A Prescient Passage From 1937

One can read Keynes as proposing an alternative theory of value. Hyman Minsky advances this reading to some extent. Classic texts for this reading include chapter 17 of the General Theory and Hugh Townshend's 1937 article on Keynes' book. The following passage is from the latter:

"... The following example ... I have made, for the sake of clarity, so extreme as to be absurd if taken literally. Imagine the community, during a given short period, to be all asleep, so that in this period neither exchange nor new production takes place, and prices must be supposed to remain where they were when business closed down the previous evening. Suppose that, on waking up the next morning and resuming business, all wealth-owners find that a fit of optimism about the (prospective) price of residential property has come over them. (I have taken this particular asset as typical of an asset having a high degree of durability, a long period of production and a low degree of substitutability, and am ignoring the complications due to the existence of various types of residential houses, selling at different prices and more or less inter-substitutable; that is to say, we assume only one kind of house available to live in or to deal in or to build.) Immediately the normal exchange of residential house-property resumes in the morning, there will be a sellers' market and the price will rise sharply. If we further assume the increase in liquidity-premium attaching to houses owing to the mental revaluations of owners and potential owners to be equal in all cases - that is, the change in opinion to be unanimous - no more and no less buying and selling will take place than on the day before. (More money will be required, other things being equal, to finance this volume of trade in houses at the higher price-level; we assume this to be forthcoming to all who want to deal, e.g. out of bank-loans.) If opinion is not unanimous, additional exchange of houses between the 'bulls' and the 'bears' will take place and will settle the price, but not in general at its former level; we assume for, the sake of the example, that the bulls preponderate, so that the price rises, the necessary money for the dealing, as before, being forthcoming. House-building will, of course, have become an abnormally profitable occupation; and in time the diversion of resources to this industry will come into play and will tend to readjust the relative prices of houses and of assets and people's expectations about them towards their former levels. But before it can do so completely, in general further (similar or opposite) spontaneous changes in the liquidity-premiums attaching to the existing houses will have taken place; obviously the physical production of new houses can never take place fast enough for its effect on prices to catch up with people's purely mental revaluations of existing ones. For the latter operate without any time-lag at all. Of course, in practice, the possibility or prospect of new production bringing down again the money-price of houses is present to people's minds, and operates to diminish optimism or to cause a wave of optimism to be followed by a wave of pessimism. (It is essential to the argument that people think in term of money-prices ...) But there is in fact no reason why new building should ever bring down the money-price of houses at all; if the price of building materials and/or labour is rising rapidly, the new production of houses may operate to reduce their relative price only, the prices of other valuables rising to the necessary degree - or, of course, intermediately to any extent. Or again, all prices may fall, that of houses more than others; or all prices may rise, that of houses less than others. The course of the actual money-price of houses is thus quite indeterminate, even in the shortest period, unless we know the course of the money-price of some one single or composite valuable (e.g. labour) - i.e. unless we have a 'convention of stability.' And, even so, the relative price, and therefore in spite of the convention of stability, the actual price of houses is still not precisely determined; it remains indeterminate to the extent to which it may be influenced by unknown changes in liquidity-preferences. This holds even in the shortest period." -- Hugh Townshend (1937) "Liquidity-Premium and the Theory of Value", Economic Journal, V. 47, N. 185 (March): pp. 157-169.

Townshend continues by considering this argument as valid for any durable asset, including monetary assets and equitities. He cites, as another example, cotton-mills in Lancashire during the 1920s. According to Townshend, cotton mills were being bought and sold, not with regard to "expectations about the price of cotton goods", but with the intent to "flip" them - to use the jargon of the recent U.S. housing market.