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Keynes and the casino

July 13th, 2009

A short extract from my proposed book, over the fold. Lots more like this to come! Comments and criticisms much appreciated, with free books for the top ten!

Dead Ideas from Live Economists: The Efficient Markets Hypothesis

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done, JM Keynes, General Theory of Employment, Interest and Money Ch 12, p142 in Google Book edition, Atlantic Publishers

If there is one economic doctrine that has been central to thinking about economic and social policy over the last three decades, it is the Efficient Markets Hypothesis, or more properly, the efficient financial markets hypothesis. The EMH says that financial markets are the best possible guide to the value of economic assets and therefore to decisions about investment and production.
Although economists since Adam Smith have pointed out the virtues of markets in general, the EMH with its focus on financial markets is specific to the era of finance-driven capitalism that emerged from the breakdown of the Keynesian Bretton Woods system in the 1970s. The EMH justified, and indeed demanded, financial deregulation, the removal of controls on international capital flows and the massive expansion of the financial sector that ultimately produced the greatest financial crisis in history.

Some more linking material to come here

Keynes and the casino

Few economists have been successful investors, and quite a few have been disastrous failures. But after a narrow escape from disaster early in his investing career John Maynard Keynes made a fortune for his Cambridge college by speculating in futures markets It is a striking paradox that Keynes was among the most scathing of all economists in his assessment of the role of financial markets.

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done” (General Theory Ch 12, p142 in Google Book edition, Atlantic Publishers

During the decades of the long Keynesian boom, financial markets were tightly regulated, and, as a result, financial crises disappeared almost entirely from the experience and memory of the developed world. At the margin, substantial profits could be made by finding ways to work around the regulations, while relying on governments to maintain the stability of the system as a whole. Not surprisingly, there was a warm reception for theoretical arguments that presented a more favorable view of financial markets.

Keynes’ views were reflected in the systems of financial regulation adopted as governments sought to rebuild national economies and the global economic system in the wake of World War II. The international negotiations undertaken at a meeting in Bretton Woods, New Hampshire, in 1944, where Keynes represented the British government, established an international framework in which exchange rates were fixed and movements of capital tightly controlled.

National governments similarly adopted policies of stringent financial regulation, and established a range of publicly-owned financial institutions in response to the failures of the private market. In the United States, a host of regulatory bodies were established to control financial institutions. The Glass-Steagall Act established the Federal Deposit Insurance Corporation (FDIC) and prohibited bank holding company from owning other financial companies. The Federal National Mortgage Association (later quasi-privatised as Fannie Mae, and then renationalised during the early stages of the 2008 meltdown) was established to support the mortgage market.

Although the details of intervention varied from country to country, the effect was the same everywhere. Banking in the 1950s and 1960s was a dull but secure business, resembling a public utility in many respects. Parents scarred by the Depression urged their children to look for ‘a nice safe job in a bank’.

The Efficient Markets Hypothesis changed all that.

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  1. July 16th, 2009 at 15:50 | #1

    The Efficient Markets Hypothesis is a bit like the notion of water finding its own level; it does, but that does not help you survive intermittent tsunamis.

  2. S.Haines
    July 17th, 2009 at 18:31 | #2


    Your point about “failure to administer Keynesian policy” actually agrees with my position that Keynesian ceased to be the governing policy paradigm years before 1973. And my stats on inflation are indeed correctly used. So we had monetary policy taking over in the states in the 1960s, and an end to the so-called “Long Boom” nearly a decade earlier than is often claimed.

  3. Alice
    July 17th, 2009 at 19:23 | #3

    S.Haines – I would agree entirely with that – the demise of Keynesian policy was probably in part to blame for the end of the long boom and the beginning of the downward slide…Monetarism sacrificed employment for the benefit of a low inflation environment which primarily rewards the wealthy. The dogma of the benefits of a low inflation environment have been pursued, and promoted, no matter what the cost to employment and indeed the employed have been sacrificed on this alter of false worship.

