Keynesianism on Interest Rates - Dictionary of Arguments

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Interest rates: Interest rates represent the cost of borrowing money or the return on invested funds over a specified time, usually expressed as a percentage. They influence borrowing and saving decisions, impacting economic activities like loans, mortgages, and savings accounts, set by central banks or influenced by market forces like supply and demand. See also Central Bank, Economy, Supply, Demand, Markets. _____________ 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.

> Keynesianism	> Interest Rates	Keynesianism on Interest Rates - Dictionary of Arguments Rothbard III 787 Interest rates/Keynesianism/Rothbard: A fall in the rate of interest, according to the Keynesians, means that less interest is being earned from bonds, and therefore there is a greater inducement to hold cash. This is correct (as long as we allow ourselves to think in terms of the interest rate as determining instead of being determined), but highly inadequate. Rothbard III 788 RothbardVsKeynes: For if a Iower interest rate "induces" greater cash holdings, it also induces greater consumption, since consumption also becomes more attractive. In fact, one of the grave defects of the liquidity-preference approach is that the Keynesians never think in terms of three "margins" being decided at once. They think only in terms of two at a time. >Liquidity preference/Keynes, >Liquidity preference/Modigliani. Interest/RothbardVsKeynesianism: The rate of interest (…) is determined by time preferences, which also determine the proportions of consumption and investment. To think of the rate of interest as "inducing" more or less saving or hoarding is to misunderstand the problem completely.⁽¹⁾ >Time preference/Rothbard. Time preference: Admitting, then, 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? Rothbard III 789 Keynesianism: 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. >Speculative demand/Keynesianism. 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. 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 997 Interest rate/money supply /Rothbard: Equilibrium: It should not be surprising that the market tends to revert to its preferred ratios. The same process (…) takes place in all prices after a change in the money stock. Increased money always begins in one area of the economy, raising prices there, and filters and diffuses eventually over the whole economy, which then roughly returns to an equilibrium pattern conforming to the value of the money. Rothbard III 998 The market therefore reacts to a distortion of the free-market interest rate by proceeding to revert to that very rate. The distortion caused by credit expansion deceives businessmen into believing that more savings are available and causes them to malinvest - to invest in projects that will turn out to be unprofitable when consumers have a chance to reassert their true preferences. This reassertion takes place fairly quickly – as soon as owners of factors receive their increased incomes and spend them. Market interest rate/money supply/Economic theories/Rothbard: This theory permits us to resolve an age-old controversy among economists: whether an increase in the money supply can Iower the market rate of interest. Rothbard III 998 Mercantilism/Keynesianism: To the mercantilists - and to the Keynesians - it was obvious that an increased money stock permanently Iowered the rate of interest (given the demand for money). Classical economics: To the classicists it was obvious that changes in the money stock could affect only the value of the monetary unit, and not the rate of interest. RothbardVsMercantilism/RothbardVsKeynesianism: The answer is that an increase in the supply of money does Iower the rate of interest when it enters the market as credit expansion, but only temporarily. In the long run (and this long run is not very "long"), the market re-establishes the free-market time-preference interest rate and eliminates the change. In the long run a change in the money stock affects only the value of the monetary unit. >Time preference/Rothbard, >Savings/Rothbard, >Inflation/Rothbard, >Credit expansion/Rothbard. 1. Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 529-30. - - - Mause I 225 Interest Rates/Keynesianism: In Post-Keynesian models in the tradition of Keynes ⁽¹⁾ and Kalecki ⁽²⁾ it is often assumed that interest rates will have little influence on demand for goods in the real economy. In particular, there is skepticism about the interest rate response of investment demand. However, monetary policy is regarded as relevant to distribution policy because it is also assumed to have an influence on long-term interest rates and thus on the income generation of asset owners. >J. M. Keynes, >M. Kalecki, >Economic cycle, >Investment trap, >Monetary policy. 1. J. M. Keynes, The general theory of employment, interest and money. London 1936 2. Michal Kalecki, In Collected works of Michal Kalecki, Hrsg. Jerzy Osyatinski. Oxford 1973. _____________ 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 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018

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