Opinion about the Liquidity Preference Theory. Discussions Concerning Weight and Risk in the Townshend-Keynes Letters of November-December 1938

Abstract

Townshend wrote Keynes a letter on November 25th,1938 and asked Keynes the following question, after informing Keynes that he had read Keynes’s A Treatise on Probability a number of years earlier and understood Keynes’s concept of non-numerical probability:


“This is the nearest I can get to an analysis of the part played by the factor of confidence in the rationale of interest. I believe that its further logical analysis at a deeper level of generalization is connected with the part played by the weight of evidence in your theory of probability, but I cannot see just how….” (Townshend 1979, 292; italics added).


Townshend ‘s question can be rewritten in the following fashion:


“Where, in your A Treatise on Probability, is your analysis of the connection between the variable, confidence, in the General Theory and the weight of evidence in your A Treatise on Probability, applied to support your analysis in the General Theory of your liquidity preference theory of the rate of interest?”


Keynes’s response was direct and straightforward:


“As regards my remarks in my General Theory, have you taken account of what I say on page 240, as well as what I say at page 148, which is the passage I think you previously quoted…”.(Letter to Townshend, Dec. 7th ,1938).


The answer given here by Keynes is for Townshend to read p.240 of the General Theory; however, it relates directly to Keynes’s chapter 26 of the A Treatise on Probability.


What Keynes provides the reader of the General Theory on p.240 is his statement that there is no discussion of how to estimate/calculate the risk and liquidity premiums in the General Theory. This paper demonstrated that Keynes’s discussion of how to estimate the risk and liquidity premiums occurs in chapter XXVI of the TP.


This paper demonstrates the logical and mathematical links between Keynes’s General Theory liquidity preference theory of the rate of interest, where liquidity preference is defined as a function of uncertainty, U, and Keynes’s A Treatise on Probability analysis of the evidential weight of the argument, V, which equals w, which is expressed in degrees. Keynes is pointing out to Townshend that U is a function of V, which is equal to w expressed in degrees. Thus, U is a function of w. We can write this out in English- 


The evidential weight of the argument, V, is equal to the degree of the completeness of the amount of information on which the probability is based. Thus, Uncertainty is a function of the evidential weight of the argument, while liquidity preference is a function of uncertainty. The analysis that is missing in all past discussions by economists and philosophers of this issue has been their failure to identify the role played by Keynes’s mathematical variable, w.

