Keynes’s Analysis of the Stock Market and Identifying the Related Policy Conclusions He Reaches.

Topics: Stock market, Capitalism, Keynesian economics Pages: 6 (2013 words) Published: February 17, 2013
‘Keynes’s analysis in Chapter 12 of the General Theory of Employment, Interest and Money suggests that capitalism is inherently unstable due to its financial structure’. Discuss outlining Keynes’s analysis of the stock market and identifying the related policy conclusions he reaches.

In Chapter 12 of the General Theory of Employment, John Maynard Keynes focused on examining the stock market and how it functions, in the sense of its structure and how it is affected by the behavior of investors because he believed the behavior of the stock market affects the aggregate demand, hence the rest of the economic system. He is most interested in the fluctuations of the rates of investments in the stock market that consequently affect the purchase of physical investment. Keynes believes that these fluctuations in the financial structure render capitalism an unstable system. He examined the determinants of the core fluctuations in the stock market which cause the aggregate demand and the economic situation to waver. Keynes also provided policies that could regulate these variations in the stock market, and hence the capitalist system.

Keynes believed the Stock Market was key to determining the position of the economy. Since aggregate demand determined the position, and the former was most heavily influenced by the changes within the stock market, Keynes deduced that it was the fluctuations in the stock market that caused variations in the economy, destabilizing the capitalist system. Keynes held a macroeconomic view against the conventional view of ‘self-righting tendencies’ within the society; he believed that the capitalist society can get ‘stuck’. To understand the fluctuations of the stock market, Keynes explains the concept of fundamental uncertainty. Conventional economists, as Keynes believes, ‘fit’ uncertainty into their theories. He does not see that as appropriate as it is not possible to mathematically calculate uncertainty for certain social aspects. In Keynes, Knowledge and Uncertainty, Lawson states that classical economists disagree with Keynes, since he was unable to provide a quantitative or statistical analysis of the uncertainty that occurs. Lawson however agrees with Keynes as he too believes it is not possible to ‘calculate’ uncertainty and Keynes has provided powerful theory to explain and support his claims. Keynes, however, firmly believes that for example, probability distributions on rate of interest cannot be placed for 30 years’ time. This occurs because expectations are based on ‘existing facts’ and ‘future events’, neither of which can be calculated with full certainty. Hence long-term expectation formation is based on confident decisions as well as the state of confident decisions. Keynes states: “The state of confidence is relevant because it is one of the major factors determining the former [the schedule of marginal efficiency of capital], which is the same thing as the investment-demand schedule” (1936, p149). Rational human beings prefer to make decisions based on correct information. However no such information is available as there is always new information emerging which causes a lack of perfect of information to base expectations on, creating what Keynes terms as fundamental uncertainty. Lawson agrees with the rational expectation hypothesis that Keynes proposes, despite his counter-argument on his statistical evaluation theory.

The Stock Market revalues investments on a daily basis allowing investors to change decisions: When Stock Market prices are high, entrepreneurs invest in their businesses so that it can be sold on the Stock Market for a profit; At low rates, it is more profitable to simply purchase a business that is at a lower price than what it would cost to set up a new one. Keynes describes the result of this as “Investments which are “fixed” for the community are thus made “liquid” for the individual.” (1936, p153). These fluctuations in the...

Bibliography: 1. Keynes, J. M, 1936, The General Theory of Employment, Interest and Money. Reprinted as The Collected Writings of John Maynard Keynes: The General Theory, Royal Economic Society, Vol VII, Macmillan, London. Chapter 12.
2. Lawson, T, 1995, ‘Expectations and Economics’ in Dow, S and Hillard, J. eds, Keynes, Knowledge and Uncertainty, Edward Elgar, Aldershot.
3. Peukert, H, 2011, ‘Dysfunctional aspects of contemporary financial markets: diagnosis and prescription’, European Journal of Law and Economics
4. Nichols, Mark W., and Michael J. Radzicki. "An Agent-Based Model of Behavior in “Beauty Contest” Games." UNR Joint Economics Working Paper Series. (2007): 1-32. Web. 28 Dec. 2011. .
5. Wray, L. Randall. "The Financial Crisis Viewed from the Perspective of the 'Social Costs ' Theory." Working Papers Series. (2011): n. page. Web. 20 Dec. 2011. .
6. Haque, Faizul, Thankom Arun, and Colin Kirkpatrick. "Corporate Governance and Capital Markets: A Conceptual Framework." Corporate Ownership and Control. 5.2 (2008): n. page. Web. 11 Jan. 2012. .
7. Amir, Munaf, Diana Damyanova, Mark W. Nichols, Michael J. Radzicki, and Esra Unluaslan. "An Agent-Based Model of Behavior in “Beauty Contest” Games." Meeting of the Association for Institutional Thought - . Worcester Polytechnic Institute. Phoenix. 2006. Address.
8. Hoy, Melanie B. "Socialization of Investment."International Encyclopedia of Social Sciences. 2. (2008): 650-651. Print. .
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