    It is this one eyed view in policy I find abhorrent. Unemployment (and underemployment and increasingly marginal employment) has been used to keep inflation low (and increasingly it has needed higher and higher unemployment (real not published) to perpetuate the myth that low inflation is good.

    The federal reserve banks have effectively taken over management of economic policy and its all about one single statistic.

  4. Alice
    July 17th, 2009 at 19:27 | #4

    I simply dispute one comment S.Haines …and that is “nearly a decade before it is claimed”. At most it is half a decade.

  5. S.Haines
    July 17th, 2009 at 19:58 | #5

    As I said my economic history is rusty, but to what extent could Australia and the UK have described as “Keynesian” at any time during the Long Boom?

  6. Alice
    July 17th, 2009 at 20:07 | #6

    I dont know why you would ask that S.haines. The pursuit of full employment (and the attainment) – the rapid response to crises like the wool spike were particularly Keynesian. The budget was used frequently as a method of control.

  7. Alice
    July 17th, 2009 at 20:12 | #7

    S.Haines – you only need look at the percentage of Govt investment in the economy (not welfare – it was very small and not needed) in this country in the 1940s and 1950s to see the impact of Keynesian policies at work. Im very surprised at your comment and seriously hope you arent intending to dispute the existence of keynesian policies during the long boom because I woul have to put you firmly in the denialist out tray if you are…

  8. S.Haines
    July 17th, 2009 at 20:44 | #8

    I would be interested to see these figures. Given the mess you made with inflation, perhaps we both really need to have a look.

  9. Alice
    July 17th, 2009 at 21:03 | #9

    Mess S.Haines ?? You are obviously in the business of spreading misinformation. If you were any genuine economist or reseaarcher (shame about your rusty memory – I suspect you never had any economic history to start with and barely economics either) you would know that inflation depends on the month, which can vary over the year and as for your figures you dont even understand that you cant add or divide annual inflation rates….end of discussion. Waste of space and arguments…just another right wing delusionist.

  10. Alice
    July 17th, 2009 at 21:15 | #10

    What I really dont understand is why people like S.haines bother to lie and make false arguments about history. This generation has all the facts at their fingertips in the electronic world but they would rather subscribe to a two bit political machine’s political rag of misinformation and garbage (and I dont care what party it is – its all still rubbish). All I can think is that they dont know how to research or how to look up the facts and the correct information (and they damn well have it so easy compared to when I was a student).
    Its an insult to any thinking person to have to deal with them.

  11. SeanG
    July 17th, 2009 at 23:22 | #11


    I am a little shocked at your cavalier attitude towards inflation. This destroys the value of the least well to do – those who receive a fixed income like pensioners or the unemployed. Historically it has torn apart countries with great examples being Germany and Bolivia.

  12. Alice
    July 18th, 2009 at 08:02 | #12

    Sean G – so does high unemployment

  13. S.Haines
    July 18th, 2009 at 23:57 | #13


    I am surprised that you still fall for these “Keynesian Long Boom” and “Golden Age” fairy tales. I also believe very strongly in evidence based analysis and discussions. So here’s a few more for you.

    1. During the 1950s and 1960s, Australian governments did not pursue the sort of active expansionary Keynesian fiscal policies you claim. There was the horror budget of 1951-52, for example.

    2. On average, budgets were in SURPLUS, and when there were deficits, they were tiny. The big deficits did not come until the 1970s.

    3. In fact, successive governments showed more sensitivity to monetarey policy, fuelled by bureacrats obssessed with inflation more than fiscal expansion, hence the legendary credit squeezes of the early 1950s and 1960s. The latter nearly lost Menzies the election.

    4. In fact by the early 1960s, policy unequivocally shifted from any pretence to growth and full employment to price control and stability – inflation being the number one policy objectivity. I have already presented the data to explain why.

    5. Your claims about government investment are like your others, without data, and are just wrong. For starters being 1950 and 1973, Australian GDP growth was below the OECD average the entire time, compared with being near the top of the OECD for the whole of 1880 to 1950. In fact, during the 1950s and 1960s, government outlays as a % of GDP average only 20%, compared to 30% during the 1970s and 1980s.

