Financial Markets

Subject: Economics
Type: Informative Essay
Pages: 8
Word count: 2116
Topics: Finance, Macroeconomics, Marketing

Speculation Dominates Enterprise on the Stock Market

Keynes changed the World through his new approach to Macroeconomics. He challenged the Classical economic views by presenting a more realistic view of how the economy works (Keynes, 1973). His General Theory on Economic Interest generated enthusiasm and criticism in equal measure. Some applauded him while others reproached his Keynesian view. Some thought that his view was unpalatable and un- comprehendible, feeling that it was too complex to understand his book. For the enthusiasts, they saw him as the savior that the Economy field had waited for too long, and they participated in sharing new ideas while expanding those that Keynes already had. Some went as far as providing positive criticism on the book to allow Keynes to include some ideas that he had missed in his book. The genesis of the Neo-Classical economics started with Keynes. He challenged the classical views that unemployment (Dow & Hillard, 1995) is a factor in the cost of labor and that investments are a factor of other things but the cost of labor. His views on money, employment, and interest form the basis of his Keynesian theory. 

Fundamental uncertainty is based on the fact that no single investor would be certain of the future of the stock market. While investing, the investor only has some information about the prospects of the stocks, but with no supporting information to boot. Most of the investors rely on a proposition that the stocks will react in a certain way, yet they do not have the perfect information to back up their actions. Keynes explained that with probability, it was possible to attempt to determine the expected performance of the stock (Keynes, 1973). However, the probability would not be sufficient to measure the risk nor the proposition of the stocks as the performance of the stocks would be determined by the future events of the company. It was, therefore, not possible to determine the proposition of the stocks by merely applying probability to determine the risk and expected returns of the investments. 

Fundamental uncertainty influenced how investors chose to do business in the Keynesian and the post-Keynesian era. Most investors would apply the little knowledge they had on the capital assets to make the best decisions whose rationale was not properly vetted. He argued that most investors of the Keynesian era only got into the business as a result of family culture and that most of them had a prior history of being in business (Keynes, 1973). He argued out that most businesses were established without paying attention to the enterprise, and most of the investors were only speculating. Keynes, in his years as a bursar at a college, invested the school’s Chest Funds in the stock market after selling off some of the school’s long-term assets. He criticized other colleges for using their funds as savings, and he challenged them to invest the funds to see a growth in their capital. His rationale for investing was that the money would not earn any value if left alone, and it required to be used systematically to earn the college some growth.

Social conventions play a huge role in the economy in that the behavior of the people affects and influences the level of investments. For instance, the aggregate demand, which was a factor of both the marginal propensity to consume and the marginal propensity to save, had a huge impact on the level of investments in the economy. If people were to save more, they would end up spending less (Krugman et al., 2006). If they spent less, the economy would be at risk of getting a recession. Conversely, if the marginal propensity to consume was to increase, the economy would have a higher output in terms of productivity and an increased uptake of the factors of production. Savings were good for the economy, but the more the people saved, the less they spent. There was a need to have a guided approach on the social conventions so that the people would know when to save and when to spend. The recession was mostly a result of the low aggregate demand in the economy. Keynes mentioned that a recession could be avoided with proper planning and the right fiscal policies to encourage investments amid an impending recession (Keynes, 1973).

During recession, stock prices are disrupted. The same applies for a boom. The effect of these two economic situations on the stock prices is different. During recession, most stocks shed some of their value due to dwindling investor confidence (Hubbard et al., 2008). Other factors also affect the stock prices, such as the fluctuation of the foreign exchange rates, the decrease in economic activity and the decrease in demand for stocks. During recession, the economy is disrupted and many companies suffer as a result of inflation (Peukert, 2012). Some lay off the employees while others decrease their uptake of the factors of production. Once the stock prices are disrupted, Keynes argues that government intervention could save the day, for both the investors and the business managers. The intervention of the government through fiscal policies allows for the recovery of the economy. The government intervention is aimed at boosting the aggregate demand for products (Keynes, 1973). An increase in the aggregate demand for products boosts the marginal propensity of consumption for goods and services, allowing people to spend more money on the goods and services. More spending allows the investors to expand the economy by taking up loan facilities from financial institutions, thus creating capital within the economy. The economy recovers from the recession with a higher employment rate and higher productivity in terms of the gross domestic product. 

According to Keynes, employment was a factor of aggregate demand as opposed to the classical notion that employment was a factor in the cost of labor (Keynes, 1973). Investments, on the other hand, were to be determined by the interest rates and the aggregate demand. The aggregate demand was determined by the marginal propensity to consume as well as by the marginal propensity to save. These two formed the aggregate demand, which in turn influenced the level of investment in the economy. Keynes argued out that the level of investment was to be influenced by the interest rates (Keynes, 1973). At higher interest rates, people are discouraged from borrowing capital, therefore the higher the interest rates, the lower the level of the investments in the economy. Conversely, the lower the interest rates, the higher the level of investments as the investors would be encouraged to borrow capital from the financial institutions. 

According to Keynes, the interest rates also played a huge role in the savings and the consumption rate of goods and services within the economy (Krugman et al., 2006). At higher interest rates, the employed people would be enticed to save as much as they can to benefit from higher interest rates given by the financial institutions. They would rather save than consume much of the income. The higher interest rates would, therefore, reduce the level of investments in the economy in two ways; one, by reducing the aggregate demand of goods and services and by discouraging investors from borrowing capital form the financial institutions. 

