Charles Brown asked:
> CB: Do markets fail because of psycho-pathology of investors ?
According to Keynes they do.
He distinguishes, however, between various kinds of "investors". One such distinction is between those responsible for investing in long- lived plant and equipment and those "concerned with the buying and selling of securities". Though he attributes significant psychopathology to both, he makes the degree greater on average in the latter.
"The vast majority of those who are concerned with the buying and selling of securities know almost nothing whatever about what they are doing. They do not possess even the rudiments of what is required for a valid judgment, and are the prey of hopes and fears easily aroused by transient events and as easily dispelled. This is one of the odd characteristics of the capitalist system under which we live, which, when we are dealing with the real world, is not to be overlooked." (Keynes, Collected Writings, vol. VI, p. 323)
The psychopathology at work in both cases is invoked to exlain liquidity crises.
"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." (Collected Writings, vol. XIV, p. 116)
The parallel with Marx's understanding of the capitalist "passions" is indicated by Marx's account of the same crises.
"Under conditions of advanced bourgeois production, when the commodity- owner has long since become a capitalist, knows his Adam Smith and smiles superciliously at the superstition that only gold and silver constitute money or that money is after all the absolute commodity as distinct from other commodities -- money then suddenly appears not as the medium of circulation but once more as the only adequate form of exchange-value, as a unique form of wealth just as it is regarded by the hoarder. The fact that money is the sole incarnation of wealth manifests itself in the actual devaluation and worthlessness of all physical wealth, and not in purely imaginary devaluation as for instance in the Monetary System. This particular phase of world market crises is known as monetary crisis. The summum bonum, the sole form of wealth for which people clamour at such times, is money, hard cash, and compared with it all other commodities -- just because they are use-values -- appear to be useless, mere baubles and toys, or as our Doctor Martin Luther says, mere ornament and gluttony. This sudden transformation of the credit system into a monetary system adds theoretical dismay to the actually existing panic, and the agents of the circulation process are overawed by the impenetrable mystery surrounding their own relations." <http://www.marxists.org/archive/marx/works/1859/critique-pol-economy/ch02_3b.htm
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Another foundational feature Keynes shares with Marx in this connection is the understanding of "rationality" as "virtuoisity" in Aristotle's sense (Marx having called Aristotle "the greatest thinker of antiquity"). From this perspective, the "state of character" domiant in capitalism lacks "virtue". In particular, it lacks the virtue of "courage".
This is connected to rational action concerning the long-run future, e.g. investing in long-lived plant and equipment, because this future is often "uncertain" in Keynes's particular sense of unknown and unknowable (and therefore not analyzable in terms of "risk"). A fully rational person would be able to face this fact with the true virtue of courage which Aristotle elaborates as follows:
“The man, then, who faces and who fears the right things and from the right motive, in the right way and from the right time, and who feels confidence under the corresponding conditions, is brave; for the brave man feels and acts according to the merits of the case and in whatever way the rule directs. Now the end of every activity is conformity to the corresponding state of character. This is true, therefore, of the brave man as well as of others. But courage is noble. Therefore the end also is noble; for each thing is defined by its end. Therefore it is for a noble end that the brave man endures and acts as courage directs.” <http://classics.mit.edu/Aristotle/nicomachaen.3.iii.html>
In contrast, the "state of character" dominant in capitalism lacks the courage to face "uncerainty" and so "hides from [itself] how little [it] foresees."
An obsessional "state of character" does this by means of "pretty, polite tecniques," i.e inapprorpiate mathematical and statistical methods. Keynes calls such mistaken and psychopathological forecasting methods "conventions" to distinguish them from rational "calculations".
This produces the false kind of "courage" and "confidence" Aristotle associates with "ignorance" of danger. As in Keynes account of a liquidity crisis, Individuals charaterized by this false kind of courage, “those who have been deceived about the facts,” “fly if they know or suspect that these are different from what they supposed.”
That they "fly" to "money" is linked psychologcally to the fact that the "end" of their action is a psychpathological love of money and money-making. In contrast, the end of truly virtuous, including truly courageous, action is "the beautiful".
Ted