WEBVTT NOTE 13. Expectations And Speculation 1 00:00:00.000 --> 00:00:08.000 Chapter 13, Expectation and Speculation 2 00:00:09.000 --> 00:00:13.000 The State of Confidence 3 00:00:14.000 --> 00:00:21.000 Keynes's Chapter 12, The State of Long-Term Expectation, is crowded with confusions. 4 00:00:21.000 --> 00:00:29.000 It is one of those chapters in which Keynes revels in pure satire and ends by believing his own paradoxes. 5 00:00:29.000 --> 00:00:39.000 All this is in the tradition of Bernard Mandeville, Bernard Shaw and Lytton Strachey, rather than of serious economics. 6 00:00:39.000 --> 00:00:54.000 But as passages from this chapter are often quoted with delighted approval by those who wish to rationalize their antipathy to the system of free enterprise and free markets, it is worth examining them in some detail. 7 00:00:54.000 --> 00:01:11.000 First we must notice that here the definition of the marginal efficiency of capital undergoes what B. M. Anderson called one of its many metamorphoses, and that causes and effects are arbitrarily selected. 8 00:01:11.000 --> 00:01:20.000 The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. 9 00:01:20.000 --> 00:01:28.000 But economists have not analyzed it carefully and have been content as a rule to discuss it in general terms. 10 00:01:28.000 --> 00:01:40.000 In particular, it has not been made clear that its relevance to economic problems comes in through its important influence on the schedule of the marginal efficiency of capital. 11 00:01:40.000 --> 00:01:46.760 There are not two separate factors affecting the rate of investment, namely the schedule 12 00:01:46.760 --> 00:01:51.600 of the marginal efficiency of capital and the state of confidence. 13 00:01:51.600 --> 00:01:57.440 The state of confidence is relevant because it is one of the major factors determining 14 00:01:57.440 --> 00:02:07.020 the former, which is the same thing as the investment demand schedule, pages 148-149. 15 00:02:07.020 --> 00:02:12.900 We saw that in his original definition of the marginal efficiency of capital, pages 16 00:02:12.900 --> 00:02:20.940 135 through 136, Keynes tied it up with the yield of specific capital instruments or assets, 17 00:02:20.940 --> 00:02:27.220 and particularly with the expected yield of newly produced assets. 18 00:02:27.220 --> 00:02:34.220 But here it is broadened out to mean business profits generally, or rather, expectations 19 00:02:34.220 --> 00:02:58.220 It is hard to see why the relevance to economic problems of the state of confidence should come in only through its important influence on the schedule of the marginal efficiency of capital, particularly if the latter phrase refers merely to the specific yield of new capital assets. 20 00:02:58.220 --> 00:03:19.220 For the state of confidence refers to all future expectations, including the future prices of consumption, as well as capital goods, the future of wage rates, of foreign trade, of the likelihood of war or peace, of a change of political administration, of a Supreme Court decision, etc. 21 00:03:19.220 --> 00:03:30.220 Why should the marginal efficiency of capital be singled out as the sole factor which makes the state of confidence relevant to economic problems? 22 00:03:30.220 --> 00:03:42.220 It is true, of course, that if the schedule of the marginal efficiency of capital is identified with the investment demand schedule, it becomes very important. 23 00:03:42.220 --> 00:04:04.220 Fictions about the Stock Market 24 00:04:04.220 --> 00:04:21.820 Chapter 12 is chiefly an essay and satire, and in order to patronize the behavior of entrepreneurs, and to ridicule the behavior of speculators, Keynes finds it necessary to patronize and ridicule the human race in general. 25 00:04:21.820 --> 00:04:42.460 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. 26 00:04:42.460 --> 00:04:45.960 pages 149 through 150. 27 00:04:45.960 --> 00:04:50.860 It is true, of course, and this seems to be mainly what Keynes is saying, 28 00:04:50.860 --> 00:04:56.460 that with regard to the future we can never act on the basis of certainty. 29 00:04:56.460 --> 00:05:01.460 We are not certain that an earthquake will not destroy our house next week. 30 00:05:01.460 --> 00:05:05.260 We are not even certain that the sun will rise tomorrow. 31 00:05:05.260 --> 00:05:09.060 We are forced to act on the basis of probabilities. 32 00:05:09.060 --> 00:05:21.060 But to admit that our knowledge of the future of an investment necessarily contains elements of uncertainty is far different from saying that it amounts to little or nothing. 33 00:05:22.060 --> 00:05:31.060 Keynes's trick in this chapter is to mix plausible statements with implausible statements, hoping that the latter will seem to follow from the former. 