The Quarterly Journal of Economics article and the atomic hypothesis
In 'The General Theory of Employment', an article by Keynes published in The Quarterly Journal of Economics (Keynes, 1937), the model of ethical behaviour investigated in TP seems to metamorphose into the model of economic behaviour adopted by the 'classical economists' such as Arthur Cecil Pigou. Keynes's critique focuses on the methods of classical economic theory based on this model. He describes the characteristics of the model as follows:
[In the classical economic system] at any given time facts and expectations were assumed to be given in a definite and calculable form; and risks, of which, though admitted, not much notice was taken, were supposed to be capable of an exact actuarial computation. The calculus of probability, though mention of it was kept in the background, was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself; just as in the Benthamite calculus of pains and pleasures or of advantage and disadvantage, by which the Benthamite philosophy assumed men to be influenced in their general ethical behavior.
(Keynes, 1937, pp. 212-13)
One of the most important subjects in economic theory is 'wealth, or the accumulation of wealth'. However, it should not be compatible with 'the world of certainty' underlying the model of classical economists. Keynes is confident enough to assert that:
The whole object of the accumulation of Wealth is to produce results, or potential results, at a comparatively distant, and sometimes at an indefinitely distant, date. Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the method of the classical economic theory.
(Keynes, 1937, p. 213)
To sum up, the subject of 'wealth, or the accumulation of wealth' inherently concerns a vague and uncertain future; as a result, it is something intractable for classical economic theory, because it would always reduce uncertainty into certainty by means of numerically measurable concepts of probability.
It is worth pointing out that the possibility of appraising 'uncertain' knowledge on Keynesian assumptions concerning economic behaviour is based on a restricted concept. In this regard, Keynes explains that:
By 'uncertain' knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable ... About these matters [the prospect of a European war, the price of copper and the rate of interest 20 years hence, and so on] there is no scientific basis on which to form calculable probability whatever. We simply do not know.
(Keynes, 1937, p. 214)
Let me state proposition (a), for example 'the price of copper 20 years hence will be about x Euro or dollars'. And then, suppose Keynes's 'rational, economic men' try to derive their probable beliefs [a] of this proposition from their actual or hypothetical knowledge [h]. In this case, they cannot find a scientific basis on which to form the proposition (premise or evidence) [h] intimately relating to their knowledge. Therefore, it is basically impossible to establish the probability relation a = a/h. Indeed, this is what 'uncertain' knowledge means.8
It is worth recalling here that Keynes asks an interesting question: 'How do we manage in such circumstances to behave in a manner which saves our faces as rational, economic men?' In order to rationalize their behaviour, Keynes's 'rational, economic men' will adopt certain strategic assumptions. I want to focus exclusively upon the last of those assumptions, as it would seem to be the most important in my subject matter. That is to say:
Knowing that our own individual judgement is worthless, we endeavour to fall back on the judgement of the rest of the world which is perhaps better informed. That is, we endeavour to conform with the behaviour of the majority or the average. The psychology of a society of individuals each of whom is endeavouring to copy the others leads to what we may strictly term a conventional judgement.
(Keynes, 1937, p. 214; emphasis added)
It seems to me that most economic men - individuals obsessed with such a conventional judgement - emerge on the stage of an organized investment market, namely, the stock exchange. In The General Theory, Keynes calls them the average private investor or the general public in contrast to professional experts. They have, to be sure, no definite preferred list of various kinds of securities, since there is, for them, no certain basis to foresee rationally the events likely to arise in the future.
Thus their behaviour, based on such conventional judgements, would be easily influenced by mass psychology fluctuating in accordance with day-to-day circumstances in the market. It is interesting to note, here, that Keynes would add
In particular, being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation.
(Keynes, 1937, pp. 214-15)
But, what, then, is the behaviour of professional experts or professional investors? Keynes clearly answers this question:
Most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public.
(GT, p. 154)
Actually, most professionals will exclusively endeavour 'to guess better than the crowd how the crowd will behave' (GT, p. 157).
It is, therefore, obvious that all of them - the general public and even the professional experts - emerging on the stage of the stock exchange could never be entitled to be the 'individual' assumed in the atomic hypothesis, because, being influenced by mass psychology, they do not, it would seem, behave as distinct, independent and rational economic men. Moreover, it is worth pointing out that a strictly defined 'conventional judgement', which consists basically of the psychology of a society of individuals, runs directly counter to a rational probable judgement of the 'individual' as defined in TP.
To sum up, all this, I think, renders the atomic hypothesis an unsuitable assumption for the analysis of the behaviour of economic subjects in organized investment markets such as explained in GT, since we cannot regard them as the legally atomic units based on their own rational and distinct preferences.