Synthesized answer
Keynes asserts that the existing organization of society relies on money serving as a stable "measuring-rod" for economic decisions [1]. When this measuring-rod is undependable, it directly disrupts the rational economic behavior of both the private investor and the businessman.
For the private investor, who places savings mainly in titles to money, an unstable monetary standard means their savings can be lost suddenly [1]. If the investor anticipates a fall in the value of money, they might alter their actions to minimize losses or increase gains, potentially by reducing their investment in the first place [5]. For the businessman, who is primarily influenced by expected profits in terms of money, an unstable measuring-rod introduces significant risk. During the process of production, the businessman incurs outgoings in money with the expectation of recouping this outlay by selling the product for money later [3]. If the value of money falls, meaning prices rise, they might be incentivized to increase borrowings and swell production beyond what is socially optimal [5]. Conversely, if they expect prices to fall, they may "damp production down," leading to enforced idleness that…
Synthesized from the book passages below. Chat with the book on Feynman for follow-up.
From the book
FACE We leave Saving to the private investor, and we encourage him to place his savings mainly in titles to money. We leave the responsibility for setting Production in motion to the business man, who is mainly influenced by the profits which he expects to accrue to himself in terms of money. Those who are not in favour of drastic changes in the existing organisation of society believe that these arrangements, being in accord with human nature, have great advantages. But they cannot work properly if the money, which they assume as a stable measuring-rod, is undependable.…
ine of normal profits, vaguely apprehended by every one, is a necessary condition for the justification of capitalism. The business man is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society. This, then, is the second disturbance to the existing economic order for which the depreciation of money is responsible. If the fall in the value of money discourages investment, it also discredits enterprise. Not that the business man was allowed, even during the period of boom, to retain the whole of…
isk could be diminished or if we could devise a better means of insurance against it for the individual _entrepreneur_. A considerable part of the risk arises out of fluctuations in the _relative_ value of a commodity compared with that of commodities in general during the interval which must elapse between the commencement of production and the time of consumption. This part of the risk is independent of the vagaries of money, and must be tackled by methods with which we are not concerned here. But there is also a considerable risk directly arising out of instability in the value of…
processes of production tend to be inhibited; and if it expects that prices will rise, they tend to be over-stimulated. A fluctuation in the measuring-rod of value does not alter in the least the wealth of the world, the needs of the world, or the productive capacity of the world. It ought not, therefore, to affect the character or the volume of what is produced. A movement of _relative_ prices, that is to say of the comparative prices of different commodities, _ought_ to influence the character of production, because it is an indication that various commodities are not being produced…
ty, partly in those described in the preceding sections of this chapter, partly in others to be mentioned in a moment. We have already seen that a change in the general level of prices, that is to say a change in the measuring-rod, which fixes the obligation of the borrowers of money (who make the decisions which set production in motion) to the lenders (who are inactive once they have lent their money), effects a redistribution of real wealth between the two groups. Furthermore, the active group can, if they foresee such a change, alter their action in advance in such a way as to…
More questions about this book
- The preface links various societal problems, from "unemployment" to "profiteering," to the "instability of the standard of value." Choose two of these consequences and delineate the precise causal steps through which monetary instability leads to each, as if explaining it to someone unfamiliar with economics.
- Keynes introduces "risk" as a distinct, fourth cost of production, arguing it's "greatly aggravated by the instability of the standard of value." In your own words, describe what constitutes these "wastes of _Risk_" and how the implementation of "sound monetary principles" would specifically reduce them.
- The author suggests that society's current economic arrangements are "in accord with human nature." What specific human economic behaviors or motivations does Keynes assume are fundamental, and how does an "undependable" monetary standard fundamentally undermine these presumed aspects of human nature?
- Keynes contends that while "conservative notions consider themselves more in place than in currency," the "need of innovation is more urgent." Based on the identified problems, what foundational "conservative notions" about currency might Keynes be implicitly challenging, and what kind of "new ideas" is he preparing the reader to receive?