34 00:05:31.060 --> 00:05:38.380 It is probable, he declares, that the actual average results of investments, even during 35 00:05:38.380 --> 00:05:44.140 periods of progress and prosperity, have disappointed the hopes which prompted them. 36 00:05:44.140 --> 00:05:46.220 Page 150. 37 00:05:46.220 --> 00:05:48.620 It is probable. 38 00:05:48.620 --> 00:05:54.860 If human nature felt no temptation to take a chance, no satisfaction, profit apart, in 39 00:05:54.860 --> 00:06:01.580 In constructing a factory, a railway, a mine or a farm, there might not be much investment 40 00:06:01.580 --> 00:06:05.080 merely as a result of cold calculation. 41 00:06:05.080 --> 00:06:07.180 Page 150. 42 00:06:07.180 --> 00:06:11.540 This is possible, but it is hard to say whether it is probable. 43 00:06:11.540 --> 00:06:17.700 It is not easy to imagine precisely what would happen if human nature and human motives were 44 00:06:17.700 --> 00:06:21.000 entirely different from what they are. 45 00:06:21.000 --> 00:06:27.440 But then Keynes begins to expatiate upon all the dire consequences which follow from the 46 00:06:27.440 --> 00:06:34.940 separation between ownership and management which prevails today, page 150, and all the 47 00:06:34.940 --> 00:06:40.120 evils which follow from the opportunities which organized stock markets give to the 48 00:06:40.120 --> 00:06:43.440 individual to revise his commitments. 49 00:06:43.440 --> 00:06:47.020 He does this by creating a number of fictions. 50 00:06:47.020 --> 00:06:52.940 One is that people know nothing about the future and chronically guess wildly. 51 00:06:52.940 --> 00:06:58.700 Another is that those who buy and sell shares on the market are ignorant of the companies 52 00:06:58.700 --> 00:07:06.700 in whose shares they deal, and that only the professional entrepreneur has genuine knowledge. 53 00:07:06.700 --> 00:07:11.900 Still another fiction is that professional speculators are not concerned with the real 54 00:07:11.900 --> 00:07:30.700 Expectation comes to mean expectations regarding expectations. 55 00:07:30.700 --> 00:07:36.600 We have reached the third degree where we devote our intelligences to anticipating what average 56 00:07:36.600 --> 00:07:42.600 Average Opinion expects the average opinion to be, page 156. 57 00:07:42.600 --> 00:07:50.720 In this chapter, Keynes is still satirizing the New York stock market of 1928 and 1929. 58 00:07:50.720 --> 00:07:58.920 Today of course it is not hard to see in retrospect that optimism then went to excessive lengths. 59 00:07:58.920 --> 00:08:04.400 Hindsight is always clearer than foresight, and Keynes seems to be preening himself on 60 00:08:04.400 --> 00:08:11.140 on how much better his hindsight of 1936 is than the foresight of the speculative community 61 00:08:11.140 --> 00:08:13.340 of 1929. 62 00:08:13.340 --> 00:08:20.460 But was Keynes sure enough of his ground in early 1929 to sound a clarion warning or to 63 00:08:20.460 --> 00:08:26.740 sell short and make a killing and, incidentally, confer a social benefit by helping to mitigate 64 00:08:26.740 --> 00:08:29.500 excessive optimism? 65 00:08:29.500 --> 00:08:35.100 Probably not, but he explains that there were certain difficulties. 66 00:08:35.100 --> 00:08:40.740 Before we go into his further rhetoric, however, it may be advisable here to make a simple 67 00:08:40.740 --> 00:08:41.740 point. 68 00:08:41.740 --> 00:08:47.860 Whenever men are allowed liberty and freedom of choice, they will make mistakes. 69 00:08:47.860 --> 00:08:53.740 Liberty is not a guarantee of omniscience, but neither are the mistakes of free men a 70 00:08:53.740 --> 00:09:00.100 a valid excuse to take away their liberty and impose government controls in its stead 71 00:09:00.100 --> 00:09:05.360 on the ground that all wisdom and disinterestedness resides in the people who are going to do 72 00:09:05.360 --> 00:09:07.540 the controlling. 73 00:09:07.540 --> 00:09:13.620 I have pointed out before that Keynes disdains to offer serious statistical evidence for 74 00:09:13.620 --> 00:09:19.740 statements that could easily be supported or disproved by available statistics. 75 00:09:19.740 --> 00:09:25.640 For example, day-to-day fluctuations in the profits of existing investments, which are 76 00:09:25.640 --> 00:09:31.580 obviously of an ephemeral and non-significant character, tend to have an altogether excessive 77 00:09:31.580 --> 00:09:34.380 and even an absurd influence on the market. 78 00:09:34.380 --> 00:09:40.740 It is said, for example, that the shares of American companies which manufacture ice tend 79 00:09:40.740 --> 00:09:46.580 to sell at a higher price in summer when their profits are seasonably high than in winter 80 00:09:46.580 --> 00:09:49.260 when no one wants ice. 81 00:09:49.260 --> 00:09:54.500 The recurrence of a bank holiday may raise the market valuation of the British railway 82 00:09:54.500 --> 00:10:01.940 system by several million pounds, pages 153 through 154. 