Saturday, June 27, 2009

Keynes and efficient markets

Greg Mankiw (“Was Keynes really a savvy investor?” in Greg Mankiw’s Blog, June 26) quotes a great post by Scott Sumner : “Don’t trust historians”, The Money Illusion , June 2009.

While Keynes is usually presented as the man who single-handedly created the new field of macroeconomics, but also, besides being a first class statesman, as a shrewd portfolio investor and financier, Sumner sets the record straight an describes how he near bankrupted a syndicate he set up with his brother, some of the Bloomsbury circle, and a financier friend from the City of London in May 1920. He had to be bailed out by his tolerant father and, propped by a loan from the coolly acute financier Sir Ernest Cassel. He could then persever in his speculation, gaining some and losing some other bets.

Adds Sumner: “Translation, without help from his rich daddy and rich friends, this cocky, arrogant, smart-aleck would have fallen on his face, ended up digging ditches somewhere and we would never have heard of him.”

Maybe. Anyway, his later gains indeed were not a proof of his superior ability as Sumner explains, giving a beautiful example of how, with a large enough capital to start with – i.e. a low or negligible risk of ruin -, earning money by speculation is not that difficult.

Conclusion: “From now on I will never believe anyone who tells me that Keynes was a great investor.” And without such a reputation “nobody would take seriously his Chapter 12 in the General Theory where he tries to shoot down the efficient market hypothesis” with “a lot of nonsense about musical chairs, beauty contests, and the seasonality of ice prices”.

A must read.

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