Re: Query on an alleged JMK aphorism

[Ted Winslow <egwinslow@xxxxxxxxxx>]

Michael Perelman wrote:

> Jamie, I have also posed the question and have received no answer,
> either
> here or on the history of thought list.
>
> On Mon, Oct 27, 2003 at 10:03:56PM -0600, James K. Galbraith wrote:
> > Pkt friends,   I have a question for someone with deep textual
> > knowledge or
> > a lot of free time...
> >
> > The aphorism "Markets can remain irrational longer than you can remain
> > solvent"  is attributed to Keynes all over the Internet.  However, I
> > had
> > never heard it before today, and the style of the sentence seems
> > wrong to
> > me.  Several sources say that it is "misattributed" to Keynes, or
> > anyway of
> > doubtful authenticity. And I have not located any actual reference.
> >
> > Can anyone advise on whether this is or is not an authentic Keynes
> > remark?
> >
> > Thanks.  James Galbraith

I've not come across this sentence myself.

I think it's to some degree inconsistent with what can be established
from other texts about Keynes's understanding of the relation between
irrationality and financial markets.  In particular, he regarded these
markets as dominated by irrationality so there was no possibility of
their returning to rationality.  He assumed that:

"the vast majority of those who are concerned with the buying and
selling of securities know almost nothing whatever about what they are
doing.  They do not possess even the rudiments of what is required for
a valid judgment, and are the prey of hopes and fears easily aroused by
transient events and as easily dispelled.  This is one of the odd
characteristics of the capitalist system under which we live, which,
when we are dealing with the real world, is not to be overlooked."
(VI, p. 323)

This means that "conventional valuations" in such markets are "the
outcome of the mass psychology of a large number of ignorant
individuals."  (VII, p. 154)

Dominance by irrationality is consistent with rational prediction of
future "conventional valuations," however, because the irrationality
has a relatively stable structure knowable by persons not themselves
victims of it i.e. by the "wisest" market participants who make money
by "aping unreason proleptically."  This makes the rational investment
policy a policy based on rational "speculation" i.e. a policy based on
rationally "forecasting the psychology of the market."

Keynes did change his mind through time about how best to do this.  In
particular, he moved from what he called a "credit cycling" to an
"intrinsic value" policy.  The former is based is based on attempting
to predict shifts in liquidity preference; the latter on predicting
future changes in the "news," e.g. changes in current profits, to which
the irrational psychology underpinning "conventional valuations" will
react in a predictable way.  The aphorism might be read as referring to
credit cycling, since the former required predicting the _timing_ of a
change in "conventional valuation," something Keynes found impossibly
difficult (XII, pp. 100-1).

"One can put the distinction like this: By credit cycling I mean buying
and selling according as you think shares cheap in relation to money.
By my alternative I mean acting according as you think them cheap in
relation to other shares, with particular reference to the
possibilities of large relative appreciation; - which means buying them
on their intrinsic value when, for one reason or another, they are
unfashionable or appear very vulnerable on a short view.  One may be,
and no doubt is, inclined to be too slow to sell one's pets after they
have had most of their rise.  But looking back I don't blame myself
much on this score; - it would have been easy to lose a great deal more
by selling them too soon."  (XII, p. 101)

"The whole thing is really summed up in something that I said in the
original version of my memorandum.  It is a much safer and easier way
in the long run by which to make investment profits to buy £1 at 15s.
than to sell £1 at 15s. in the hope of repurchasing them at 12s.6d."
(XII, p. 101)

"One is doing a fundamentally sound thing, that is to say, backing
intrinsic values, enormously in excess of the market price, which at
some utterly unpredictable date will in due course bring the ship
home." p. 77

The intrinsic value policy was also a policy of rational "speculation,"
however. Here, for instance, is how he described a specific instance of
its operation in a 10 April 1940 letter to F.C. Scott:

"very few American investors buy any stock for the sake of something
which is going to happen more than six months hence, even though its
probability is exceedingly high; and it is out of taking advantage of
this psychological peculiarity of theirs that most money is made."
(XII, p. 78)

Though the irrationality is relatively stable, it's nature changes
through time (this is why economics is not a subject like physics -
Newtonian or Eisteinian).  The regularities observable in human
behaviour change with changes in "human nature."  A policy of rational
"speculation" has to take this into account.

"the prejudice of investors and investing institutions in favour of
bonds as being 'safe' and against common stocks as having, even the
best of them, a 'speculative' flavour, has led to a relative
over-valuation of bonds and an under-valuation of common stocks.
	"It is dangerous, however, to apply to the future inductive arguments
based on past experience, unless one can distinguish the broad reasons
why past experience was what it was.  Otherwise there is a danger of
expecting results in the future which could only follow from the
special conditions which have existed in the United States during the
past fifty years."  (XII, pp. 247-8)

Ted