Re: General Thery seminar

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Hugh,
     No.
     My reading of Keynes is that it is the "prospective
yield" that is changing, which just shifts all your curves.
"Prospective" refers to "expected," and Keynes well
understood that expectations of future yields can change
suddenly and without warning.
Barkley Rosser
-----Original Message-----
From: Hugh Whinfrey <whinfrey@xxxxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Date: Sunday, January 30, 2000 5:17 PM
Subject: Sv: General Thery seminar


>Barkley writes:
>
>
>>Hugh,
>>     I think that Keynes' downward-sloping curve
>>assumes fixed expectations.  If expectations change
>>as the capital stock changes, then the curve is shifting.
>>That can certainly happen during a speculative bubble.
>>Indeed, I'm sure that is how Keynes would view a
>>speculative bubble.
>>Barkley Rosser
>
>I've been playing with this on and off all weekend.  Here's
>what I get out of it:
>
>Definitions:
>
>1) "Prospective Yield" or "expectation of yield" as Keynes
>defines it at the start of Chapter 11 actually constitutes
>the series itself of returns expected (Q1, Q2, Q3...) - without
>the present value function applied to it.
>
>2)  The assumption of the downward-sloping
>curve, which is what I was originally questioning,
>implies that the expected yield, Qn, during any period
>n is a downward-sloping function of the capital
>stock at n=0.
>
>3) The "marginal efficiency of capital" for a given
>capital stock at n=0 is thus the "prospective yield"
>series discounted at that interest rate i which results
>in a value equal to the "supply price" at the margin
>for that given amount of capital stock.
>
>4) Systematically computing the present values of
>the "expected yield" series for a range of interest
>rates at a given capital stock, and repeating the
>procedure for a range of capital stock will result in
>a series of constant interest rate curves plotted
>on a graph with the present value of the "expected
>yield" on the vertical axis and the capital stock on
>the horizontal axis.
>
>Confirmation?:
>
>5) I understand your reply to me to mean that these
>'present value' curves, each with its own interest rate,
>all shift to the right - which gives a higher "marginal
>efficiency of capital" by virtue of the associated interest
>rates of these 'present value' curves being ordered from
>highest to lowest as one travels to the right.  It is then
>implied that the reason for the shift is found in changes
>occuring in the set of curves, one for each period,
>mentioned in #2 above.
>
>Conjecture:
>
>6) I would suggest however that there is another
>possibility to explain bubbles that might be
>consistent within this paradigm. Suppose 'unspecified'
>changes take place to some or all of the set of curves
>in #2, causing the 'present value' curves in #4 to not be
>lines at all, but rather a set of curves with a U-shaped
>wrinkle in them.  The "supply price" curve then intersects
>some of these 'present value' curves at least twice - one
>being the standard "fundamental" valuation and the other
>being a "bubble" valuation.
>
>Pecking at possible explanations:
>
>7) Look at the situation with employee stock options,
>which probably flatten the slope of the "supply price"
>curve, as well as shift it downwards in absolute terms.
>These expenses are actually being re-allocated to the
>aggregate "prospective yield" series, and could be
>the source of some of those 'unspecified' changes in #6.
>
>For what it's worth
>Hugh
>
>>-----Original Message-----
>>From: Hugh Whinfrey <econ@xxxxxxxxxxxx>
>>To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
>>Date: Wednesday, January 26, 2000 10:07 PM
>>Subject: Sv: General Thery seminar
>>
>>
>>>
>>>Paul Davidson writes:
>>>
>>>>The quick answer to Barkley is No, not in the way  the speculative
bubble
>>>>concept is discussed in the mainstream literature.  The term bubble
>>>>connotates that there exists some fundamentals that determine the future
>>>>spot prices (intrinsic values) of all liquid assets -- and in a "bubble"
>>>>episode occurs when their are  systemic price variations from these
>>>>intrinsic values.
>>>
>>><snip>
>>>
>>>>Any comments on Chapter 12?
>>>
>>>
>>>Something that immediatly bothers me here:
>>>
>>>
>>>>From Chapter 11, page 136:
>>>
>>>"If there is an increased investment in any given type of capital
>>>during any period of time, the marginal efficiency of that type of
>>>capital will diminish as the investment in it is increased, partly
>>>because the prospective yield will fall as the supply of that type of
>>>capital is increased, ..."
>>>
>>>It seems to me that this assumption is precisely what's being
>>>violated in the present situation in the US today.  Note that the
>>>underlying "marginal efficiency of capital" is based on "current
>>>expectations" and *not* hindsight.  The "prospective yield" as
>>>defined on page 135 poses *no requirement* that any measure
>>>of fundamentals be involved and simply takes "expectations"
>>>as a given, thus allowing the inclusion of the expectation of
>>>substantial speculative gains.  The intent of the definition
>>>seems moreover to purposefully be distancing itself from any
>>>attempt to limit such expectations to a realm other than what
>>>investors are in fact acting upon - i.e. if it's a casino, so be it.
>>>
>>>The fact is, the expectations of substantial speculative gains seem
>>>to be *increasing* with the addition of capital rather than *decreasing*
>>>as Keynes is assuming.  There is also a point where I think it is
>>>realistic to deem that acting upon highly unrealistic forecasts of
>>>profits in the long run is the equivalent to 'speculation'.
>>>
>>>So with the "marginal efficiency of capital" not behaving itself as
>>>Keynes has defined it, what implications does that have for the
>>>applicability of Chapter 12 to the present environment?
>>>
>>>Hugh
>>>
>>>(Sorry about my sudden de-lurking here, it's just that you've hit a
>>>couple of topics that are of particular interest to me.)
>>>
>>>
>>
>
>