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However, by allowing the stock market to value the stock of the firm,
this ideal goes wrong, says Keynes, because most investors are from the
"ignorant masses" and they tend to buy stock only for short term capital
gains rather than for long term income.
Although our view of capital markets has changed since 1935, Keynes was,
of course, a giant in his time and his wisdom still influences economic and
financial thought. However, it helps to understand that his work was
largely part of the overall response of economists to the 1929 crash and
the ensuing depression.
It must have seemed at the time that the system of free enterprise that
we inherited from the Dutch and the British Dissenters and their
Industrial Revolution may not be viable; that capitalism had failed; just as
it seemed after the fall of the Soviet Union that communism has failed.
And it was Keynes' work more than any other ideology that delivered us
from at least the psychological depression of the times. In the midst of
all the wringing of hands and gnashing of teeth, he stood tall and said
that capitalism had not failed and prescribed a cure for the depression.
It was a very uplifting piece of work.
The legacy of the crash was to make the market into the whipping boy
explaining away the depression as an artifact of market structure that
can be fixed and therefore not a fundamental failure of capitalist
economics. Keynes' strong language in this regard can be forgiven on this
score. We believe today that the market is, on the aggregate, rational
and an efficient aggregator of information and provider of liquidity going
so far as to provide additional mechanisms for speculators to provide
information and liquidity to markets. We do not question market valuation
and investor behavior. We only seek to understand them.