Sunday, August 9, 2009

Keynes Hated Stock Markets


I am currently working on a lengthy piece regarding John Maynard Keynes and his most famous work, The General Theory of Employment Interest and Money. A lot is seemingly attributed to the man and his supposed views. After reading what he actually wrote, however, one may have a distinctly different view of what Keynes actually stood for.

For now, I want to highlight some surprising ideas that Keynes held in regards to stock markets. You are not likely to see these quotes highlighted by modern economists. The following passages, highlighted in bold text, are taken from The General Theory of Employment Interest and Money, which you can read in its entirety here.

Chapter 12, Section V:
Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future.

This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of yearsFor it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs - a pastime in which he is victor who says Snap neither too soon or too late, who passes the Old Maid to his neighbor before the game is over, who secures for himself when the music stops.

Keynes' words seem even more relevant today than they did in his day. Stock market yields are now far below their historical average. Dividends, or the expected increase in dividends, are practically ignored by stock analysts. Also, when is the last time you heard an economist note the downsides to liquidity?

Chapter 12, Footnote 5:
It is said that, when Wall Street is active, at least half of the purchases or sales of investments are entered upon with an intention on the part of the speculator to reverse them the same day. This is often true of the commodity exchanges also.

Keynes would surely be appalled by today's market activity. We are now a world of high frequency trading between computers that hold positions for a fraction of a second at a time.

Chapter 12, Section VI
Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laisserz-faire capitalism – which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object. These tendencies are a scarcely avoidable outcome of our having successfully organized “liquid” investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive...The introduction of a substantial Government transfer tax on all [stock market] transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.

The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils.

Let's start from the beginning of this passage. Keynes asserts that when Wall Street speculation becomes the driver for the economy, and not the other way around, the economy will suffer dire consequences. I think this is a pretty concise way to describe what is happening today and what the results have been and are likely to be going forward.

Keynes then declares that Wall Street is not a great example of free market capitalism and that the primary purpose of Wall Street is not, contrary to popular belief, to allocate capital efficiently. Name me one well known economist, even amongst the so-called Keynesian economists, who professes this view.

Finally, Keynes advised an increase in the transaction costs of stock trading in order to curb trading by the general public and in general, speculation in favor of investment. Keynes would certainly be against the much lower transaction costs present today compared to his time. He would also be appalled by the high level of speculation taking place by the public. The idea of a 401k would probably be absurd to Keynes.

In essence, Keynes was against the workings of the stock markets of his day and, based on his specific grievances, would be against the workings of modern stock markets, only more so. For all of the lavish praise heaped upon Keynes and his most famous work, you would think that maybe one well known economist would share Keynes' views on stock markets or at least quote some of the passages mentioned here.

Stay tuned for upcoming posts for more thoughts on John Maynard Keynes.
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