Quotation of the Day…

by Don Boudreaux on October 16, 2011

in Prices, Seen and Unseen, State of Macro

… is from page 142 of Capital, Expectations, and the Market Process - a 1977 collection, edited by Walter Grinder, of some of Ludwig Lachmann’s finest academic papers; this quotation is from Lachmann’s 1954 article “Some Notes on Economic Thought, 1933-1953“:

It is difficult to avoid the impression that Keynes introduced expectations whenever it suited his argument, and left them out when it did not.  Furthermore, in his Chapter 12 on “The State of Long-Term Expectation,” the famous diatribe against the Stock Exchange, it becomes painfully evident that Keynes failed to grasp the nature of the problem posed by the existence of inconsistent expectations.  Instead of studying the process by which men in a market exchange knowledge with each other and thus gradually reduce the degree of inconsistency by their actions, he roundly condemned the most sensitive institution for the exchange of knowledge the market economy has ever produced!

It should be noted that Lachmann was more favorably disposed to Keynes’s economics than are most other economists who are heavily influenced by the Austrian tradition.

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vidyohs October 16, 2011 at 9:24 am

A political economist loading the dice! Whoda thunk it.

Methinks1776 October 16, 2011 at 10:31 am

As I remember it, Keynes was deeply pained by his losses in the stock market and was absolutely certain they shouldn’t have occurred because he could see what others could not. He was, after all, LORD Keynes.

The problem isn’t him. It’s you dummies who mess things up for us professionals. Pour quoi? His Lordship says so.

Ever the elitist, our Lord Keynes proclaims:

“The only radical cure for the crises of confidence which afflict the economic life of the modern world would be to allow the individual no choice between consuming his income and ordering the production of the specific capital-asset which, even though it be on precarious evidence, impresses him as the most promising investment available to him.”

No choice, peasants. No choice for you. You’re not lordly.

“That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive.”

Inaccessible, peasants. Investing your own capital should not be an option for you. After all, you twits made Lord Keynes lose a lot of money in the market. Needlessly. Surely it was you unwashed, benighted masses deciding for yourselves that foisted such hardships upon his Lordship and this is proof enough that you must be silenced. Apparently, Lord Keynes, in all his wisdom, just didn’t know how to deal with fish at that the table.

vidyohs October 16, 2011 at 12:03 pm

“inaccessible and very expensive.” “
If that is an accurate quote of his words, wouldn’t a Lord see the oxymoron there, you’d think a brilliant Lord would.

If something is inaccessible, it can’t be expensive or cheap, you ain’t going there under any conditions as it is inaccessible.

Based on my astute analysis, do I get my Lord Certificate in the mail or will I be called to a special presentation? :-)

Methinks1776 October 16, 2011 at 12:51 pm

Lord JMK ends the chapter:

“For my own part, I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment…”

But, remember, Lord JMK was not in favour of central planning and the State directing investment should not be mistaken for central planning. The whole chapter can be summarized as “I, Lord Keynes, neither understand nor like reallocation of resources in ways I can’t personally understand and that I can’t personally agree with.”

Economic Freedom October 16, 2011 at 1:05 pm

And the same can be said for the followers and acolytes of His Lordship, too.

That’s why the public choice explanation for all this is clear: in a truly free market, there is simply no need for universities or corporations to hire Keynesians.

Methinks1776 October 16, 2011 at 2:03 pm

He’s a piece of work. The differences of opinion expressed in the stock market turn it into a casino, and, as we all know, “it is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges.”

He does concede that speculation increases liquidity and liquidity facilitates new investment. “But, a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is “liquid” (though this cannot be true for all investors collectively) calms his nerves and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment so long as alternative ways in which to hold his savings are available to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hording or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and knows little about them), except by organising markets wherein these assets can be realised easily for money. ”

So, liquidity (optionality, by another name) allows the investor to accept a lower rate of return, facilitating new investment. That’s good. However, this optionality gives the dumb masses…well…options, which means they may occasionally make choices that differ from what Lord Keynes thinks is best – like selling investments they think are too rich. And of course, this is all chalked up to “market psychology” or the amorphous “animal spirits”, never actual valuation or personal circumstances.

This is a great chapter in The General Theory of Lordly Wisdom.

vikingvista October 16, 2011 at 4:32 pm

Outstanding series of JMK quotes! Thanks!

Craig October 16, 2011 at 8:11 pm

“it is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges.”

The same could be said of “The General Theory”.

Ron H October 17, 2011 at 12:29 am

I’ve generally relied on Hazlitt to translate Keynes for me. His “general Theory” is completely explained in Hazlitt’s “The Failure of the New Economics”. :-)

Sam Grove October 16, 2011 at 4:15 pm

I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views

What in hell was he smoking?

and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment…”

Collectivism defined.

outsider October 19, 2011 at 12:32 pm

Keynes speculated regularly on his own account between 1922 and 1939. During that period his invested assets increased from about £22,000 sterling to about £200,000 (equivalent to $800,000 at that time and roughly $12 million in today’s money) mainly from stocks and government bonds, though he also dabbled in commodities and currencies. During that period, however, his fortunes varied wildly, at one time losing half what he started with but peaking at about $30 million in today’s money, largely because he was heavily leveraged. His returns were doubtless higher than these numbers suggest because he spent some of his gains along the way.
Just putting in a few facts.

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