Keynes, one of the great speculators?

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    Hi Professor Manish.

    I’ve recently read Jim Rogers new book “Street Smarts: Adventures on the Road and in the Markets”, and in Chapter 4 (Beating the Bear Market) he says the following about Keynes:

    On Wall Street there is no truer adage, I learned, than the one attributed erroneously to John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent.” Keynes, by the way, was both smart and rich; he was one of the great stock market speculators of all time. He knew what he was doing. With the King’s College, Cambridge, endowment and with his own money, he speculated almost full-time, and he was very successful. When he died in 1946, he was worth more than half a million pounds, the equivalent of over $16 million today.

    I’ve also read Hunter Lewis post on the MisesBlog ( I just was wondering what your view is of Keynes the speculator. Was he really one of the great stock market speculators of all time in your view?

    Also, what would you say about that famous adage. Isn’t it true that markets must eventually become rational because if they didn’t we would never have busts but only infinite artificial booms? Or is it as Niall Ferguson said in his ‘Ascent of Money’ book:

    According to Soros’s Theory of Reflexivity, financial markets can’t possibly be perfectly efficient, much less rational, for the simple reason that prices are just the reflection of the ignorance and the biases, mostly completely irrational, of millions of investors. In Soros’s eyes, markets are bound to go through cycles of boom and bust, as surely as the human temperament is prone to bouts of euphoria and despondency.




    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.

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