. If inflation is expected, market participants will purchase goods beforehand, and prices will indeed rise.

Interestingly, the result is the same even when changes in expectations occur without any basis. Because of this, rational expectations are called self-fulfilling. What market participants think actually comes true. The reason expectations become self-fulfilling is speculation. Many of our people perceive speculation as inherently bad. However, upon closer examination, there are numerous transactions in the market that can only be classified as speculation.

In capitalist economies, speculation often plays a beneficial rather than harmful role. Theorists who advocate leaving all resource allocation to market principles believe in the power of speculation. If, for any reason, demand is expected to exceed supply causing prices to rise, speculative demand to purchase beforehand naturally increases, and prices rise. As prices rise, demand decreases and supply increases, and the market returns to a stable state.

Changes in expectations also occur when government policies change. Therefore, when designing policies, it is essential to consider how market participants' expectations will change along with the policies. Policies that disregard market participants' expectations are bound to fail. Such policy failures have been repeated under the Moon Jae-in administration. Officials responsible for policies often complain that the market does not follow and respond with even more aggressive regulations.

The most representative example is probably real estate policy. Watching the market react oppositely every time the policy changes, one cannot help but doubt whether anyone has ever seriously considered how the market will respond to policy changes. The real estate market in this country is currently abnormal. By opposing every issue with regulations, it is instead tightening the noose on ordinary people, making it impossible to escape from being homeless. Housing policy is not the only case.

The economy is about people. The Moon Jae-in administration seems to desperately need an understanding of people. The current government appears to assume that once a policy is established, market participants will act according to the government's intentions. But market participants are not robots. After more than twenty policy changes, if the policy effects come out the opposite way, shouldn't there be some reflection? Once again, when policies change, the people's thoughts (expectations) also change. I want to see policies that understand the people, not just pander to popularity.

Jo Jang-ok, Professor Emeritus, Department of Economics, Sogang University

This content was produced with the assistance of AI translation services.