    6. Given that Australia had one of the largest immigration programs in the world, when we look at GDP per cpaita, Australia becomes a basket case relatively. In the 1950s, our GDP per capita growth was a measley 1.7%, compared to the OECD average, which was nearly double at 3.3%. In the 1960s, we gained a bit to 3.2%, but still way behind the 3.9% average.

    7. Any “boom” Australia did experience was ironically due to good old fashioned liberalism; the liberalisation of global trade in the post-war era accounts for a huge amount of Australian growth and prosperity.

    Alice, I get the impression you are a teacher of some sort. What do you teach, and where do you get your materials? And where have you picked up all these myths about Keynes and Australian economic history?

  14. Alice
    July 19th, 2009 at 00:14 | #14

    Oh for goodness sake S.haines. The horror budget you refer to corrected the inflationary Korean war wool boom within a year (alongisde the crash in the wool price). What part of keynesian contractionary budgets dont you understand …or did you think Keynesian policy only expanded indefinitely? I think you have confused Keynesian policy with Greenspan style policies. You havent lived long enough S.Haines and its obvious.
    Look up Govt investment S.Haines as a percentage of GDP in the 1950s – tell me what do you see?
    Ill look it up tomorrow for you S.Haines but Im too tired tonight to deal with this nonsense.

  15. Alice
    July 19th, 2009 at 00:15 | #15

    And S.Haines…its none of your business where I work and its none of my business where you work and I dont ask you (and I dont care) so dont overstep the mark.

  16. Alice
    July 19th, 2009 at 00:24 | #16

    Liberlaim also wasmnt even in the vocabulary in 1950s S.Haines (unfortunately for you). Liberalism is a sham dogma for young liberals to read instead of the bible (sign of the times) but they would be far better off with the latter in terms of social usefulness.

  17. Alice
    July 19th, 2009 at 00:26 | #17

    Correction to above – “liberalism wasnt even in the vocabulary in the 1950s S.Haines”.

  18. S.Haines
    July 19th, 2009 at 00:31 | #18

    ROFL. That would have been news to Bob Menzies!! On your other points, I have provided arguments and data. Now, it is your turn.

  19. SeanG
    July 19th, 2009 at 04:43 | #19

    Liberalism a sham dogma? Freedom for individuals is a shame? Opening opportunties such as voting rights is considered a sham? How about the Old Age Pension which was introduced in the UK by a Liberal Government. This Government acted like a beta test for the Australian Liberals. Liberalism has been a guiding light for humanity compared to socialism which has delivered stagnant economies and societies and being the precursor to a more authoritarian state.

  20. jquiggin
    July 19th, 2009 at 06:57 | #20

    Can we cool things down a bit, please. S. Haines, I can’t say I’m convinced by your claims here. Alice is exactly right about the horror budget for example, and more generally, you seem to be conflating Keynesian demand management with budget deficits. But if you have references to published work dating the end of the long boom to the early 60s, or official statements on a shift away from reliance on fiscal policy, I’d be keen to see them.

  21. Alice
    July 19th, 2009 at 15:33 | #21

    S.haines doesnt distinguish between Government investment and Government welfare outgoings either. In the 1950s Govt social capital investment was high and government unemployment benefits payments were extremely extremely low. The expenditure of public authorities was approximately equal to private investment in fixed capital throughout the 1950s, Funny about that. Public authorities (as opposed to the public committees that proliferate today) created jobs so that people didnt need their hand out for welfare but there is no distinction able to be made by S.Haines who cant see the link between high unemployment today and the expectation that private investment would see it trickle down. It didnt and it wont adequaltely in this country. In addition investment in stocks was a very small part of GDP 1950s, unlike today where the speculative component of investemnt has been mistaken for production in a real sense and allowed to run over to far too large a part of the economy (financial services sector). This is not sound economic management but I doubt certain so called economic liberals in this blog would see any of this. The simple view that “govt is bad and private = good” is all that they are capable of arguing by whatever blinkered means possible.

