John Maynard Keynes: Preserving liberal capitalism … the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil. Lifelong drive to impress and influence opinion and policy How can I adopt a creed [Communism] which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and intelligensia who … are the quality of life and surely carry the seed of all human advancement.

Keynes’ influence and prescience: From Economic Consequences: –“Carthaginian Peace”  Hitler & revanchism –US rejection of League of Nations –WW I Inter-allied debt problem  WW II Lend-lease –European free-trade zone on fragmented continent  EU From the Tract: –Gold standard, a “barbaric relic”  post-depression fiat systems freeing domestic policy … Bretton – Woods System From Economic Consequences of Mr. Churchill: –British class conflict and industrial decline From The General Theory: –The Age of Keynes, 1946 – 1973 (?), 1946 – ? Keynesian Uncertainty: Edmund Phelps, WSJ, March 14,

Keynes’ anticipations of General Theory Treatise on Probability intuitive –Probabilities affecting decisions are intuitive as well as empirical  Uncertainty and instability in General Theory Treatise on Money Fundamental equations –Price = Wage + “Profit”  Anticipates markup view of post-Keynesians –P C distinguished from P I Purchasing power parity needn’t hold between P C and P I Dispersion of prices at once the test and measure of social disturbances Investment drives the (price) system Widow cruse: the more she spends, the more she earns  anticipates multiplier of General Theory Motives for holding money  anticipates liquidity preference function of General Theory

The General Theory: The familiar macro framework Y = C + I C = C(Y) …Propensity to consume  passive response to income I = I(i) …Marginal efficiency of capital + animal spirits  instability S = I …spending multiplier L = L(Y,i) … Liquidity preference function  interest rate determined in money market Uncertainty  Fear  Rush to liquidity & Collapse of I [Downward] wage rigidity  Sticky prices  Unemployment equilibrium G as offset to I fluctuations

Investment drives Keynes’ economy. What drives investment? Long-term expectation The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made … Our basis for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. … a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation… Our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits, of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; though fears of loss may have a basis no more reasonable than hopes of profit had before. [T]he daily revaluations of the Stock Exchange … inevitably exert a decisive influence on the rate of current investment. For there is no sense in building up a new enterprise at a cost greater than that at which a similar existing enterprise can be purchased…Thus certain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than by the genuine expectations of the professional entrepreneur.

Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity … It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is 'to beat the gun', as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow. …it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs a pastime in which he is victor who says Snap neither too soon nor too late, who passed the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. Or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. 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.

In one of the greatest investment markets in the world, namely, New York, the influence of speculation is enormous. 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. 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. Only experience can show how far management of the rate of interest is capable of continuously stimulating the appropriate volume 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.

Enter government spending When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. [Thus] "wasteful" loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better. It is curious how common sense… has a preference for wholly "wasteful" forms of loan expenditure rather than for partly wasteful forms;… the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions. If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez- faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

In conclusion … the foregoing theory is moderately conservative 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 … in other ways. … [it is] unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. [T]herefore, a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment.[T]herefore, a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment. … beyond this no obvious case is made for a system of State Socialism … If the State is able to determine the aggregate amount of resources devoted to [investment] and the basic rate of reward to those who own [capital], it will have accomplished all that is necessary. there is no objection to the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed ……if our central controls [establish] full employment as nearly as is practicable, …then there is no objection to the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed …