Keynes goes further on, saying that a way to make the stock market less liquid is to impose huge transfer taxes on people. i. e. (pay huge sums of money to buy and sell shares), but he argued that this way the stock market would loose its advantage of being liquid(being able to get cash easily) and hamper investment. Here, Keynes suggests that a way in which these problems can be solved is to just give people 2 choices. (i) Either consume all their income or (ii) Invest it. This would ensure that there is a stable level of aggregate demand and thus, output and employment.
However, Keynes being a liberal economist felt uncomfortable with this and wanted to give the consumer choices along with the freedom to take decisions about their income, which left Keynes with ambivalent feelings about this idea. However, these policies would have successfully made the stock market less liquid, and thus ensured that stock prices remain constant, resulting in an equally stable rate of aggregate demand. In relation to the stock market as a whole, Keynes would have recognised its efficiency in that it encourages a lot of people to invest because of its high liquidity.
He would have also stressed on the fact that the stock market collects small amounts of investment and presents it to the use of the companies operating on the market. However, Keynes would have been adamant that the stock market is a very inefficient institution for the economy overall, as it creates massive fluctuations in stock prices and thus, through aggregate demand, output and employment. For Keynes the stock market would have been a very unstable organisation that creates uncertainty and makes economic planning difficult.
(He likens the stock market to a casino that it has a negative effect on the people and the economy). So, the essential thing that chapter 12 of the general theory is that it shows the poverty of the 45-degree line and the IS/LM framework, due to the absence of fundamental uncertainty and the role of conventions. Chapter 12 further reflects Keynes views of the stock market and outlines the relationship between stock prices and physical investment, which follows onto aggregate demand and finally output and employment.
Keynes conclusion of making the stock markets less liquid is very significant as it effectively shows the solution to the problem of fluctuations in output and employment. Although, chapter 12 is a only a part of the story of the stock market and its features, it has played a very important role in moulding economists views and beliefs and is considered an integrate part of the book that essentially changed macroeconomic thinking in the 1930’s i. e. The general theory of Employment, Interest and Money by John Maynard Keynes.