  22. SeanG
    July 19th, 2009 at 17:31 | #22


    You bring up an interesting point. During the era of full employment the government employed a lot of people which kept welfare payments low. However, what is the difference between welfare payments and employing people for the sake of employing them? If employing someone to do a non-existant job is social capital investment, is that nothing more than welfare under a different guise?

  23. Alice
    July 19th, 2009 at 18:03 | #23

    The difference is the idea of the Keynesian injection Sean (G). It has a multiplier effect and it expands GDP much like the budget deficits are doing now – but back then in the 1950s the idea of Government investment in the economy had not yet come to be derided by the extreme economic liberals amongst us (who I prefer to be classified under their real name of those who subscribe to laissez faire beliefs, who were always with us and always will be with us – if only for the betterement of a few powerful groups amongst us, if not all of us..and the foolishness of the laissez faire economics view is that in the long run, the market will sort it out without any government presence and the choice of the individual becomes all powerful. It just doesnt work (the choice of large merged oligopolistic and monopolistic enterprises becomes all powerful until they disturb and fracture the very foundations of democracy and erode the choice of the individual a say in how and by whom they are governed…thus it becomes self defeating to the liberal view) and those who subscribe to it unquestionly in the name of “liberalism” do us all harm…and their party of choice…. and themselves. Even the US Govt was still investing heavily in the US economy in social capital and infrastructure in the 1950s and this was considered the home of liberalism dont forget).

    Any growth in GDP must carry the majority in an economy with it, Sean G , for maximum effect (economic welfare maximisation). A divided society (a growing tail left beind) will ultimately correct itself and sometimes unpleasantly. Despite how much economic liberals may want to see those people as lazy or bereft of the necessary skills for satisfying employment, you leave them behind at all of our peril. It is in all of our interests to keep these numbers of unemployed to a minimum by enuring there is sufficient investment for job creation (be it public or private).

  24. SeanG
    July 19th, 2009 at 18:58 | #24


    There is a debate as to the size of the multiplier effect. The problem with the idea of full employment is that it does not place resources – labour – to their most productive use. That is one reason why in the 1970s-1990s there was a wave of large scale privatisations to break down unproductive and inefficient public sector entities. Examples include the use of Six Sigma to minimise variations in production, 20-70-10 pioneered by General Electric’s Jack Welch, the general “profit maximisation” goal and remuneration incentives.

    The next problem is that welfare maximisation as a “right” creates a corresponding obligation on others. For everyone who is employed in an unproductive manner can only be employed by taking money away in the form of taxes by someone else. The concept of “idleness” has long bothered economists and politicians (including socialists).

    Liberalism in the 1950s grew from the experiences of both WW2, the Great Depression and pre-Depression post-WW1 political economy. That is why Menzies promoted the middle class and free enterprise but wanted a strong social net. Liberalism is an organic belief that changes with society and it has swung back to free markets due to the brief 20-30 year experience of big government within a democracy.

  25. Donald Oats
    July 19th, 2009 at 19:35 | #25

    Six Sigma Blackbelts, they karate-chopped big businesses into small businesses. Well, maybe not, I just felt like saying that. The difficulty with six sigma is that not every business has a production function that is easily measurable in a manner meaningful to the goals of the business. Take a software firm and six-sigma it at your peril. A six-sigma hatchet job risks throwing out some of the important informal practices – having an impromptu brainstorm upon a free whiteboard for example – and replacing them with overburdened formal practices. Pre-six-sigma, a question concerning how a piece of networking software handled certain conditions might have been answered by a couple of s/w techies wandering down to the local computer store, buying a couple of computers and other bits and pieces, and then jury-rigging it together and, well, just experimenting. A post-six-sigma corruption of this could simply freeze out initiative in the mistaken belief that skiving off to the IT store and building an informal testbed is an unproductive or uncontrolled task. To continue, so long as the results of the experiment are captured for posterity and are communicated effectively, it shouldn’t be viewed in a negative light.
    Anyway, while it isn’t impossible for six-sigma to add something beneficial, for a S/W chop shop it isn’t necessarily the best tool for the job.