83 00:10:01.940 --> 00:10:05.260 Let us take these statements as they occur. 84 00:10:05.260 --> 00:10:11.460 Contrary to Keynes's first assertion, what nearly always surprises daily market commentators 85 00:10:11.460 --> 00:10:17.940 and outside observers is how little attention the market usually pays to non-significant 86 00:10:17.940 --> 00:10:21.540 and day-to-day fluctuations in profits. 87 00:10:21.540 --> 00:10:28.080 A strike in the steel industry may be front-page news in every newspaper in the country, but 88 00:10:28.080 --> 00:10:34.500 shares of steel companies may not go down at all or only by a tiny fraction. 89 00:10:34.500 --> 00:10:39.260 On the day that the strike is settled, however, and the whole country is breathing an audible 90 00:10:39.260 --> 00:10:43.500 sigh of relief, the steel stocks may go down. 91 00:10:43.500 --> 00:10:49.900 This is always ridiculed in letters to the editor as illogical, but it may happen because, 92 00:10:49.900 --> 00:10:55.940 though operations are being resumed, the higher wage cost involved in the settlement may be 93 00:10:55.940 --> 00:11:01.500 regarded as threatening a reduction of profits in the long term. 94 00:11:01.500 --> 00:11:04.900 Notice how Keynes's second assertion above begins. 95 00:11:04.900 --> 00:11:10.740 It is said, Is such hearsay Keynes's notion of evidence? 96 00:11:10.740 --> 00:11:17.540 Apparently it is, for he offers nothing else. In these days of electric refrigerators, his 97 00:11:17.540 --> 00:11:23.700 illustration of ice manufacturing companies may seem obsolescent. But I have succeeded 98 00:11:23.700 --> 00:11:30.920 in digging up two American ice companies, and I print in Appendix B the high, low and 99 00:11:30.920 --> 00:11:37.660 average prices for each of them in the midwinter period January to February for each of the 100 00:11:37.660 --> 00:12:04.420 In the final column of the July-August average is presented as a percentage of the January-February average. 101 00:12:04.420 --> 00:12:06.700 What do these comparisons show? 102 00:12:06.700 --> 00:12:12.300 They show that the shares of the American Ice Company averaged higher in summer than 103 00:12:12.300 --> 00:12:18.820 in winter in fourteen of these twenty-five years, but actually averaged lower in summer 104 00:12:18.820 --> 00:12:21.960 than in winter for nine of them. 105 00:12:21.960 --> 00:12:29.180 The shares of City Products Company, formerly City Ice and Fuel Company, averaged higher 106 00:12:29.180 --> 00:12:38.180 They were higher in summer than in winter in 12 of those years, but lower in summer than in winter for 9 of them. 107 00:12:38.180 --> 00:12:47.180 Out of 50 cases, in short, the shares of these companies sold higher in summer than in winter only 26 times, 108 00:12:47.180 --> 00:12:53.180 about as often as a penny might come heads instead of tails in 50 throws. 109 00:12:53.180 --> 00:12:58.980 What's here, it may be said, are inconclusive because summer ice companies were usually 110 00:12:58.980 --> 00:13:01.940 also in the winter fuel business. 111 00:13:01.940 --> 00:13:08.060 This is true, but it merely emphasizes the frivolous and apocryphal nature of Keynes's 112 00:13:08.060 --> 00:13:10.220 undocumented illustration. 113 00:13:10.220 --> 00:13:17.680 Keynes's third assertion about bank holidays lends itself more easily to statistical verification 114 00:13:17.680 --> 00:13:19.580 or disproof. 115 00:13:19.580 --> 00:13:26.080 In Appendix C, I present a table comparing the closing bid and asked prices of the Southern 116 00:13:26.080 --> 00:13:32.700 Railway Company's deferred ordinary shares on two specific days out of every year for 117 00:13:32.700 --> 00:13:39.040 the 25 years from 1923 to 1947 inclusive. 118 00:13:39.040 --> 00:13:45.820 The Southern Railway Company has been chosen because it was one of the four main line railway 119 00:13:45.820 --> 00:13:50.920 companies, and did not have dividends falling due in August. 120 00:13:50.920 --> 00:13:59.620 The 25 years from 1923 to 1947 were chosen because amalgamation of the British railways 121 00:13:59.620 --> 00:14:06.480 took effect as from the 1st of January, 1922, when the four main line railway companies 122 00:14:06.480 --> 00:14:12.820 came into being, and because nationalization of the principal railway undertakings was 123 00:14:12.820 --> 00:14:34.820 was effected on the 1st of January, 1948, when they were vested in the British Transport Commission and shareholders received compensation by way of a fixed interest stock, guaranteed as to principal and interest by the British Treasury, and its market prices were not, therefore, influenced by earnings. 