For John Maynard Keynes, eco­nomic the­ory was side­line

“He was, above all, a prac­ti­tioner and stu­dent of high fi­nance. In­vest­ment and fi­nance were his vo­ca­tion, and po­lit­i­cal eco­nom­ics was his av­o­ca­tion.”

The Pak Banker - - Front Page - Colin Read

EVEN as global fi­nan­cial tur­moil in­duces some to ad­vo­cate for freer mar­kets, the heav­ier hand of Key­ne­sian macroe­co­nomic pol­icy is also ex­pe­ri­enc­ing a resur­gence. Yet John Maynard Keynes was far more than the Ivory Tower aca­demic econ­o­mist we think we know. He was, above all, a prac­ti­tioner and stu­dent of high fi­nance. In­vest­ment and fi­nance were his vo­ca­tion, and po­lit­i­cal eco­nom­ics was his av­o­ca­tion.

Keynes came from a line of aca­demics. His fa­ther was a renowned philoso­pher and se­nior ad­min­is­tra­tor at Cam­bridge Univer­sity. Keynes was aca­dem­i­cally pre­co­cious. As an un­der­grad­u­ate, he was cap­ti­vated by math­e­mat­i­cal the­ory, and es­pe­cially prob­a­bil­ity the­ory.

Af­ter grad­u­a­tion, he served two years as a lowly clerk to the Crown, sta­tioned in In­dia. This oth­er­wise un­ful­fill­ing ex­pe­ri­ence gave Keynes the time to con­tem­plate both the mean­ing of prob­a­bil­ity and the wan­ing po­lit­i­cal and eco­nomic influence of Great Bri­tain.

He be­gan to write ar­ti­cles on in­ter­na­tional eco­nom­ics that demon­strated his clear think­ing. He also caught the eye of the U.K. Trea­sury, and soon rose to the high­est ech­e­lon of in­ter­na­tional fi­nance.

Keynes even­tu­ally re­al­ized that his world­view was in­com­pat­i­ble with po­lit­i­cal prag­ma­tism, and he forged an al­ter­na­tive ca­reer.

He had fre­quented the high­est lev­els of Bri­tain's gov­ern­ment, arts and so­ci­ety. He also had been dab­bling in fi­nance as an ex­ten­sion of his ex­pe­ri­ences at the Trea­sury and as a way to in­vest some of his own sav­ings and bor­row­ings.

Keynes be­gan to ad­vise an ex­clu­sive clien­tele, and be­came known for the qual­ity of his in­vest­ment ad­vice.

He quickly be­came the fi­nan­cial ad­viser to a ver­i­ta­ble who's who of Bri­tain's in­tel­li­gentsia.

Keynes first flour­ished by in­vest­ing in bonds and for­eign ex­change. His in­ter­est was sparked when he amassed a small for­tune for the Trea­sury dur­ing World War I. In his re­spon­si­bil­ity for se­cur­ing for­eign ex­change to pur­chase war sup­plies, Keynes ac­cu­mu­lated, and then rapidly sold, Span­ish pe­se­tas that re­sulted in a large drop in the sterling/pe­seta ex­change rate and a large profit for the Trea­sury.

He held a dim view of the stock mar­ket, which he likened to casino gam­bling or a beauty con­test.

Keynes ar­gued that in­vestors don't trade on an as­set's fun­da­men­tal value, but rather in an­tic­i­pa­tion of the strate­gies of other in­vestors. In turn, in­vestors watch their col­leagues, also with lit­tle re­gard for the fun­da­men­tal un­der­ly­ing value of the se­cu­rity. As­set val­u­a­tion is ob­scured as traders strate­gize over their as­sess­ments based more on an­i­mal spir­its than on rea­son.

In­stead, Keynes de­voted his in­vest­ment en­er­gies to bond mar­kets -- where traders sought com­pet­i­tive and reg­u­lar fixed- in­come flows -- to the con­struc­tion of hedges to re­duce risk, and to the for­eign-ex­change mar­kets where rel­a­tive eco­nomic progress and terms of trade be­tween nations dic­tate equi­lib­rium. He be­lieved that the more ra­tio­nal and sea- soned in­vestors op­er­ated in these mar­kets.

When Cam­bridge Univer­sity needed a trust man­ager, it called on Keynes.

Over two decades of man­age­ment of the univer­sity's Chest Fund, he gar­nered a spec­tac­u­lar 400 per­cent re­turn, even though the stock mar­ket was lit­tle changed in that pe­riod. Keynes suc­ceeded be­cause of his long-held in­ter­est in mar­ket psy­chol­ogy, which dated to his 1921 book, "A Trea­tise on Prob­a­bil­ity."

He ob­served that prob­a­bil­ity as­sess­ments by hu­mans dif­fer from the cal­cu­la­ble risks in na­ture and sci­ence.

He be­lieved our per­sonal prob­a­bil­i­ties are what we think they are, not those pre­de­ter­mined by un­seen nat­u­ral forces. Sim­i­larly, to Keynes, and to pro­po­nents of per­sonal prob­a­bil­i­ties, the value of a stock is what a group of some­times ir­ra­tional spec­u­la­tors is will­ing to pay for it. Ken­neth Ar­row went on to en­shrine this val­u­a­tion the­ory in his rev­o­lu­tion­ary model of se­cu­rity prices.

A con­tem­po­rary of Keynes, the in­vestor Bernard Baruch, is re­puted to have quipped that "if economists are so smart, why aren't they rich?" When Keynes died, his net worth, mostly from his in­vest­ments, was about $30 mil­lion in to­day's dol­lars.

War­ren Buf­fett, the bil­lion­aire chair­man of Berk­shire Hath­away Inc., mod­eled his "value in­vest­ing" af­ter Keynes's in­vest­ment strat­egy, and once said the econ­o­mist's "bril­liance as a prac­tic­ing in­vestor matched his bril­liance in thought." When Keynes died, the Fi­nan­cial Times re­ported: "Some sur­prise has been ex­pressed about the large for­tune left by Lord Keynes, yet he was one of the few economists with the prac­ti­cal abil­ity to make money."

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