Julio Huato wrote:
Ted Winslow wrote:
So "mathematical abstractions" are limited
in their applicability by "internal
relations," the degree of limitation
depending on the degree to which "internal
relations" are relevant,.
Can you then exactly pinpoint your disagreement with using game theory
(a particular set of mathematical abstractions) to examine the
behavior of an economy under some abstract conditions?
You have not referred to anything *specific* to game theory. You have
only alluded to the general limitations of all (mathematical and
nonmathematical) abstractions.
As I said, if Keynes's account of the behaviour of liquidity
preference is realistic, the behaviour can't be represented by any
set of mathematical abstractions because of the relevance of internal
relations. The behaviour is also irrational in a way that's
inconsistent with representing it as any form of rational optimization.
Keynes treats the "individuality" dominant in capitalism as
expressing the intermal social relations that constitute capitalism -
as what Marx calls the "character mask" of those relations. He
"abstracts" from changes in these relations, i.e. he treats them as
sufficiently stable to be taken as "given" (his word). (His long run
project, however, is, like Marx's, to transform these relations so as
to make them coincide with the ideal "individuality" and the "ideal
social republic" such an individuality would create.)
He assumes this individuality is significantly irrational. He
claims the "main motive force of the economic machine" in capitalism
iinvolves "an intense appeal to the money=making and money-loving
instincts of individuals." This constitutes it as "a somewhat
disgusting morbidity, one of those semi-criminal, semi-pathological
propensities which one hands over with a shudder to the specialists
in mental disease."
This irrationality is embodied in "the three fundamental
psychological factors" of the General Theory: "the psychological
propensity to consume, the psychological attitude to liquidity and
the psychological expectation of future yield from capital-assets."
An explanation of interest rates in terms of the last two of these is
provided in the passage I quoted earlier.
“Why should anyone outside a lunatic asylum wish to use money as a
store of wealth?
"Because, partly on reasonable and partly on instinctive
grounds, our desire to hold money as a store of wealth is a barometer
of the degree of our distrust of our own calculations and conventions
concerning the future. Even though this feeling about money is
itself conventional or instinctive, it operates, so to speak, at a
deeper level of our motivation. It takes charge at the moments when
the higher, more precarious conventions have weakened. The
possession of actual money lulls our disquietude; and the premium
which we require to make us part with money is the measure of the
degree of our disquietude.” (vol. XIV, p. 116)
This implements a psychoanalytic understanding of the irrationality.
Understood in this way, capitalist "individuality" remains subject to
changes in its "identity" with changes in those relations not treated
as "given." Keynes elaborates these changes in identity in terms of
the psychoanalytic idea of a "psychological group" (the idea used to
formally define a "conventional judgment" in the third of his three
forecasting "conventions") and of "regression" (the idea underpinning
the role assigned to the "feeling about money" in the above
passage). So internal relations continue to be relevant to the
analysis in a way that rules out mathematical representation.
Keynes makes use of these ideas in his own approach to investment.
This doesn't involve rational forecasting of the rational behaviour
of others; it's rational forecasting of irrationality understood in
the above way, i.e. it's rational "speculation" where "speculation"
is defined, as Keynes defines it (vol. VII, p. 158), as "the activity
of forecasting the psychology of the market."
In the General Theory (vol. VII, pp 207-8), he claims the U.S. bond
market in 1932 was characterized by "a financial crisis or crisis of
liquidation" of the kind pointed to in the passage, a crisis "when
hardly anyone could be induced to part with holdings of money on any
reasonable terms."
Letters he wrote at the time indicate that he believed this created
an opportunity for practically certain "speculative" profit.
For example, in a July 7, 1932 letter to C.L. Baillieu he claims that
"the most striking feature of the immediate situation is the
extraordinary disparity between yields in London and yields in New
York of comparable securities. It seems to me quite impossible that
the present situation can long persist. And I should have supposed
it to be probable that the readjustment would be brought about by a
substantial rise in the prices of prime fixed-interest securities in
New York. The present may be the chance of a lifetime for the
purchase of the latter. Obviously everyone in New York is scared so
stiff as to be unable to move. But that may be the opportunity of
others away from any unsettling influence of the local atmosphere.
No serious risk can arise unless the existing financial system in
America is going to peg out altogether. I suppose that that is just
possible, but I cannot believe that it is probable." (vol. XII, p. 113)
In a subsequent letter on July 20, in language even more explicit
than the language of chap. 12 of the General Theory (vol. VII,
153-61), he describes the functioning of U.S. financial markets as
follows:
"It will not take much to bring about a reversal of sentiment in the
United States. For the moment their markets are dominated by insane
gambling to get in at the bottom, just as they were dominated in the
boom by insane gambling to get out only at the top. If one is
offered $20 for the price of $10, it may be foolish to refuse; but it
may not seem so, if the $20 is on offer at $8 a week later. Yet
positions of this kind - games of musical chairs in which all the
players but one will in the end fail to get a seat - which are not
based, and do not even pretend to be based, on intrinsic values and
long views, change suddenly." (vol. XII, pp. 120-1)
A March 1934 letter to Walter Case repeats this analysis.
"Unless the recovery plans break down completely and end in universal
disorder and discredit and fear, interest rates in America are almost
certain, sooner or later, to take the same course they [that] they
have over here. It seems to me that it must be right to back this
opinion, since, if this is wrong, all other forms of investment in
America, except possibly the flight of capital from the country, are
certain to turn out disastrously. It seems to me almost absurd to
suppose that an investment either in common stocks or in actual cash
can turn out well and that an investment in fixed-interest securities
of the second class can turn out badly. There are innumerable
instances of profits on that scale in this country during the last
two years on the most steady going securities. It is obvious,
looking back, that opportunities which offered profit out of all
proportion to possible loss were missed. My feeling is that this is
now the position in the United States. If you have any belief in
your own prospects at all, this strikes me as the outstanding
certainty." (vol. XII, p. 319)
Here he stresses the role of mistaken and irrational beliefs about
the determination of interest rates.
"The whole subject has, of course, many more ramifications than can
be discussed in a letter, but almost everyone who has any pretensions
to being a sound or orthodox thinker on financial problems in New
York probably has his brain stuffed with fallacies on this particular
matter. So there is an opportunity for anyone, if there is anyone,
who can think (or so it seems to me) scientifically straight on this
issue." (vol. XII, p. 320)
Ted
