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Keynes Seminar
4 February 2009
Mark Hayes
Robinson College, Cambridge
General Theory Reading Group
6: Aggregate Demand II:
The Dark Forces of Time and Ignorance
www.postkeynesian.net © PKSG 2009
Time and Ignorance
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. (G.T. 149)
Time and Ignorance
By uncertain knowledge, let me explain, I do not mean merely to
distinguish what is known for certain from what is only probable. The
game of roulette is not subject in this sense to uncertainty…Or, again,
the expectation of life is only slightly uncertain. Even the weather is
only moderately uncertain. The sense in which I am using the term is
that in which the prospect of a European war is uncertain, or the price
of copper and the rate of interest 20 years hence, or the obsolescence
of a new invention, or the position of private wealth owners in the
social system in 1970. About these matters there is no scientific basis
on which to form any calculable probability whatever. We simply do
not know. (C.W. XIV, pp. 113–4)
Fundamental value
N


1
*
**


qt  qt  Et  dt i

E
q

t  t 
1  Rt i  
 1
Keynes’s and Classical probability
 x  xˆ  
  x  xˆ  

x |  1

E x 

  x  dx  

E x 
  x  dx  0.5
Conventional value
q
t 1
 qˆt 1  Rt 1   t   qt 1  qˆt 1  Rt 1   t

Time and Ignorance
We should not conclude that everything depends on waves of
irrational psychology. On the contrary, the state of long-term
expectation is often steady. Thus after giving full weight to the
importance of the influence of short-period changes in the state of
long-term expectation as distinct from changes in the rate of interest,
we are still entitled to return to the latter as exercising, at any rate, in
normal circumstances, a great, though not a decisive, influence on the
rate of investment. (G.T. 162)
Kaldor on Keynes’s liquidity
Mr Keynes, in certain parts of The General Theory appears to use the
term ‘liquidity’ in a sense which comes very close to our concept of
‘perfect marketability’; ie goods which can be sold at any time for the
same price, or nearly the same price, at which they can be bought. Yet
it is obvious that this attribute of goods is not the same thing as what
Mr Keynes really wants to mean by ‘liquidity’.
Certain gilt-edged securities can be bought on the Stock Exchange at
a price which is only a small fraction higher than the price at which
they can be sold; on this definition therefore they would have to be
regarded as highly liquid assets. In fact it is very difficult to find
satisfactory definition of what constitutes ‘liquidity’ – a difficulty, I think,
which is inherent in the concept itself. (Kaldor, 1939, p. 4, n5)
Keynes on liquidity
In [a non-monetary] economy capital equipments will differ from one
another (a) in the variety of the consumables in the production of
which they are capable of assisting, (b) in the stability of value of their
output (in the sense in which the value of bread is more stable through
time than the value of fashionable novelties), and (c) in the rapidity
with which the wealth embodied in them can become ‘liquid’, in the
sense of producing output, the proceeds of which can be re-embodied
if desired in quite a different form. (G.T. 240)
Keynes on liquidity
… there is a further decision which awaits him, namely, in what form
he will hold the command over future consumption which he has
reserved, whether out of his current income or from previous savings.
Does he want to hold it in the form of immediate, liquid command (i.e.
in money or its equivalent)? Or is he prepared to part with immediate
command for a specified or indefinite period, leaving it to future market
conditions to determine on what terms he can, if necessary, convert
deferred command over specific goods into immediate command over
goods in general? (G.T. 166)
Keynes on liquidity
In [a non-monetary] economy capital equipments will differ from one
another (a) in the variety of the consumables in the production of
which they are capable of assisting, (b) in the stability of value of their
output (in the sense in which the value of bread is more stable through
time than the value of fashionable novelties), and (c) in the rapidity
with which the wealth embodied in them can become ‘liquid’, in the
sense of producing output, the proceeds of which can be re-embodied
if desired in quite a different form. (G.T. 240)
The hierarchy of liquidity
Money
Liquidity-preference
Bonds
Marginal efficiency of capital
Capital-assets
Propensity to consume
Consumption-goods
Changes in international equity prices since
4 January 2005(a) as of August 2008 Inflation Report
Source: Thomson Datastream.
(a) In local currency terms.
Updated as of November 2008 Inflation Report
Sources: Bloomberg and Thomson Datastream.
(a) In common currency (US dollar) terms.
Sterling three-month interbank rates relative to future
expected policy rates(a) – November 2008 Inflation Report
Sources: Bloomberg and Bank calculations.
(a) Three-month Libor spread over equivalent-maturity overnight interest rate swaps. Dashed lines show forward spreads derived from forward rate agreements and are based on the fifteen
working day averages to 6 August 2008 and 5 November 2008 respectively.
Next time:
Geoff Tily
HM Treasury
Keynes, Policy and The General Theory
11 February 2009