In chapter 12, Keynes focuses on the role of long-term expectations in the determination of prospective yield. The entrepreneur has short-term expectations about their current stock of capital equipment and vague long-term expectations about how these factors may change in the future, and jointly these expectations constitute prospective yield. The relation between prospective yield (which is an estimation in nature) and supply cost determines the marginal efficiency of capital. This relation between the marginal efficiency of capital the interest rate determines the rate of investment.
Throughout this chapter, Keynes makes various points about the role of long-term expectations within the above context:
- that the level of confidence of our long-term expectations plays a significant role in influencing market sentiment (see Chapter 12, Section II);
- that, over the course of recent history, enterprise has seen increasing levels of investment from people uninvolved in the enterprise itself, which means that said remote investors are less experientially equipped to assess the value of these enterprises (see Chapter 12, Section III);
- that our convention, of grounding long-term expectations in the assumption that the current status quo will more or less hold its course, at once afford individual investors relatively stable context to adjust their investments, but also contributes to our inability to systematically forecast how marginal efficiency of capital will develop over time (see Chapter 12, Section IV);
- that our long-term expectations are highly variable and unstable due to factors like investors not having requisite experience to value their investments, memetic booms and busts which swing market value wildly around a reasonable value assessment, other ephemeral circumstantial phenomena which impact investor sentiment;
- the predominant influence of speculators on the market as opposed to reasonable investors assessing prospective yield, and the sentiment of the lending institutions which fund speculators (see Chapter 12, Section V);
- that increases in liquidity in investment markets, due to mechanisms like public stock exchanges, tend to be accompanied by an increasing prevalence of speculators focused on predicting market sentiment rather than reasonably assessing long-term prospective yield (see Chapter 12, Section VI);
- and finally that our economic agency is not purely based on reasoned calculations, but also whims, emotions, and perceived market/social sentiment.
All of this goes to show that our ability to assess prospective yield based on short-term and long-term expectations is subject to an immense amount of randomness, and that on a collective level, due to the high liquidity of investment markets, this arguably enables an assessment vacuum to be filled by speculators who are ultimately concerned with predicting (if not manipulating) market sentiment, in lieu of a more substantial manner of deriving profits.