    As for Jack Welch, the 20-70-10 rule involved flushing of the 10% annually – pink slip time would have been a barrel of laughs at GE I’m sure. Wouldn’t production have taken a hit as morale started reflecting the uncertainty of employment? Wouldn’t people become secretive about expert knowledge that they possess, rather than sharing it with others to further the company interest?
    And in any case it is a rough way to look at headcount – oops, I mean fellow journeymen and women.

  26. Alice
    July 19th, 2009 at 19:59 | #26


    Menzies also said “the people need protection from monopolies” Sean. Another idea sacrificed on the alter of liberalism (Goldman Sachs…gets big because they are brilliant, The grocery industry gets concentrated “because they are clever.” Big oil and big pharma can teach us all a lesson about business intelligence…Im sure).

    But economic liberalism has chased very few with monopoly power in the past few decades Sean, to the extent the ordinary man is becoming impatient with lack of regulatory action by governments concerning monopoly market power.

    So Menzies wasnt liberal enough? Is that what you are telling me? Because now, no social net is positive to economic liberals (no social net at all…and correct me if I am wrong) and de-regulation ensures monopoly power grows and anti comptetitive practices grow unchecked, but its not our right to interfere?? Is that it?

    So what is really important is total unfettered freedom in markets with no government intervention or presence because the right of the individual rides over it all?

    Even Menzies views Sean

    What you also ignore also is the fact that a person who is “flexibly employed” ( and in many cases this may mean tenuously employed) lacks the “animal spirits” to spend freely in the economy (theirn confidence is sapped), deprived as they are of security of employment or tenure or a reasonable expectation that their work will continue and the ordinary man adjusts savings accordingly…to save for the lean times which are unknown at the point they decide to be more careful with their expenditure …and we all know savings is a leakage…so the mere unquestioning acceptance of NAIRU (and an ever upwardly adjusting NAIRU) with its concommitant acceptance of a higher “human labour force discard rate” becomes an escalating drag on the economy which then requires an even higher NAIRU to justify.

  27. SeanG
    July 19th, 2009 at 20:06 | #27


    Six Sigma is implemented in service as well as manufacturing firms. It is about variations in performance and output. Six Sigma does improve productivity and it can be applicable to government as well as private sector.

    With Welch’s 20-70-10 all you have to do is look at the results of his time there to see the amazing growth in revenues and profitability. GE always prided itself on being candid which is something not replicated by other companies. After nearly 20 years of this type of practice, GE was the largest company in the world. So it looked like it worked.

  28. S.Haines
    July 19th, 2009 at 20:35 | #28


    Let me give you a hint why Keyesianism itself was responsible for the inflationary breakouts in the 1960s. Keynesianism relied on hermetically-sealed national economies. In Ausstralia, it relied on US foreign investment to build big industry. The state provide protection for the development of monopoly industries like the car industry. The resulting government-created monopolistic production and competition among largely foreign capital within Australia was one of the causes of the inflationary breakout.

  29. SeanG
    July 19th, 2009 at 20:49 | #29


    A coupled of things.

    1) Monopolistic competition is a symptom of a lack of competition due to stringent regulation or the event where competition policy is not enforced. This is as much a problem during Keynesian economics than during the free market because if we look at the US economy as an example where you have a large number of very large companies you also see an amazing growth in smaller companies which compete and challenge the larger companies.

    Goldman Sachs, you bete noir, is one of two remaining Wall Street investment banks. Goldman gets competition from numerous other banks but employs the best people, has a culture that is about excellence so when they are challenged by other banks, hedge funds and private equity firms they adapt and survive while others like Bear or Lehman Bros can barely make it in a competitive environment. Schumpeter’s “creative destructionism” at its best.

