John Maynard Keynes
Quotes
"Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
"I would rather be vaguely right than precisely wrong."
"The difficulty lies not so much in developing new ideas as in escaping from old ones."
"Day-to-day fluctuations in profits of existing investments, which are obviously of an ephemeral and nonsignificant character, tend to have an altogether excessive, and even absurd, influence on the market."
"The game of professional investment is intolerably boring […] to anyone who is entirely exempt from the gambling instinct".
"In the long run we are all dead".
Another famous saying:
"The market can stay irrational longer than you can stay solvent," goes a saying that was probably never uttered by John Maynard Keynes, but is often attributed to him.
Source: Justin Fox. The myth of the rational market: a history of risk, reward, and delusion on Wall Street. Harriman House Limited, 2011. [B203]
See More: Misattributions
Impact
Keynes created a whole new branch of economics called macroeconomics:
Keynes's classic treatise, The General Theory of Employment, Interest and Money, was published in 1936 and revolutionized economic theory.
Source: Gary Smith. Standard Deviations: Flawed Assumptions, Tortured Data, and Other Ways to Lie with Statistics. United States, Harry N. Abrams, 2015. [B038]
Two of its key tenants are:
Keynes is now remembered [...] for his controversial argument that governments should use fiscal policy to stimulate demand during recessions or depressions.
He thought that emotions, or what he called "animal spirits," played an important role.
Source: Richard Thaler. Misbehaving: The making of behavioral economics. WW Norton & Company, 2015. [B128]
A simple illustration of the market's irrationality (also from Thaler's Misbehaving):
[Keynes] believed that as shares became more widely dispersed, "the element of real knowledge in the valuation of investments by those who own them or contemplate purchasing them . . . seriously declined." To buttress his point, he noted the fact that shares of ice companies were higher in summer months when sales are higher. This fact is surprising because in an efficient market, stock prices reflect the long-run value of a company, a value that should not reflect the fact that is it warm in the summer and cold in the winter. [Yet] firms with seasonal businesses have higher prices when their earnings are higher.
But it didn't take long for holes to form in his theories. By the 1970's, the bloom was off its rose.
The "Lucas critique," as it was known, was a near- crippling blow to Keynesian macroeconomics. [...] For his work in rational expectations, Robert Lucas received the Nobel Prize in 1995.
Source: Andrew W. Lo. Adaptive markets: Financial evolution at the speed of thought. Princeton University Press, 2017. [B116]
Japan proved that Keynesianism has its limitations:
All the Keynesians have been mired in stasis over Japan for 25 years. [...] The Keynesian "hammer" was surprisingly ineffective. It was Japanese psychology that the economists failed to take into account. [...] Japan made all the right Keynesian moves, lowering interest rates and providing massive fiscal stimulation, to no effect. The models of the past failed to predict it.
Source: Daniel Pecaut and Corey Wrenn. University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting. United States, Pecaut, 2017. [B221]
The Stock Market As A Beauty Contest
It is an apt metaphor:
The phenomenon of investors focusing on forecasting the forecast of others is called the "Keynesian Beauty Contest"1
[The playing of the stock market] is analogous to entering a newspaper beauty-judging contest in which one must select the six prettiest faces out of a hundred photographs, with the prize going to the person whose selections most nearly conform to those of the group as a whole.2
Keynes held the view that in a beauty contest it didn't matter who you thought should win, the only thing that mattered was who the judges thought should win.4
Keynes pointed out that the optimal strategy [in the newspaper beauty contest] is not to pick the six prettiest faces based on one's own opinion. Instead, it makes more sense to pick the six that one thinks other people would find prettiest.5
On valuation:
[He] wrote, "It is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence." 2
Keynes's point is that the process can go off track when investors ignore fundamentals and buy a stock simply based on the view that others will drive the price higher1.
John Maynard Keynes, once said that "successful investing is anticipating the anticipations of others." [...] Level one is 'I know.' Two is 'you know that I know.' Three, 'I know that you know that I know.' 3
Sources
1 : Lasse Heje Pedersen. Efficiently inefficient: how smart money invests and market prices are determined. Princeton University Press, 2015. [B114]
2 : Burton G. Malkiel. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Revised and Updated). WW Norton & Company, 2007. [B201]
3 : Brian Christian and Tom Griffiths. Algorithms to live by: The computer science of human decisions. Macmillan, 2016. [B098]
4 : Satyajit Das. Traders, guns and money. Pearson UK, 2020. [B177]
5 : Robert J. Shiller. Narrative economics: How stories go viral and drive major economic events. Princeton University Press, 2019. [B118]
Other Opinions
Keynes famously coined the "Paradox of Thrift":
In the broader economy, one family's rational response to a weak economy (fewer dinners out, no new car this year) merely exacerbates the economic problem as restaurants and car dealers lay off workers, who then spend less and spread the economic malaise. [...] One person's thrift lowers another person's income.
Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]
Keynes wasn't a goldbug:
The supply of gold is not meaningfully related to the growth rate of our global economy, as Keynes pointed out, meaning that prices will rise in periods of rapid gold production and fall when the supply of gold lags behind growth in the rest of the economy.
Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]
On inflation:
John Maynard Keynes quipped that in inflationary times, people ought to take taxis, whereas in noninflationary times, buses are preferred. His logic? You pay at the end of a taxi ride and at the beginning with buses. In times of hyperinflation, the later you can pay a fee, the lower its true economic cost.
Source: Terry Burnham. Mean markets and lizard brains: How to profit from the new science of irrationality. John Wiley & Sons, 2008. [B131]
Two Personal Tidbits
It's not just fellow economist Irving Fisher that fell for the "permanently high plateau":
Keynes didn't see the disaster of 1929 coming and he again lost big.
Source: Philip Tetlock and Dan Gardner. Superforecasting: The art and science of prediction. Random House, 2016. [B216]
Keynes was somewhere on the Kinsey scale:
Keynes was reputed to be gay or bisexual.
Source: Robert J. Shiller. Narrative economics: How stories go viral and drive major economic events. Princeton University Press, 2019. [B118]