Re: Uncertainty and Liquidity Preference

[Ted Winslow <winslow@xxxxxxxx>]

f.c. maclachlan wrote:

>do you have a citation for that?

IV, pp. 54-5 "The active and working elements in no community, ancient or
modern, will consent to hand over to the _rentier_ or bond-holding class
more than a certain proportion of the fruits of their work.  When the
piled-up debt demands more than a tolerable proportion, relief has usually
been sought in one or other of two out of the three possible methods."

The three are "repudiation", "currency deprectiation" and the "capital
levy".  Repudiation "as regards _internal_ debt" has to be "ruled out"
except "as the accompaniment of revolution".  The capital levy is "the
rational, the deliberate method" but it "provokes violent prejudice by
coming into conflict with the deep instincts by which the love of money
protects itself".

Though advocating it in the _Tract_, Keynes later (in evidence before The
Committee on National Debt and Taxation, 6 May 1925, XIX, Part 2, pp.
839-55) abandons it as a practical alternative because of the "violent
prejudice".

"In so far as its [the capital levy's] results would be worse than those of
any other new tax, I think that the ill consequences would be due to
psychological rather than to economic or technical causes (841)." "The
capital levy is extraordinarily disturbing in proportion to its magnitude -
far more so than any other tax.  You are insulting, by it, a set of very
strong irrational feelings in men (852)."  This leaves currency
depreciation as the only _practical_ method.

The GT , where Keynes has moved to a very different theory of inflation and
interest rates, contemplates the euthanasia of the rentier through the
steady fall of nominal rates of interest towards zero (VII, pp. 375-6).
The sixty and more years since have not done much to establish this as a
practical alternative.

In any event, my point doesn't depend on the practical certainty of holding
money for a long period of time being a losing proposition.  At best, the
long run consequences would be, like the long run consequences of investing
in productive physical assets, fundamentally uncertain.  Given this, what
rational basis is there for preferring liquidity as a long run way of
storing wealth?

>on liquidity preference, i'd recommend reading shackle, esp.
>Epistemics and Economics (1972) and Keynesian Kaleidics (1974).
>

I've read Shackle, but I don't see how he adequately answers the question
I'm asking.  For one thing, if I'm recalling his argument correctly, he
misses the fact since pointed out by Meek, that, according to Keynes, the
_rational_ method of dealing with fundamental uncertainty is "to allow
caprice to determine us and to waste no time on the debate."  (VIII, p. 32;
see also XXIX, p. 294)  Elsewhere (e.g. IX, p. xviii; XXVII, pp. 445-6)
Keynes adds to this acting on "faith" in the "optimistic hypothesis".

In the GT, he points to entrepreneurs who appear to deal with fundamental
uncertainty in this rational way but treats them largely as figures of
"former times".

"In former times, when enterprises were mainly owned by those who undertook
them or by their friends and associates, investment depended on a
sufficient supply of individuals of sanguine temperament who embarked on
business as a way of life, not really relying on a precise calculation of
prospective profit." (VII, p. 152)

Notice that rational entrepreneurs would deal with the invariant fact of
fundamental uncertainty not by holding money but by carrying on business as
"a way of life".

Ted


Ted Winslow                          E-MAIL: WINSLOW@xxxxxxxx
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