Just simply answer the question Complete this in about one hour! In the “State of Long-Term Expectations,” Keynes argued that “as the organization of inve

Just simply answer the question Complete this in about one hour!

In the “State of Long-Term Expectations,” Keynes argued that “as the organization of inve

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Just simply answer the question Complete this in about one hour!

In the “State of Long-Term Expectations,” Keynes argued that “as the organization of investment market improves,” there was a growing risk for “the capital development of a country” to become “the by-product of the activities of a casino”. Based on your reading of section 3 and 5 of the chapter, discuss why Keynes believed the development of financial markets could make the capitalist investment more unstable. Why did Keynes anticipate the state to take “an ever greater responsibility” for directly organizing investment? Neoclassical Theory

Circular Flow
Businesses
Households

Incomes

Spending (Effective Demand)
Saving, Taxes, Imports
Investment, Gov spending, Exports

Exports and Imports
Gold Standard; Free Flow of Capital

Trade Surplus  Gold inflow  Domestic prices rise  domestic goods more expensive, foreign goods cheaper  Exports fall, Imports rise

Trade deficit  …  Exports rise, imports fall

Capital Market
(Neoclassical)

Saving or Investment
Interest rate
I(i)
S(i)
S*, I*
i*

Simple Macroeconomic Model

Keynes on Saving

Keynes on Saving

Saving or Investment
Interest rate
I1
S(Y1)
S1, I1
i
I2
S(Y2)
S2, I2

Neoclassical Theory of Investment

Investment
Interest rate
VMPK
I1
i1
i2
I2

Keynes, Chapter 12
Canvas, home page, week 15

Click on “Chapter 12”

Keynes on Investment

Investment
Interest rate
Prospective yield
(VMPK)
I1
i1
I2

Keynes on Investment
The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market.

Keynes on Investment
Some of the factors which accentuate this precariousness may be briefly mentioned.

(1) As a result of the gradual increase in the proportion of the equity in the community’s aggregate capital investment which is owned by persons who do not manage and have no special knowledge of the circumstances, either actual or prospective, of the business in question, the element of real knowledge in the valuation of investments by those who own them or contemplate purchasing them has seriously declined.

Keynes on Investment
(2) Day-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market.

Keynes on Investment
(3) A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady.

Keynes on Investment
(4) … It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.

Keynes on “Beauty Contest”
It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.

Keynes on Financial Market
If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase. In one of the greatest investment markets in the world, namely, New York, the influence of speculation (in the above sense) is enormous.

Keynes on Financial Market
Even outside the field of finance, Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market. It is rare, one is told, for an American to invest, as many Englishmen still do, “for income”; and he will not readily purchase an investment except in the hope of capital appreciation. This is only another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator.

Keynes on Financial Market
Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism — which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.

Keynes on Socialization of Investment
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 organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.

Keynes on Socialization of Investment (Ch. 24, Section III)
The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment.

Keynes on Socialization of Investment (Ch. 24, Section III)
I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community.

Stabilizing An Unstable Capitalism?

Minsky’s Profit Equation
National Income: W + Π + T + D (wages + profit + taxes + depreciation)

National Expenditures: C + I + G + (X-M) (personal consumption + investment + government consumption + net exports)

Macroeconomic Equilibrium:

W + Π + T + D = C + I + G + (X-M)

Π = (I – D) + (C – W) + (G – T) + (X – M)

Small Government Capitalism
If household, government, and trade sectors are in balance

Π = I – D

“Workers spend what they earn, capitalists earn what they spend”

Minsky’s Total Profit (Great Depression)

Big Government Capitalism
Assume household sector and trade are in balance

Π = (I-D) + (G-T)

Increase in government deficits helps to offset fall of investment

Government sector needs to be sufficiently big (roughly as big as private investment)

Minsky’s Total Profit (Great Recession)

Minsky’s Total Profit (Covid-19 Recession)

Stabilizing Unstable Capitalism
Big Government: stabilizes capitalist profit during recessions

Central Bank (lender of last resort): stabilizes asset prices during financial crises

Socialization of Risk
Socialization of Risk without Socialization of Investment

Capitalists: make investment decisions to make private profits but (largely) no longer bear the consequences of bad decision-making

 Encourage risky investment and financing behaviors
 Financial fragility
 Financial Crisis
 Force big government/central bank to intervene
 Validate the riskier financial structure

Does Government Debt Matter?

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