Keynes’s Analysis of the Stock Market and Identifying the...

‘Keynes’s analysis in Chapter 12 of the General Theory of Employment, Interest and Money suggests that capitalism is inherently unstable due to its financial structure’. Discuss outlining Keynes’s analysis of the stock market and identifying the related policy conclusions he reaches. In Chapter 12 of the General Theory of Employment, John Maynard Keynes focused on examining the stock market and how it functions, in the sense of its structure and how it is affected by the behavior of investors because he believed the behavior of the stock market affects the aggregate demand, hence the rest of the economic system. He is most interested in the fluctuations of the rates of investments in the stock market that consequently affect†¦show more content†¦Keynes (1936, p155-56) describes the stock market using an analogy between professional investment and newspaper beauty contest: â€Å"Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole†¦It is not a case of choosing those which, to the best of one’s judg ment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth, and higher degrees.† The Stock Market decisions work based on conventional values too, where each is not concerned with determining the real stock value, but the market value the community will place on the stock, before everyone else does. Keynes observes some other features of this situation within the stock market. This type of liquidity not only leads to future fluctuations in physical asset investment, but also creates fluctuations of the daily profit on investments which further influences the market. One of the key themes Keynes observes is that there is plenty ofShow MoreRelatedGame Theory and Economic Analyst83847 Words   |  336 PagesGame Theory and Economic Analysis Game Theory and Economic Analysis presents the wide range of current contributions of game theory to economics. The chapters fall broadly into two categories. Some lay out in a jargon-free manner a particular branch of the theory, the evolution of one of its concepts, or a problem that runs through its development. Others are original pieces of work that are signiï ¬ cant to game theory as a whole. After taking the reader through a concise history of game