Re: Uncertainty and Liquidity Preference

["f.c. maclachlan" <cameron0@xxxxxxxxxxxxx>]

thank you for that detailed response. still, i'm not convinced that keynes was,
in any way, an *advocate* of inflation.  but maybe that's not what you were
suggesting.

You're quoting from  _A Tract on Monetary Reform_  about which Milton Friedman
says:

" I am one of a small minority of professional economists who regard his Tract
on Monetary Reform (1923), not the General Theory, as his best book in
economics. Even after sixty-five years, it is not only well worth reading but
continues to have a major influence on economic policy."
http://www.zolatimes.com/v3.10/keynes.htm

That, in itself, should be a clue that Keynes wasn't advocating inflation
there.

Skidelsky concurs:
"Keynes concluded chapter 1 [of A Tract on Monetary Reform] with a famous,
carefully nuanced, passage: 'Thus inflation is unjust and deflation
inexpedient.  Of the two perhaps deflation is, if we rule out exaggerated
inflations such as that of Germany, the worse; because it is worse, in an
impoverished world, to provoke unemployment than to disappoint the _rentier_.'
The important qualifying phrase 'in an impoverished world' has been ignored by
those who claim this passage as evidence of Keynes's indifference to
inflation.  In fact, as he makes clear, 'it is not necessary that we should
weigh one evil against the other.  It is easier to agree that both are evils to
be shunned.'" [1992, 155-156]

This is worth remembering given Krugman's recommendation of  inflation for
Japan:
"This belief in the importance of price stability is not based on standard
economic models--on the contrary, the usual textbook theory [by which he means
is this: http://web.mit.edu/krugman/www/japtrap.html], when applied to Japan's
unusual circumstances, points directly to inflation as the natural solution."
[1999, 79]

Getting back to your original question ... I think Chip Poirot's example of
LTCM is apt.  They got into trouble because of a rush to Treasurys by nervous
investors, i.e., because of an increase in the investors' desire for liquidity
(in Shackle's more general sense) far beyond what was expected, given past
experience.

Ted Winslow wrote:

> 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
> Division of Social Science           VOICE: (416) 736-5054
> York University                      FAX: (416) 736-5615
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==========================================f.c. maclachlan, manhattan college
voice: 718.862.7466   fax: 718.862.8032
http://www.manhattan.edu/business/ecofin/fmaclach/fiona.html