The investments, on the other hand, were controlled somehow by the investor perception. Keynes explained that the stock market is susceptible to the speculation habits of the investors and it was largely controlled by their perception rather than by the forces of demand and supply. Speculation formed the biggest influence on the stock market (Keynes, 1973), and the investors would acquire and dispose the stocks based on speculation. The trend was worrying as some stocks suffered a blow while other stocks enjoyed the limelight.

 He also explained that investments were dependent on the marginal efficiency of capital. The marginal efficiency of capital was dependent on the supply price of the long-term asset and its expected returns. The expected returns of the capital assets or the stocks were based on some pre-existing facts that were known to the investors at the time of acquisition as well as the future performance of the stocks. The future performance of the stocks was based solely on the future events that were expected to shape the destiny of the various companies operating under the various sectors of the economy (Keynes, 1973). For instance, if a country was expected to go to war, and the government had contacted a local company with an offer to supply it with ammunition and other weapons, that company’s stocks would be expected to grow in yields and prices over the next financial period that the purchases would be made by the government. Similarly, if a listed company were to sign a huge contract to supply goods or services to a “big” client, their stocks would be expected to yield more returns. These speculation habits formed the basis of the acquisition decisions rather than the entrepreneurial spirit of the investors (Hubbard et al., 2008). Most investors were, therefore, willing to hoard on to their money until such opportunities existed. 

Keynes explained that the demand for goods had a hand in the level of production, and by that association, the level of investments in the economy. The aggregate demand for goods affected the level of production for the goods. When the aggregate demand was higher, the companies would be forced to employ more people to produce more quantities of the goods, thus paying more taxes to the government in the form of income taxes and corporate taxes. A higher aggregate demand also meant that the people were willing to consume more of their income as opposed to more savings. The increased demand for goods would boost the employment levels as the producers would have to employ more labor to produce more goods, irrespective of the cost of labor. The level of employment was, therefore, more likely to be influenced by the aggregate demand rather than the cost of labor (Dow & Hillard, 1995). The rationale behind this notion was that a higher aggregate demand triggers more uptakes of the factors of production despite the cost of those factors of production. Thus, at a higher aggregate demand, the level of unemployment would decrease by default. 

Need a custom paper ASAP?
We can do it today.
Tailored to your instructions. 0% plagiarism.

Keynes had a rationale for the speculation habits dominating enterprise on the stock market. Most investors are prone to forecasting as is the case with budgeting. Most investors, therefore, were more concerned with the going concern of the business (Keynes, 1973). Most of them would look into the events of the companies whose stock they sort to acquire, and analyze those events. The level of confidence played a huge role in the acquisition decisions of the investors (Krugman et al., 2006). For instance, most investors would purchase the stocks of companies whose future looked bright as compared to those companies’ whose future looked uncertain. Most investors are interested with the certainty of the company they sort to acquire. They therefore, are guided by the recent facts of the company in relation to its business model and its financial performance (Peukert, 2012). Investors feel confident acquiring stocks of companies that have recently made huge strides in their operations as opposed to companies that have been stagnant in their operations. 

Conclusions of the Stock Market Analysis

Keynes advised investors to take up capital from financial institutions and invest it when there were increases in the aggregate demand. He proposed the lowering of the interest rates by the government as it would have a spiral growth in the economy. His argument was based on the notion that, at lower interest rates, the investors would be encouraged to take up more capital and to invest it in the economy. The higher the level of investment in the economy, the higher the output of that economy (Dow & Hillard, 1995). He believed the stock market would never come back to equilibrium on its own, and that there was a need for government intervention. 

He proposed there be some intervention in the investment sector, especially with reforms from international organizations such as the International Monetary Fund. He proposed that the investments should be boosted through financial and economic policies. Investments, if let alone, would not be achievable (Peukert, 2012). The government had a role to play to entice the investors to engage in trading (Krugman et al., 2006). The aggregate demand of the economy had to be boosted to ensure that the investors had more rationale of taking up capital to expand the economy. He noted that the recession happened due to poor fiscal policies and the lack of government intervention. He proposed proper planning by the government to ensure that the economy would always stay afloat, despite the dynamics of the business sector. 

Deadlines from 1 hour
Get A+ help
with any paper

Did you like this sample?
  1. Dow S & Hillard J (eds.) (1995) Keynes, Knowledge and Uncertainty. Post-Keynesian Economics Study Group, 2. Aldershot: Edward Elgar.
  2. Hubbard, R., & Brien, A. (2008). Economics (2nd ed.). Upper Saddle River, N.J.: Pearson Prentice Hall.
  3. Keynes, J. M. (1936). The general theory of employment interest and money. London: MacMillan.
  4. Keynes, J. M. (1973). The general theory of employment, interest and money the collected writings of John Maynard Keynes: vol VII. London: Macmillan for the Royal Economic Society
  5. Krugman, P., & Wells, R. (2006). Economics. New York: Worth
  6. Peukert, H. (2012, May 12). Dysfunctional aspects of contemporary financial markets: diagnosis and prescription. Retrieved January 06, 2018, from
Related topics
More samples
Related Essays