Re: Uncertainty and Liquidity Preference

[Ted Winslow <winslow@xxxxxxxx>]

Paul wrote:

>Why don't you read Davidson, post keynesian macroeconomic theory,
>especially pp. 52-56 -- wehivch is an explanation of Chapter 16 of the
>general theory --- which draws the reason for the distinction of physical
>real capital from liquid financial assets (including money) and the
>difference between the motive to save (i.e., not wishing to commit one's
>current claims on the product of industry today [via spot cotracts] or at a
>speciic date in the future [ via future contracts] --cf.  first sentence on
>page 210 of GT --)  and Chapter 6 of my POST KEYNESIAN MACROECONOMIC THEORY
>BOOK .  That should answer your query.
>

I've read you too Paul.  I'll read you again more carefully.  My
recollection is that you don't answer the question either, however.  The
reference to Chap. 16 of the GT doesn't help me.

I don't think Keynes treats liquidity preference as a rational way of
dealing with fundamental uncertainty.  Like conventional forecasting
practices, liquidity preference in this context is a way of avoiding the
anxiety provoked by _consciousness_ of fundamental uncertainty.
Conventional forecasting practices work by suppressing this consciousness;
they enable us to "hide from ourselves how little we foresee."

The "feeling about money" that enables anxiety to be avoided by holding
money is, like these forecasting practices, "itself conventional or
instinctive" but "operates, so to speak, at a deeper level of our
motivation". "It takes charge at the moments when the higher, more
precarious conventions have weakened.  The possession of actual money lulls
our disquietude; and the premium which we require to make us part with
money is the measure of the degree of our disquietude."  (XIV, p. 116)

Fundamental uncertainty is invariant; what varies is _consciousness_ of
fundamental uncertainty.  For the psychological reason just pointed to,
liquidity preference varies with this consciousness.

The discussion in Chap. 16 is fully consistent with this.  It treats the
marginal efficiency of capital as the product of conventional forecasting
practices, i.e. as the outcome of practices associated not with rational
"faith" in the "optimistic hypothesis" but with an irrational need to "hide
from ourselves how little we foresee."  Thus "the expectation of future
consumption is so largely based on current experience of present
consumption that a reduction in the latter is likely to depress the former,
with the result that the act of saving will not merely depress the price of
consumption-goods and leave the marginal efficiency of existing capital
unaffected, but may actually tend to depress the latter also". (VII, p. 210)

Another difficulty with basing an interpretation of the relation between
uncertainty and liquidity preference on the premise that individuals are
always fully conscious of fundamental uncertainty and act rationally in
relation to it is raised by Keynes's claim in Chap. 16 that an "absurd"
idea about the effect of increased saving on investment - Say's law - is
"almost universal".  Moreover, "it is of this fallacy ['that current
investment is promoted by individual saving to the same extent as present
consumption is diminished'] that it is most difficult to disabuse men's
minds."  (VII, p. 211-2)  Why would sensible people be "most difficult to
disabuse" of an "absurd" idea?

Ted





Ted Winslow                          E-MAIL: WINSLOW@xxxxxxxx
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