References

[1] Arthmar, R. and Brady, M. E. 2018. Boole, Ramsey and the Keynes-Townshend exchanges on subjective probability. Journal of Economic Thought and Policy 2: 55-74. DOI: 10.3280/SPE2018-002003
[2] Baddeley, M.C. 1999. Keynes on Rationality, Expectation and Investment. In Peter Kriesler (Editor), Claudio Sardoni (Editor). Keynes, Post-Keynesianism and Political Economy: Essays in honour of Geoff Harcourt, Volume III (Routledge Frontiers of Political Economy) 1st Edition.pp.199-216. ISBN 9781138865839
[3] Basili, M. and Zappia, C. 2009. Keynes’s ‘non-numerical’ probabilities and non-additive measures. Journal of Economic Psychology, 30: 419–30. DOI: https://doi.org/10.1016/j.joep.2008.11.003
[4] Brady, M. E. 2004a. J. M. Keynes’ Theory of Decision Making, Induction, and Analogy. The Role of Interval Valued Probability in His Approach. Xlibris Corporation. (Pennsylvania; Philadelphia). ISBN: 9781413472042
[5] Brady, M. E. 2004b. Essays on John Maynard Keynes and …. Xlibris Corporation. Pennsylvania; Philadelphia. ISBN: 13 9781413449594
[6] Brady, M. E. 2023. I.J. Good’s Claim, That Keynes’s Evidential Weight of the Argument, V, a Logical Relation, is a Number, is False. Theoretical and Practical Research in the Economic Field, 1(27): 5-15. DOI:https://doi.org/10.14505/tpref.v14.1(27).01
[7] Braithwaite, R. B. 1973. Editorial Foreword. In Volume 8, CWJMK edition of the A Treatise on Probability, pp. xiv-xxii. England; Macmillan
[8] Clarke, P. 2023. Keynes at work. United Kingdom; Cambridge University Press. ISBN 9781009255011
[9] Gerrard, B. 2023a. Ramsey and Keynes Revisited. Cambridge Journal of Economics, 47(1): 195-213. DOI:https://doi.org/10.1093/cje/beac068.
[10] Hishiyama, I. 1969. The Logic of Uncertainty according to J. M. Keynes. Kyoto University Economic Review, 39(1): 22-44. DOI: https://doi.org/10.11179/ker1926.39.22
[11] Joyce, J. 2005. How probabilities reflect evidence. Philosophical Perspectives, 19: 153–178. DOI:https://doi.org/10.1111/j.1520-8583.2005.00058.x
[12] Kasser, J. 2016. Two conceptions of the Weight of Evidence in Peirce’s Illustrations of the Logic of Science. Erkinntnis, 81(3): 629-648. DOI: https://doi.org/10.1007/s10670-015-9759-5
[13] Keynes, J. M. 1921. A Treatise on Probability. London: Macmillan
[14] Keynes, J. M. 1973. A Treatise on Probability. Volume 8, Collected Writings of John Maynard Keynes. London; Macmillan.
[15] Keynes, J.M. 1936. The General Theory of Employment, Money and Interest. New York; Prometheus (1997). ISBN 13: 9781573921398
[16] Levi, I. 2011. The weight of argument. In S. M. D. Brandolini & R. Scazzieri (eds.), Fundamental uncertainty: Rationality and plausible reasoning Basingstoke: Palgrave Macmillan, pp. 39–58.
[17] Misak, C. 2020. Frank Ramsey: A Sheer Excess of Powers. Oxford; Oxford University Press. ISBN: 9780198755357
[18] Peden, W. 2018. Imprecise Probability and the Measurement of Keynes’s “Weight of Argument”. Journal of Applied Logics 5(3): 677-708. Available at: https://www.researchgate.net/publication/327446033_Imprecise_Probability_and_the_Measurement_of_Keynes's_Weight_of_Arguments
[19] Runde, J. 1990. Keynesian uncertainty and the weight of arguments. Economics and Philosophy, 6: 275–292. DOI: https://doi.org/10.1017/S0266267100001255
[20] Runde, J. 1994. Keynesian uncertainty and liquidity preference. Cambridge Journal of Economics, 18: 129-44. https://doi.org/10.1093/oxfordjournals.cje.a035266
[21] Terra, F. 2023. The Economics of John Maynard Keynes. London; Routledge (April). DOI:https://doi.org/10.4324/9781003287094
[22] Townshend, H. 1979. Townshend-Keynes letters of November 25th and December 7th, 1938. In Moggridge,D. E. (ed.). CWJMK, XXIX, pp. 257-8,288-294.
[23] Vercelli, A. 2011. Weight of Argument and Economic decisions. In Fundamental Uncertainty, eds by Brandolini, S and Scazzieri, England, Palgrave Macmillan, pp.151-170. DOI:https://doi.org/10.1057/9780230305687_7
[24] Vercelli, A. 2013. Weight of Argument and liquidity preference: Keynes after Savage and Choquet. Department of Political Economy and Statistics University of Siena, pp.1-21. Available at: https://www.depfe.unam.mx/actividades/14/seminario-politicas-economicas/04_vercelli_2013.pdf
[25] Vercelli, A. 2016. Weight of Argument and liquidity preference: Maynard Keynes and Victoria Chick. Department of Political Economy and Statistics University of Siena, pp.1-19. Available at: http://www.postkeynesian.net/downloads/downloads/events/GTVC80_VERCELLI.ppt
[26] Vercelli, A. 2018. Weight of Argument and liquidity preference: Maynard Keynes and Victoria Chick. In The General Theory and Keynes for the 21st Century. S Dow, J. Jesperson, and G. Tily (eds.). Edward Elgar, London, pp.84-97. DOI: https://doi.org/10.4337/9781786439888.00014
[27] Weatherson, B. 2002. Keynes, uncertainty, and interest rates. Cambridge Journal of Economics, 26: 47–62. http://www.jstor.org/stable/23600357
Published
2024-03-29
How to Cite
BRADY, Michael. Opinion about the Liquidity Preference Theory. Discussions Concerning Weight and Risk in the Townshend-Keynes Letters of November-December 1938. Theoretical and Practical Research in Economic Fields, [S.l.], v. 15, n. 1, p. 45 - 53, mar. 2024. ISSN 2068-7710. Available at: <https://journals.aserspublishing.eu/tpref/article/view/8361>. Date accessed: 11 oct. 2024. doi: https://doi.org/10.14505/tpref.v15.1(29).05.