An English In Kentucky


















Sunday June 16th 2019Tim Candler9


    I was going to talk about the Tulip Bubble that burst in the February of 1637, and whether or not it played a role in the decline of what was and by some calculations still figures as the richest Corporation the world has ever seen, the Dutch East India Company. But back in the late 1930's John Maynard Keynes had an idea that might explain price fluctuations in equity markets, bubbles and things like that. An equity is a share in a public company, which means you own a bit of the company. You can buy and sell your bit of a company in an equity market place. The supply and demand for a share in a company determines the price of a share in that company. If a company doesn't look as though it's doing very well, there are clear reasons why a person might want to sell their share in a company. And if a company does look as though it's doing very well there are clear reasons why a person might want to buy a share in a company. But for Keynes these sort of clear reasons didn't really explain all price fluctuations. He suggested that much of the trade in equity, and in futures markets could be understood  in terms of what a buyer or seller reckoned other buyer and sellers were thinking. A naive person would buy a share because he or she just thought it looked jolly good and exciting. A less naive person would buy a share because he or she reckoned that a majority of people reckoned the share looked good. An even less naive person would buy a share because he or she reckoned that because other people reckoned the share looked good, the price would rise and soon enough he or she would be able to sell the share for a profit. Therefore truly virulent buyers and sellers of equities devoted their, "intelligence to anticipating what average opinion expects the average opinion to be."  For those interested the quoted passage is from Keynes' General Theory of Employment, Interest and Money. (1936)



   And as a result, Keynes argued, prices fluctuate around the constant moving feast that was average opinion rather than anything like an objective appreciation of the condition or otherwise of the company. Less genteel minds have called the phenomenon "The Greater Fool Theory." And it's true, sometimes average opinion does fall very far foul of reason, and you end up with a panic of selling, supply soars as demand disappears. Generally speaking when this happens a company's in deep do-do, it's embarrassing, no one feels good about themselves, they can't get the best people because they have to avoid the golf club for a bit. There's debate of course, but one argument suggests that when you suddenly give a company lots of money, by for example reducing its tax burden, rather than improving wages and conditions for the lowly, or anything like that, a rational company which initially sold shares to raise money for vitally important wealth creating projects or whatever, would be very inclined to spend that windfall buying back it's own shares. By doing this the company has a greater control of the market for its shares because it has more say in "what average opinion expects the average opinion to be" of it's own shares. And it's also true that company officers have a big interest in the value of their company shares, because that's kind of how as individuals they get paid and how on the day of their retirement they get revoltingly wealthy and disgustingly pleased with themselves, not to mention smug. For Keynes, a much better hearted man than I, what he called businessmen were engaged in a game of chance and skill, they got wholly involved, and often the returns on the game, they found basically disappointing, so for Keynes the whole wide eyed never ending fandango was about more than just profit. "If human nature felt no temptation to take a chance, or derived no satisfaction (apart from profit) in constructing a factory, a railway, a farm or a mine, there might not be much investment merely as a result of cold calculation." Also from General Theory of Employment, Interest and Money. (1936)


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