Economics Dictionary of ArgumentsHome
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| Demand for money: Demand for money in economics refers to the desire of individuals and institutions to hold cash or liquid assets for transactions, precautionary needs, and speculative purposes. It's influenced by interest rates, inflation expectations, economic stability, and convenience. The demand for money reflects the balance between holding wealth in cash versus other interest-bearing assets. See also Demand, Money, Markets, Interest rates, Inflation, Consumption._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Keynesianism on Demand for Money - Dictionary of Arguments
Rothbard III 789 Speculative demand/interest/Keynesianism/Rothbard: Admitting (…) that time preference determines the proportions of consumption and investment and that the demand for money determines the proportion of income hoarded, does the demand for money play a role in determining the interest rate? >Time preference/Rothbard, >Demand for money/Rothbard. The Keynesians assert that there is a relation between the rate of interest and a "speculative" demand for cash. Should the schedule of the latter rise, the former rises also. RothbardVsKeynesianism: But this is not necessarily true. A greater proportion of funds hoarded can be drawn from three alternative sources: (a) from funds that formerly went into consumption, (b) from funds that went into investment, and (c) from a mixture of both that leaves the old consumption-investment proportion unchanged. Condition (a) will bring about a fall in the rate of interest; condition (b) a rise in the rate of interest, and condition (c) will leave the rate of interest unchanged. Thus hoarding may reflect either a rise, a fall, or no change in the rate of interest, depending on whether time preferences have concomitantly risen, fallen, or remained the same. >Hoarding. Keynesianism: The Keynesians contend that the speculative demand for cash depends upon and determines the rate of interest in this way: if people expect that the rate of interest will rise in the near future, then their liquidity preference increases to await this rise. Equilibirum theory/Keynes/RothbardVsKeynes: This, however, can hardly be a part of a long-run equilibrium theory, such as Keynes is trying to establish. Speculation: Speculation, by its very nature, disappears in the ERE (Evenly Rotating Economy), and hence no fundamental causal theory can be based upon it. >Evenly Rotating Economy/Rothbard. Interest: Furthermore, what is an interest rate? One grave and fundamental Keynesian error is to persist in regarding the interest rate as a contract rate on Ioans, instead of the price spreads between stages of production. >Production structure/Rothbard. The former (…) is only the reflection of the latter. A strong expectation of a rapid rise in interest rate means a strong expectation of an increase in the price spreads, or rate of net return. Speculation: A fall in prices means that entrepreneurs generally expect that factor prices will fall further in the near future than their selling prices. >Factors of Production, >Factor market, >Structure of production/Rothbard. But it requires no Keynesian labyrinth to explain this phenomenon; all we are confronted with is a situation in which entrepreneurs, expecting that factor prices will soon fall, cease investing and wait for this happy event so that their return will be greater. This is not "liquidity preference," but speculation on price changes. >Liquidity preference/Keynesianism, >Speculation/Rothbard, >Investments/Rothbard, >Demand for money/Keynesianism. Rothbard III 790 Demand for money/Keynesianism/Rothbard: … The final Keynesian bogey is that people may acquire an unlimited demand for money, so that hoards will indefinitely increase. This is termed an "infinite" liquidity preference. >Liquidity preference/Keynesianism. Vs „Infinite“ money demand see >Demand for Money/Rothbard. And this is the only case in which neo-Keynesians such as Modigliani believe that involuntary unemployment can be compatible with price and wage freedom. >Modigliani. The Keynesian worry is that people will hoard instead of buying bonds for fear of a fall in the price of securities. >Hoarding/Rotbhard. RothbardVsKeynesianism: Translating this into more important "natural" terms, this would mean, (…) not investing because of expectation of imminent increases in the natural interest rate. Rather than act as a blockade, however, this expectation speeds the ensuing adjustment. Furthermore, the demand for money could not be infinite since people must always continue consuming, whatever their expectations. Of necessity, therefore, the demand for money could never be infinite. The existing level of consumption, in turn, will require a certain level of investment. As long as productive activities are continuing, there is no need or possibility of lasting unemployment, regardless of the degree of hoarding.(1) >Unemployment/Rothbard. Uncertainty: A demand for money to hold stems from the general uncertainty of the market. Keynesianism: Keynesians, however, attribute liquidity preference, not to general uncertainty, but to the specific uncertainty of future bond prices. RothbardVs: Surely this is a highly superficial and limiting view. In the first place, this cause of liquidity preference could occur only on a highly imperfect securities market. >Risks/Rothbard. LachmannVsKeynes: As Lachmann pointed out years ago in a neglected article, Keynes' causal pattern - "bearishness" causing "liquidity preference" (demand for cash) and high interest rates - could take place only in the absence of an organized forward orfutures market for securities. If such a market existed, both bears and bulls on the bond market „could express their expectations by forward transactions which do not require any cash. Where the market for securities is fully organized over time, the owner of 4% bonds who fears a rise in the rate of interest has no incentive to exchange them for cash, for he can always "hedge" by selling them forward.“(2) Rothbard III 792 Rothbard: Bearishness would cause a fall in forward bond prices, followed immediately by a fall in spot prices. Thus, speculative bearishness would, of course, cause at least a temporary rise in the rate of interest, but accompanied by no increase in the demand for cash. Hence, any attempted connection between liquidity preference, or demand for cash, and the rate of interest, falls to the ground. >Interest rates/Keynesianism, >Interest rates/Rothbard. 1. As Hutt points out, if we can conceive of a situation of infinitely elastic liquidity preference (and no such situation has ever existed), then "we can conceive of prices falling rapidly, keeping pace with expectations of price changes, but never reaching zero, with full utilization of resources persisting all the Way." Ibid., p. 398. 2. L.M. Lachmann, "Uncertainty and Liquidity Preference," Economica, August, 1937, p. 301._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Keynesianism Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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> Counter arguments against Keynesianism
> Counter arguments in relation to Demand for Money
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