124 00:14:34.820 --> 00:14:43.820 Now the most famous English bank holiday, which bears that specific name, is the one that falls on the first Monday in August. 125 00:14:43.820 --> 00:14:50.820 This is the one most likely to show the effect of bank holidays on the quotations of British railways. 126 00:14:50.820 --> 00:14:59.820 Therefore, the table in Appendix C compares the closing bid and asked prices of Southern Railway shares 127 00:14:59.820 --> 00:15:18.820 on the last business day in February, chosen as being furthest away from the August bank holiday and also reasonably away from the Christmas New Year holidays, with the closing bid and asked prices on the first business day after the August bank holiday. 128 00:15:18.820 --> 00:15:43.820 And what do the results show? Comparing the price of each of the two days, we find that in only 7 of the 25 years was the price of these railway shares higher on the day after the August bank holiday than on the last day of February, whereas in 18 of the 25 years it was actually lower right after the August bank holiday. 129 00:15:43.820 --> 00:15:47.820 From Keynes's point of view, this is simply bad luck. 130 00:15:47.820 --> 00:15:55.820 On the mere law of averages, assuming that the bank holiday did not affect the value of railway shares one way or the other, 131 00:15:55.820 --> 00:16:03.820 southern railway shares should have been higher at bank holiday time about as often as they were lower. 132 00:16:03.820 --> 00:16:12.820 I attach no significance to the fact that the result turns out to be exactly the reverse of that of Keynes's unsupported statement. 133 00:16:12.820 --> 00:16:19.780 Statement, but the actual comparison is a good lesson against making sarcastic jibes 134 00:16:19.780 --> 00:16:25.900 at the expense of the speculative community on the basis of unconfirmed and, as it may 135 00:16:25.900 --> 00:16:29.540 turn out, quite false information. 136 00:16:29.540 --> 00:16:32.500 Keynes next attacks professional speculators. 137 00:16:32.500 --> 00:16:38.900 They are concerned, he writes, not with what an investment is really worth to a man who 138 00:16:38.900 --> 00:16:45.100 who buys it for keeps, but with what the market will value it at, under the influence of mass 139 00:16:45.100 --> 00:16:48.780 psychology, three months or a year hence. 140 00:16:48.780 --> 00:16:51.280 Page 155. 141 00:16:51.280 --> 00:16:58.420 And this behavior is an inevitable result of the mere freedom to buy and sell securities. 142 00:16:58.420 --> 00:17:04.340 For it is not sensible to pay 25 for an investment of which you believe the prospective yield 143 00:17:04.340 --> 00:17:23.340 Such reasoning on the part of a professional speculator is of course possible, but it is preposterous to regard it as usual. 144 00:17:23.340 --> 00:17:28.340 It assumes a speculator saying to himself something like this. 145 00:17:28.340 --> 00:17:34.940 I know from my own sources of information that this stock I can buy now for 25 is really 146 00:17:34.940 --> 00:17:41.420 worth 30 on the basis of what it is going to earn, but I have a hunch that some apparently 147 00:17:41.420 --> 00:17:47.100 bad news is going to break within the next few months, and though I know that this will 148 00:17:47.100 --> 00:17:53.560 not adversely affect the real value of this stock, other people who constitute the majority 149 00:17:53.560 --> 00:17:58.680 will be foolish enough to be influenced by this news, and therefore they will push the 150 00:17:58.680 --> 00:18:04.520 quotation of this stock down to twenty, even though more people by that time will know 151 00:18:04.520 --> 00:18:11.920 as I do that the stock is really worth thirty on the basis of yield, etc., etc. 152 00:18:11.920 --> 00:18:16.760 It is a byword in Wall Street that people who turn this number of mental somersaults 153 00:18:16.760 --> 00:18:20.840 to arrive at a conclusion quickly go broke. 154 00:18:20.840 --> 00:18:25.880 Contrary to what Keynes supposes, it is the speculators who try to figure out what the 155 00:18:25.880 --> 00:18:31.600 real future values of stocks are going to be who are most likely to come out best in 156 00:18:31.600 --> 00:18:33.640 the long run. 157 00:18:33.640 --> 00:18:39.840 Many seasoned speculators got out of the market in 1928 for the sound reason that stocks were 158 00:18:39.840 --> 00:18:44.160 selling too high in relation to existing or likely earnings. 159 00:18:44.160 --> 00:18:50.400 Then, seeing the market still going up, some of them decided to jump in again on the assumption 160 00:18:50.400 --> 00:18:57.360 and that the others were not only crazy but could be safely counted upon to go still crazier. 