Re: Uncertainty and Liquidity Preference

[Paul Davidson <pdavidson@xxxxxxx>]

At 12:08 PM 7/13/99 +1000, you wrote:
>Paul has provided a comprehensive answer.
>
>This is just self defence:
>When I wrote that today is the best predictor of tomorrow that is my exact
meaning: today is Tuesday in Melbourne and tomorrow the weather and the
Australian economy won't be very different.  Neither I nor anyone else
knows exactly how different tomorrow will be, but experience teaches that,
whatever direction the changes take, they are likely to be small ones.
>

I call that a belief in  short-run inertia -- which seems reasonable in
normal times --- otherwise we would never be able to go to sleep.  Keynes
once wrote to Joan Robinson that you must not confuse uncertainty with
instability.  In "normal" times, the future may be uncertain but it is not
a danger to believe in inertia.

As I indicate in a forthcoming paper that I will be giving in CCambridge
University this coming September:

	In a letter dated 17 September 1936, Keynes (1973, p.137) admonished Joan
Robinson saying "You must not confuse instability with uncertainty.  It is
true that the future ...[is] uncertain but this does not mean that the
present ... is in a technical sense unstable". Market conditions will be
stable in normal times as long as market participants expect there are no
"surprises" in the near future.
	Abnormal times of instability can readily occur, however, when the market's
		"conventional valuation... is established as the outcome of the mass
psychology of a large number of ignorant individuals, [then it] is liable
to change violently as the result of a sudden fluctuation of opinion due to
factors which do not really make much difference to the prospective
yield... In abnormal times in particular, when the hypothesis of an
indefinite continuance of the existing state of affairs is less
plausible...the market will be subject to waves of optimistic and
pessimistic sentiment which are unreasoning and yet in a sense legitimate
where  no solid basis exists for reasonable calculation" (Keynes, 1936, p.
154).

Paul
Paul Davidson
Holly Chair of Excellence in Political Economy
Editor, JOURNAL OF POST KEYNESIAN ECONOMICS [JPKE]
Economics Department -- 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
email: Pdavidson@xxxxxxx;   phone: (423)974-4221;    fax: (423) 974-4601
http://econ.bus.utk.edu/Davidson.html