John Maynard Keynes · Economics
Keynes’s insight that economic life is ruled not by cool calculation but by psychology, confidence, and herd instinct in the face of an unknowable future.
Investment means committing money now for returns that will come years, even decades, into the future. But the future, Keynes insisted, is not merely risky (where you can calculate odds) - it is genuinely uncertain, in a way no probability can capture. Will there be a war in twenty years? What will technology look like? What will tastes be? We simply do not know, and cannot know. So the cool rational calculation that classical economics assumed - weighing all future outcomes by their probabilities - is, for most real investment decisions, impossible. There is no rational basis to compute.
Keynes, himself a successful speculator, gave a brilliant picture of financial markets. They are like a newspaper beauty contest, he said, where readers win by picking not the face they find prettiest, but the face they think most other readers will pick. So everyone is really trying to guess what everyone else will guess - and to anticipate what others anticipate, in an infinite regress. Stock prices, then, reflect not the real underlying value of companies but the swirling mass psychology of what speculators think other speculators will think. Markets become engines of crowd opinion, prone to bubbles and crashes.
If the future is genuinely uncertain and cannot be calculated, how do people manage to act at all - to invest, to value a company, to make decisions whose consequences stretch decades ahead? Keynes’s answer, beyond ‘animal spirits,’ is that we fall back on convention: a set of tacit rules for coping with the unknowable that let us behave as if we knew far more than we do. The central convention is to assume that the present state of affairs will continue indefinitely, except insofar as we have specific reason to expect a change. We project the present into the future, treat current conditions and recent trends as the best guide to what is coming, and assume that the existing valuation of things - the current stock price, the current state of business - embodies a correct judgement that will persist unless something definite disturbs it. This convention is not irrational; it is a reasonable way of coping when genuine calculation is impossible. It lets us act despite our ignorance, by anchoring our decisions to something concrete.
This is the opening of the lesson. The rest — the dialogue, the primary source, and the recall — is in the app.
You learned that Keynes saw the future as fundamentally uncertain and investment as driven by ‘animal spirits.’ Explain why he thought rational calculation cannot fully guide investment, in your own words.
Leads to Robert Shiller.
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