Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

JOCHEN RUNDE AND JÖRG BIBOWthe banking system s balance sheet. (In the General Theory, incontrast, all institutional detail is suppressed and the whole effect ofchanges in beliefs is necessarily on security prices, given that thestock of money, that is the size of the banking system s balancesheet, is constant by assumption.)To begin with, in the Treatise on Money bearish views on the partof the public may have no effect on securities prices where theseviews are compensated by the banking system taking the oppositeview and buying the securities. An alternative possible case ofdivergent beliefs mentioned by Keynes occurs when ‘two views’develop within the public. Whilst in the former case the bankingsystem and the public hold opposing views, and the effect of a changein beliefs about future prices may be reflected partly in security pricesand partly in changes in the size of the banking system’s balancesheet, in the latter case changes in the size of the banking system’sbalance sheet do not necessarily require the banking system to take aparticular view. Rather it may simply provide additional short-termadvances to the ‘bulls’ who buy securities from the ‘bears’ who endup holding more ‘savings deposits B’. Keynes finds that both ‘bull’and ‘bear’ markets may occur with either convergent or divergentexpectations about future prices. For instance, in the case of a bullmarket with convergent expectations, bears are closing their positionson a rising market and the volume of savings deposits B falls. In abull market with divergent expectations, in contrast, bears may beincreasing their positions on a rising market. To repeat, the size ofthe banking system’s balance sheet (and the amount of savingsdeposits B provided) may change either because the banking systemitself is taking a view on securities prices or because it decides tofacilitate the changing degree of divergence of beliefs within the public,where the public may also take recourse to channels outside thebanking system.Keynes (1971:225) ventures that both the volume of financialtransactions and the size of bear positions are ‘likely to bephenomena of rapidly changing prices rather than of an absolutelyhigh or low level’. The volatility of prices, for instance, may reflectcontradictory information that becomes available and increases thediversity of beliefs about future prices. In addition, Keynes mentionsthe possibility of speculative excesses leading to what we would nowcall ‘bubbles’. He finds that such a development may be related in itsfinal stage to beliefs about future prices that have diverged widely,with abrupt falls in security prices resolving the tension betweenopposing views.194