161 00:18:57.360 --> 00:19:03.040 It was the speculators who threw away their own sensible calculations in a cynical effort 162 00:19:03.040 --> 00:19:07.400 to beat the mob psychology who got caught. 163 00:19:07.400 --> 00:19:11.280 But Keynes is firmly convinced of the opposite. 164 00:19:11.280 --> 00:19:18.840 Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. 165 00:19:18.840 --> 00:19:24.860 He who attempts it must surely lead much more laborious days and run greater risks than 166 00:19:24.860 --> 00:19:31.560 he who tries to guess better than the crowd how the crowd will behave, page 157. 167 00:19:31.560 --> 00:19:37.400 Keynes apparently believes this precisely because it is so implausible. 168 00:19:37.400 --> 00:19:43.000 It is the long-term investor, he who most promotes the public interest, who will in 169 00:19:43.000 --> 00:19:48.560 and practice come in for most criticism, wherever investment funds are managed by committees 170 00:19:48.560 --> 00:19:50.800 or boards or banks. 171 00:19:50.800 --> 00:19:57.040 If he is successful, that will only confirm the general belief in his rashness, and if 172 00:19:57.040 --> 00:20:07.880 in the short run he is unsuccessful, which is very likely, he will not receive much mercy. 173 00:20:07.880 --> 00:20:13.120 To one who, like the present writer, spent many years writing daily on the stock market 174 00:20:13.120 --> 00:20:18.620 for New York newspapers, the foregoing sounds suspiciously familiar. 175 00:20:18.620 --> 00:20:23.780 It sounds like a man who once gave investment advice that turned out to be wrong and who 176 00:20:23.780 --> 00:20:26.040 was looking for an alibi. 177 00:20:26.040 --> 00:20:29.660 It is the system that made the mistake, not he. 178 00:20:29.660 --> 00:20:35.120 The stock he recommended should, in all logic, have gone up to 108, even though it never 179 00:20:35.120 --> 00:20:36.920 did. 180 00:20:36.920 --> 00:20:44.280 But such suspicions are unworthy, and I shall return to the merits of the argument. 181 00:20:44.280 --> 00:20:48.680 Gambling Speculation Enterprise 182 00:20:48.680 --> 00:20:51.920 What is it that Keynes is trying to prove? 183 00:20:51.920 --> 00:20:57.300 He is trying to prove that liquidity is wicked, that the freedom of people to buy and sell 184 00:20:57.300 --> 00:21:03.220 securities in accordance with their own judgment ought not to be allowed, and that their money 185 00:21:03.220 --> 00:21:10.880 ought to be taken from them and invested by bureaucrats omniscient and beneficent by definition. 186 00:21:10.880 --> 00:21:18.760 Of the maxims of orthodox finance, none, surely, is more antisocial than the fetish of liquidity. 187 00:21:18.760 --> 00:21:23.700 The doctrine that it is a positive virtue on the part of investment institutions to 188 00:21:23.700 --> 00:21:28.940 concentrate their resources upon the holding of liquid securities. 189 00:21:28.940 --> 00:21:35.340 It forgets that there is no such thing as liquidity of investment for the community as a whole. 190 00:21:35.340 --> 00:21:37.860 Page 155. 191 00:21:37.860 --> 00:21:42.260 It is true that there is no such thing as liquidity of investment for the community as 192 00:21:42.260 --> 00:21:46.900 a whole, but only if this means the world community. 193 00:21:46.900 --> 00:21:52.860 The British, for example, can't relieve a crisis by selling their American shares. 194 00:21:52.860 --> 00:21:58.500 Any individual country can sell or buy gold or dollars, etc. 195 00:21:58.500 --> 00:22:04.180 But even if we grant that there is no such thing as liquidity of investment for the world, 196 00:22:04.180 --> 00:22:09.580 considered as one big community, this does not mean that liquidity cannot still be of 197 00:22:09.580 --> 00:22:16.780 considerable advantage to individual countries, individual banks, individual corporations, 198 00:22:16.780 --> 00:22:23.700 or individual persons, and therefore of advantage to the community as a whole. 199 00:22:23.700 --> 00:22:29.100 On the same kind of reasoning as he used in this instance, Keynes could have argued that 200 00:22:29.100 --> 00:22:34.860 fire insurance is worthless because someone must bear the loss of the fire. 201 00:22:34.860 --> 00:22:40.780 It is true that someone must bear the loss, but the whole purpose of insurance is to distribute 202 00:22:40.780 --> 00:22:47.100 and diffuse the loss, and this is what liquidity also serves to do. 203 00:22:47.100 --> 00:22:52.400 It is easy to see how much good can come, and it is difficult to see how much harm can 204 00:22:52.400 --> 00:22:59.400 This is why there is no point to Keynes's complaint that, 205 00:23:22.400 --> 00:23:29.400 to outwit the crowd and to pass the bad, or depreciating, half-crown to the other fellow. 