    2) Where did I say that Menzies was not liberal enough? Liberalism, as I have said, is organic which changes with the environment. It was the experience of the Liberal Party in the UK, the Depression and WW2 that lead to the liberals to adopt a very centrist position of free enterprise with a strong social safety net. You need to learn more about Liberal history.

    3) When has anyone said that total unfettered markets is the best way to go? Do you even read comments on this thread or make things up as you go along?

  30. S.Haines
    July 19th, 2009 at 21:00 | #30


    How can you say “liberalism wasnt even in the vocabulary in the 1950s”? Follow this link and note the start date. Still waiting for your promised data.


  31. S.Haines
    July 19th, 2009 at 21:07 | #31


    Bob Hawke killed the Left in Australia, and Keating turned the ALP into the Australian Liberal Party.

  32. Michael of Summer Hill
    July 19th, 2009 at 21:32 | #32

    John, this is for dear Alice,

    It seems you were taught to work and play,
    Full of work and full of play,
    Have your say and let it out,
    Wright or wrong, let it out,
    Get up their nose and rub it in,
    They’ll never forget dear Alice.

  33. Kevin Cox
    July 20th, 2009 at 06:41 | #33

    Markets are efficient. The so called Financial market as it is constructed is NOT a market. A market has the characteristic that as demand increases and supply cannot meet demand then prices rise so encouraging an increase in supply.

    So called financial markets are “markets” where as demand increases, prices rise but supply decreases. Similarly when demand decreases, prices drop but supply increases. This is not a market but a casino because the size of the price peaks and troughs are random when you have these positive feedback mechanisms in the “market place”.

    Don’t believe me? Our current situation is that the demand for money has increased, the price has dropped but the banks have difficulty lending money because the value of assets against which loans can be made has dropped and hence the supply of money has decreased.

    Also a system where inflation is tolerated and even targetted is flawed. How can we have an efficient market when the unit of measurement changes. It is like trying to keep to the speed limit when the unit of measurement, kms per hour changes in meaning, and we do not know what the change is until a couple of months after we have broken the speed limit.

    To stop the so called business cycle, to eliminate inflation, and to make financial true efficient markets then the “commodity” being traded – namely money – must follow the following rules.

    When the demand for money increases and price rises then the amount of money needs to be increased. When the demand for money decreases and the price drops the amount of money needs to be decreased.

    The solution. Stop using loans as the method to increase the money supply.

  34. Alice
    July 20th, 2009 at 09:44 | #34

    S.Haines – cause of inflationary breakout in the 1950s was due to not only excess demand in the Australian economy but excess demand in the US economy. We were not as hermetically sealed as you like to imagine. Yes we had surging import demand but export demand came first and rose more sharply, but its also no accident that the wool export price crashed the same quarter in the same year that the US announced price controls to manage their own inflationary outbreak and we developed a large BOP deficit (51-52). The Uk (30%) and US (21%) accounted for for 51% of our entire wool production in 1950-51. and that boost at those prices added substantial export demand and income to the economy before the wool price fell. If you look at growth in all the other price and wage indexes for the period, the growth in the export price index far outstrips their contribution and aligns directly with the period of high inflation in 1950-52.

  35. Alice
    July 20th, 2009 at 09:47 | #35

    How soon you forget Sean…the creative destruction of Goldman Sachs was prevented by a bailout of taxpayers funds.

  36. Alice
    July 20th, 2009 at 09:57 | #36

    I would also like to let S.haines know that according to the Economic Record Vol 1. which notes “practically all import restrictions lifted by this time…” next to 4th quarter, 1950. So much for your comment that Australia was “hermetically sealed” and the inflation was driven by big government monopolisation.

    S.Haines – it appears your memory of economic history is rusty after all.

  37. S.Haines
    July 20th, 2009 at 15:34 | #37


    Vol. 1 of which year of ER?

  38. Alice
    July 20th, 2009 at 18:43 | #38

    1950-1960 (the decade) S.Haines. Private subscription published by ERA House Pty Ltd. It should be in the reference section.

  39. SeanG
    July 20th, 2009 at 21:59 | #39

    Very true, Alice.

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