Reply To: Keynes, one of the great speculators?



I apologize for the tardiness of my response. Let me take your points in order. Regarding the claim that Keynes was a great speculator, I agree more with Hunter Lewis. Keynes met with both success and failure as a speculator and wasn’t, to the best of my knowledge, consistently successful enough to be classified as a “great speculator.” For more on Keynes’ experiences as a speculator as well as other aspects of Keynes’ life I would recommend Robert Skidelsky’s biography.

As far as the question of the rationality of markets goes, I believe Ferguson is correct when he claims that markets are not perfectly efficient or rational. In other words, given the endemic uncertainty that characterizes our world, entrepreneurs often make errors. After all, that is why we witness the phenomenon of monetary losses, which are a reflection of incorrect guesses or predictions of entrepreneurs. I do not, however, agree with the conclusion that Ferguson draws from this premise. The fact that entrepreneurs make erroneous judgements does not imply that that there must be boom and bust cycles on the market. In fact, the market possesses an inherent error correction mechanism – the profit-loss system – that rewards the successful entrepreneurs and penalizes the unsuccessful ones. This ensures that at any given moment in time the most able or the entrepreneurs that have been most successful in the past are the ones that allocate resources. Moreover, under normal circumstances some entrepreneurs make mistakes whereas others succeed. Business cycles, however, result from a cluster of entrepreneurial errors, i.e., many entrepreneurs making the same kind of errors simultaneously, a phenomenon that is a result of a subversion of the profit loss system, not a result of the existence of losses.