206 00:23:29.400 --> 00:23:31.400 Page 155 207 00:23:31.400 --> 00:23:41.400 This is a peculiarly unfortunate image for Keynes, the advocate of government spending, deficit financing and inflation to have used. 208 00:23:41.400 --> 00:23:49.400 For if the half-crown is depreciating, it is depreciating because the politicians are printing too much money, 209 00:23:49.400 --> 00:23:59.400 and if the half crown can be passed on despite the other fellows unwillingness to take it, it is because the politicians have made it legal tender. 210 00:23:59.400 --> 00:24:09.400 Keynes forgets that what he is describing is not merely the purpose of stock market speculation, but the purpose of enterprise as well. 211 00:24:09.400 --> 00:24:17.400 For the entrepreneurs who make the greatest profits will be the minority who first and best anticipate the wants of consumers, 212 00:24:17.400 --> 00:24:23.960 Summers, who, if Keynes wishes to put it that way, beat the gun as compared with the majority 213 00:24:23.960 --> 00:24:26.360 of their competitors. 214 00:24:26.360 --> 00:24:31.440 Keynes once derided economists who worried about results in the long run. 215 00:24:31.440 --> 00:24:36.960 In the long run, he said cynically, we are all dead. 216 00:24:36.960 --> 00:24:43.340 It is amusing to find the same man complaining here that long-run considerations are minimized 217 00:24:43.340 --> 00:24:50.740 because human nature desires quick results, there is a peculiar zest in making money quickly, 218 00:24:50.740 --> 00:24:56.180 and remotor gains are discounted by the average man at a very high rate. 219 00:24:56.180 --> 00:24:58.420 Page 157. 220 00:24:58.420 --> 00:25:04.660 But for Keynes, any stick was apparently good enough to beat the capitalist system with. 221 00:25:04.660 --> 00:25:12.260 In attacking speculation in Wall Street, Keynes forgets that all enterprise, all human activity, 222 00:25:12.260 --> 00:25:18.660 extricably involve speculation, for the simple reason that the future is never certain, never 223 00:25:18.660 --> 00:25:21.020 completely revealed to us. 224 00:25:21.020 --> 00:25:23.960 Who is a greater speculator than the farmer? 225 00:25:23.960 --> 00:25:29.460 He must speculate on the fertility of the acreage he rents or buys, on the amount and 226 00:25:29.460 --> 00:25:35.580 distribution of rainfall over the coming crop season, on the amount of pests and blight, 227 00:25:35.580 --> 00:25:41.260 on the final size of his crop, on the best day to sow and the best day to harvest and 228 00:25:41.260 --> 00:25:45.260 and his ability to get help on those days. 229 00:25:45.260 --> 00:25:50.940 And finally, he must speculate on what the price of his crop is going to be when he markets 230 00:25:50.940 --> 00:25:56.420 it or at what day or price to sell for future delivery. 231 00:25:56.420 --> 00:26:02.700 And even in deciding how much acreage to plant to wheat or corn or peanuts, he must guess 232 00:26:02.700 --> 00:26:08.580 what other farmers are going to plant and how much they are going to harvest. 233 00:26:08.580 --> 00:26:15.520 It is one speculation after another, and he and every entrepreneur in every line must 234 00:26:15.520 --> 00:26:21.380 act in relation to some guess regarding the actions of other entrepreneurs. 235 00:26:21.380 --> 00:26:28.800 When all this is kept in mind, Keynes's attack on speculation begins to look pretty silly. 236 00:26:28.800 --> 00:26:33.300 His contrast between speculation and enterprise is false. 237 00:26:33.300 --> 00:26:39.660 If he is merely attacking bad speculation, then it is bad by definition. 238 00:26:39.660 --> 00:26:45.260 But intelligent speculation, as economists and market analysts have pointed out over 239 00:26:45.260 --> 00:26:51.960 and over, mitigates fluctuations, broadens markets, and increases production of the types 240 00:26:51.960 --> 00:26:56.620 of goods that consumers are most likely to want. 241 00:26:56.620 --> 00:27:03.300 speculation is an indispensable and inherent part of intelligent production. 242 00:27:03.300 --> 00:27:05.780 But Keynes deplores human freedom. 243 00:27:05.780 --> 00:27:12.820 He seems to deplore practically all the financial progress of the last two centuries. 244 00:27:12.820 --> 00:27:17.740 Speculators may do no harm as bubbles on a steady stream of enterprise, but the position 245 00:27:17.740 --> 00:27:23.660 is serious when enterprise becomes a bubble on a whirlpool of speculation. 246 00:27:23.660 --> 00:27:28.020 When the capital development of a country becomes a by-product of the activities of 247 00:27:28.020 --> 00:27:32.140 a casino, the job is likely to be ill done. 248 00:27:32.140 --> 00:27:37.920 The measure of success attained by Wall Street, regarded as an institution of which the proper 249 00:27:37.920 --> 00:27:43.920 social purpose is to direct new investment into the most profitable channels in terms 250 00:27:43.920 --> 00:27:50.660 of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire 251 00:27:50.660 --> 00:27:51.660 capitalism. 