Synthesized answer
Monetary instability leads to unemployment because deflation causes falling prices [4]. When prices fall, entrepreneurs try to avoid losses by restricting production [4]. This restriction of production leads to unemployment [4]. Additionally, during periods of falling prices, the effort of everyone to hold as small stocks as possible brings industry to a standstill [3].
Monetary instability also leads to profiteering. During periods of rising prices (inflation), there is an over-stimulation of industrial activity [4]. Business men are influenced by the profits they expect to accrue in terms of money [1]. If the money they receive for their products is worth less than when they began production, they can make excessive gains [1, 5]. This can be considered profiteering, especially if these gains are windfalls and do not relate to the efficiency of the business [1, 3].
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…
depression, with falling prices, which operate on those who hold stocks in a manner exactly opposite to rising prices. Excessive losses, bearing no relation to the efficiency of the business, took the place of windfall gains; and the effort of every one to hold as small stocks as possible brought industry to a standstill, just as previously their efforts to accumulate stocks had over-stimulated it. Unemployment succeeded Profiteering as the problem of the hour. But whilst the cyclical movement of trade and credit has, in the good-currency countries, partly reversed, for the time being…
ng authority should take steps to counteract this expectation by setting in motion some factor of a contrary tendency. Even if such a policy were not wholly successful, either in counteracting expectations or in avoiding actual movements, it would be an improvement on the policy of sitting quietly by, whilst a standard of value, governed by chance causes and deliberately removed from central control, produces expectations which paralyse or intoxicate the government of production. * * * * * We see, therefore, that rising prices and falling prices each…
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…
More questions about this book
- Keynes asserts that the existing organization of society "cannot work properly if the money...is undependable." Explain, using a specific example or analogy, how an unstable monetary "measuring-rod" directly disrupts the rational economic behavior of both the "private investor" and the "business man" as described in the text.
- 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?