Plastic Full Quantity Theory
In economics, the concept of ‘Plastic Full Quantity Theory’ (PFT) was developed in the 1930s by John Maynard Keynes. The theory suggests that the “supply” and “demand” for an asset or currency, for example, are not necessarily fixed. In particular, it argues that if the “price” of the asset or currency experiences a significant volatility, then the effect of the change on the quantity demanded and supplied could differ from what would otherwise be expected.
Keynes argued in his ‘General Theory of Employment, Interest and Money’ (1936) that this phenomenon could occur because there is a “plastic quantity” of money and other assets which can be made available depending on the elasticity and volatility of the underlying asset or currency price. He argued that the level of demand and supply of the underlying asset or currency depends in part on the elasticity or volatility of its price. If the asset or currency is highly volatile, then the position of the supply and demand curves become more elastic, meaning that an alteration in the price of the asset or currency will result in a greater change in the quantity demanded and supplied than if the asset or currency was steady.
The practical implications of this theory are twofold. Firstly, it implies that decision makers in financial markets should pay attention to the volatility of the asset or currency being traded and build a decision around this. Secondly, it also provides a framework for understanding the behavior of investors during episodes of extreme volatility. In particular, if investors are faced with highly volatile assets or currency prices, then they may modify their expectations around the quantity of a particular asset that they would typically buy or sell in the event of price changes, taking into account the potential for a greater change in the quantity demanded and supplied.
The plastic full quantity theory has been used in various investment strategies, with some financial advisors advocating its use as a means of maximizing returns. For example, one strategy may suggest that investors buy a small amount of an asset with a high degree of volatility, such as Bitcoin, while also investing in less volatile assets, such as bonds or stocks, to help diversify their portfolio. The concept is also applied to central banking policies, as central banks often try to respond to changes in the price of their respective currencies in order to try and stabilize their economies.
However, it should be noted that while the plastic full quantity theory has some relevance in understanding the behavior of investors, it is not without its critics. Some economists argue that the theory does not capture the full complexity of factors that influence investment decisions and may fail to take into account the potential for unexpected events and changes in investor sentiment. Others have argued that investment strategies based on the concept of PFT may be too aggressive in some instances and may involve significant risk and are not suitable for more conservative portfolios.
Overall, the plastic full quantity theory is a useful tool for decision makers in financial markets, and can potentially help investors maximize their returns when volatility is present. However, it is important to consider the potential risks associated with a strategy based on the concept and remember that no investment strategy is without its drawbacks. As such, investors should always assess the potential upside and downside of any strategy and consult with a financial advisor before making any decisions.