252 00:27:51.660 --> 00:27:54.160 159. 253 00:27:54.160 --> 00:28:00.600 This tirade, which treats speculation as merely a synonym for gambling, reflects the prejudices 254 00:28:00.600 --> 00:28:02.740 of the man in the street. 255 00:28:02.740 --> 00:28:07.140 The difference between gambling and speculation is clear. 256 00:28:07.140 --> 00:28:11.940 In gambling, the risks are arbitrarily invented or created. 257 00:28:11.940 --> 00:28:17.980 In speculation, the risks already exist, and somebody has to bear them. 258 00:28:17.980 --> 00:28:24.780 In gambling, one man wins $1,000 and another loses it, depending on whether a ball falls 259 00:28:24.780 --> 00:28:33.340 into an odd or even number on a roulette wheel or on which horse comes in first on a racetrack. 260 00:28:33.340 --> 00:28:38.820 But the wheel could be spun and the race could be run without the betting, without either 261 00:28:38.820 --> 00:28:40.860 losses or gains. 262 00:28:40.860 --> 00:28:46.600 The world would probably be richer rather than poorer if gambling casinos and racetracks 263 00:28:46.600 --> 00:28:53.360 did not exist at all, but it is not so with the great organized exchanges, either for 264 00:28:53.360 --> 00:29:00.320 commodities or for securities. If these did not exist, the farmer who raises wheat would 265 00:29:00.320 --> 00:29:06.360 have to speculate on the future price of wheat, but as they do exist, the farmer or miller 266 00:29:06.360 --> 00:29:12.600 who does not wish to assume this risk can hedge, so passing the risk on to a professional 267 00:29:12.600 --> 00:29:37.600 and Professional Speculator. Similarly, a corporation manager who knows how to make air conditioners but does not wish personally to assume all the financial risks involved from the vicissitudes of competition and of changing market conditions for air conditioners may offer stock on the market and let investors and professional speculators assume those financial risks. 268 00:29:37.600 --> 00:29:43.920 Thus, each job is done by a specialist in that job, and is therefore likely to be better 269 00:29:43.920 --> 00:29:50.240 done than if either the producer or the speculator tried to do both jobs. 270 00:29:50.240 --> 00:29:55.760 The market consisting of human beings, unable to foresee the future with certainty, will 271 00:29:55.760 --> 00:30:01.720 make mistakes, and some of them, in retrospect, will look like incredible mistakes. 272 00:30:01.720 --> 00:30:08.440 Yet Wall Street, notwithstanding its academic and political detractors, can be claimed as 273 00:30:08.440 --> 00:30:13.320 one of the outstanding triumphs of laissez-faire capitalism. 274 00:30:13.320 --> 00:30:16.000 The results speak for themselves. 275 00:30:16.000 --> 00:30:21.680 The United States has achieved the greatest volume of investment, the greatest capitalistic 276 00:30:21.680 --> 00:30:28.500 development, the greatest volume of production, the greatest economy of manpower, the highest 277 00:30:28.500 --> 00:30:34.740 Standard of Living that the world has ever known, and it has been able to do this in 278 00:30:34.740 --> 00:30:41.980 an important degree precisely because of the help rendered by the marvelous financial organization 279 00:30:41.980 --> 00:30:46.260 centered in Wall Street and not in spite of it. 280 00:30:46.260 --> 00:30:51.220 Surely it should have struck Keynes and his followers as worthy of notice that the country 281 00:30:51.220 --> 00:30:57.160 with the greatest gambling casinos and the greatest liquidity was also the country with 282 00:30:57.160 --> 00:31:03.360 with the World's Greatest Capital Development and the Highest Average Standard of Living. 283 00:31:03.360 --> 00:31:09.280 But Keynes carries his hostility to freedom to the point where he suggests the introduction 284 00:31:09.280 --> 00:31:16.240 of a substantial government transfer tax on all transactions as the most serviceable reform 285 00:31:16.240 --> 00:31:17.680 available. 286 00:31:17.680 --> 00:31:21.660 Page 160 Continuing, he declares, 287 00:31:21.660 --> 00:31:27.260 The spectacle of modern investment markets has sometimes moved me towards the conclusion 288 00:31:27.260 --> 00:31:33.020 that to make the purchase of an investment permanent and indissoluble, like marriage, 289 00:31:33.020 --> 00:31:39.380 except by reason of death or other grave cause, might be a useful remedy for our contemporary 290 00:31:39.380 --> 00:31:40.740 evils. 291 00:31:40.740 --> 00:31:42.700 Page 160. 292 00:31:42.700 --> 00:31:49.880 He draws back from this totalitarian suggestion for a moment, only to work himself up again. 