The future — something we know very little about

18 February, 2018 at 19:54 | Posted in Economics | 1 Comment

All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface.

check-your-assumptionsPerhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the marketplace, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.

I dare say that a classical economist would readily admit this. But, even so, I think he has overlooked the precise nature of the difference which his abstraction makes between theory and practice, and the character of the fallacies into which he is likely to be led.

John Maynard Keynes

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  1. “At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface.”

    Yes, the real risks are psychological, not conditioned on physical scarcity. The risk is that liquidity in financial markets will become psychologically constrained, and that will cause aggregate demand to weaken because those privileged few who benefit from the private expansion of money have an outsized effect on the real economy, when they go into a panicked money-hoarding mode and money dealers stop making markets. But we know how to fix it: the Fed becomes a money dealer …


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