Keynes on "'psychological' poverty"

[Ted Winslow <winslow@xxxxxxxx>]

The psychological premises I'm attributing to Keynes in my interpretation
of his treatment of conventional expectations are also found in his
treatment of the two other "fundamental psychological factors" underpinning
his economics: "the psychological attitude to liquidity" and "the
psychological propensity to consume."

In the case of the latter he makes a claim which I suspect remains relevant
to analyzing the real consequences of stock market fluctuations.

In analyzing the real consequences of the stock market collapse of 1929, he
claims that "the 'psychological' poverty which the collapse of paper values
brought with it probably increased saving." (CW VI, p. 176)

He then goes on to draw from this a "generalisation of permanent value"
respecting the "psychological" propensity to consume.

"The last point [re "'psychological' poverty"] is important, and we may
pause upon it for a moment.  It may suggest a generalisation of permanent
value.  A country is no richer when, for purposes of swopping titles to
prospective gain between one of its citizens and another, people choose to
value the prospects at twenty years' purchase, than when these are valued
at ten years' purchase; but the citizens, beyond question, _feel_ richer.
Who can doubt that a man is more likely to buy a new motor-car if his
investments have doubled in money value during the past year than if they
have been halved?  He feels far less necessity or obligation to save out of
his normal income, and his whole standard of expenditure is raised.  For
their paper profits and their savings out of current income are not kept by
most men (as perhaps they should be) in entirely separate compartments of
the mind.
     "In the actual example before us the market value of the securities
listed on the New York stock exchange rose from $70,000 million in April
1929 to $90,000 million in September 1929, and had fallen back to $64,000
million by December 1929.  The public cannot be expected to see their
nominal wealth increase by $20,000 million in six months and then lose
$26,000 million in three months, and to maintain precisely the same style
of life during the second period as during the first.  I conclude that they
are more likely to 'save' (in my sense of the word) when they are 'losing'
than when they are 'making' hundreds of millions of dollars a week - more
likely to refrain from new extravagances and to pay off the instalments of
their former purchases." CW VI, pp. 176-7

Ted


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