293 00:31:49.880 --> 00:31:56.000 So long as it is open to the individual to employ his wealth in hoarding or lending money, 294 00:31:56.000 --> 00:32:02.560 the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive. 295 00:32:02.560 --> 00:32:04.600 Page 160. 296 00:32:04.600 --> 00:32:11.560 The only radical cure for the crises of confidence would be to allow the individual no choice 297 00:32:11.560 --> 00:32:17.960 between consuming his income and ordering the production of a specific capital asset. 298 00:32:17.960 --> 00:32:24.920 161, for people don't know what they are doing anyway. 299 00:32:24.920 --> 00:32:30.880 Most probably of our decisions to do something positive can only be taken as a result of 300 00:32:30.880 --> 00:32:37.840 animal spirits, of a spontaneous urge to action rather than inaction, and not as the outcome 301 00:32:37.840 --> 00:32:45.060 of a weighted average of quantitative benefits multiplied by quantitative probabilities. 302 00:32:45.060 --> 00:32:50.780 Mises only pretends to itself to be mainly actuated by the statements in its own prospectus 303 00:32:50.780 --> 00:32:59.960 p. 161-162 Free private investment depends upon the nerves 304 00:32:59.960 --> 00:33:08.900 and hysteria and even the digestions of private investors, p. 162, on whim or sentiment or 305 00:33:08.900 --> 00:33:12.260 chance, p. 163. 306 00:33:12.260 --> 00:33:14.720 And what is all this leading up to? 307 00:33:14.720 --> 00:33:19.620 The denouement comes in the final paragraph of the chapter. 308 00:33:19.620 --> 00:33:26.320 For my own part, I am now somewhat skeptical of the success of a merely monetary policy 309 00:33:26.320 --> 00:33:29.800 directed towards influencing the rate of interest. 310 00:33:29.800 --> 00:33:35.920 I expect to see the State, which is in a position to calculate the marginal efficiency of capital 311 00:33:35.920 --> 00:33:42.080 goods on long views and on the basis of the general social advantage, taking an ever greater 312 00:33:42.080 --> 00:33:46.840 responsibility for directly organizing investment. 313 00:33:46.840 --> 00:33:51.700 Page 164 So there you have it. The people who have 314 00:33:51.700 --> 00:33:58.860 earned money are too short-sighted, hysterical, rapacious and idiotic to be trusted to invest 315 00:33:58.860 --> 00:34:05.400 in themselves. The money must be seized from them by the politicians who will invest it 316 00:34:05.400 --> 00:34:12.200 with almost perfect foresight and complete disinterestedness, as illustrated, for example, 317 00:34:12.200 --> 00:34:15.700 by the Economic Planners of Soviet Russia. 318 00:34:15.700 --> 00:34:21.160 For people who are risking their own money will of course risk it foolishly and recklessly, 319 00:34:21.160 --> 00:34:27.120 whereas politicians and bureaucrats who are risking other people's money will do so only 320 00:34:27.120 --> 00:34:32.040 with the greatest care and after long and profound study. 321 00:34:32.040 --> 00:34:37.960 Naturally, the businessmen who have earned money have shown that they have no foresight, 322 00:34:37.960 --> 00:34:43.840 The politicians who haven't earned the money will exhibit almost perfect foresight. 323 00:34:43.840 --> 00:34:48.920 The businessmen who are seeking to make cheaper and better than their competitors the goods 324 00:34:48.920 --> 00:34:55.440 that consumers wish and whose success depends upon the degree to which they satisfy consumers 325 00:34:55.440 --> 00:35:00.140 will of course have no concern for the general social advantage. 326 00:35:00.140 --> 00:35:05.760 But the politicians who keep themselves in power by conciliating pressure groups will 327 00:35:05.760 --> 00:35:11.280 will of course have only concern for the general social advantage. 328 00:35:11.280 --> 00:35:17.300 They will not dissipate the money for hair-brained peanut schemes in East Africa, or for crop 329 00:35:17.300 --> 00:35:23.960 supports that keep sub-marginal farmers in business and sub-marginal acreage in cultivation, 330 00:35:23.960 --> 00:35:30.960 or to build showy dams and hydroelectric plants that cannot pay their way but can swing votes 331 00:35:30.960 --> 00:35:36.880 in the districts where they are built, or to set up reconstruction finance corporations 332 00:35:36.880 --> 00:35:42.360 or small business administrations to make loans to projects in which nobody will risk 333 00:35:42.360 --> 00:35:44.320 his own money. 334 00:35:44.320 --> 00:35:49.680 There will never be even a hint of bribery or corruption or the gift of a mink coat to 335 00:35:49.680 --> 00:35:53.960 a minor official by the beneficiary of the loan. 336 00:35:53.960 --> 00:35:57.760 This is the glorious vista that Keynes unveils. 337 00:35:57.760 --> 00:36:00.200 This is The New Economics.