At 2:14 PM 4/16/96, Gary Dymski wrote: >This suggestion comes in Keynes' book which is, by all accounts, dripping >with suggestions about the relationships of the financial and real. Doug >always comments sensibly on the economy, and I know he doesn't want to make >the same blunder in theory as do some of our neoclassical colleagues -- that >is, to cook Keynes down to a single formula. The most egregious example of >this approach is in the "Keynes effect" that has been discussed in "modern >macro" (see Blanchard and Fischer). Thanks for calling me a sensible commentator, but I don't intend to cook JMK down to a single nostrum at all. There is no doubt that financial markets are mad; there is no doubt that financial structure matters; but, having made the point that S and I are done by two different sets of people, JMK and lots of PKs then seemed to ignore the distinction. Finance matters because of access to credit or its lack, and because interest payments matter for cash flow and cash flow for investment - but the case that financial market volatility influences real investment is, as they say in the Italian courts, not proved. You often hear similar things about FX volatility - that purely speculative activity depresses real activity. How do we know this? Growth in trade volume has been consistently outstripping growth incomes for most of the last 50 years - both the Bretton Woods era *and* the floating era. Paul Davidson (who isn't here on PEN-L) seems to blame many of our economic ills on the breakdown of Bretton Woods, but 1) the collapse of BW seems as much a symptom as a cause, and 2) I don't see the mechanism of this supposed malign influence. >I too don't specifically remember the Vishny et al paper you cite, but I >know the work; that is, asymmetric information/game theoretic modelling of >principal-agent problems in ownership/credit markets. It's a purely empirical work, none of those fancy models at all. In other words, something I can understand, which I can't say for Stiglitz, whom I find completely incomprehensible. At 6:23 AM 4/17/96, Ted Schmidt Economics & Finance <[EMAIL PROTECTED] wrote:> >Doug, did you try re-reading chapter 12? If the q theory is supposed to "play >such an important role in the GT," why would the master spend half a paragraph >on it? Well, yes, I've read the chapter many times, and I just read it again this morning. It is unquestionably the best thing ever written on investment markets. But the only reason people outside those markets should care about the chapter's analysis is if market psychology influences real investment. That half a paragraph is precisely what makes that connection. "[C]ertain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than by the genuine expectations of the professional entrepreneur. How then are these highly significant daily, even hourly, revaluations of existing invesments carried out in practice?" Q theory is a formalization of Keynes's argument. Market ideologues want to make investment more responsive to stock market signals, which would be a disaster for all the reasons that Keynes shows. But the link now is very very tenuous. By the way, Toni Negri makes the argument that when Keynes was talking about expectations and sentiment he was really talking about politics - that fatcats were seriously worried about the collapse of capitalism and the more than somewhat comprehensive socialization of investment. That's a very different story from the kind of sentiment and uncertainty we talk about today. In normal times, quantifiable risk rather than radical uncertainty prevails. Doug -- Doug Henwood Left Business Observer 250 W 85 St New York NY 10024-3217 USA +1-212-874-4020 voice +1-212-874-3137 fax email: <[EMAIL PROTECTED]> web: <http://www.panix.com/~dhenwood/LBO_home.html>
