Economics Dictionary of ArgumentsHome
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| Liquidity preference: Liquidity preference in economics, introduced by John Maynard Keynes, refers to individuals' desire to hold cash or easily convertible assets instead of less liquid investments. It depends on motives like transactions, precautionary needs, and speculation, influencing interest rates and money demand in the economy._____________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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Franco Modigliani on Liquidity Preference - Dictionary of Arguments
Rothbard III 786 Liquidity preference/Modigliani/Rothbard: Modigliani explains this "liquidity preference" as follows: „we should expect that any fall in the rate of interest ... would induce a growing number of potential investors to keep their assets in the form of money, rather than securities; that is to say, we should expect a fall in the rate of interest to increase the demand for money as an asset.“(1) RothbardVsModigliani: This is subject to the criticism, (…) that the rate of interest is here determining, and is not itself explained by any cause. Furthermore, what does this statement mean? Interest rates/Keynesianism: 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 787 RothbardVsKeynes/VsLiquidity preference: 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. Modigliani: Hence, Modigliani: "Having made his consumption-saving plan, the individual has to make decisions concerning the assets he owns"; i.e., he then allocates them between money and securities.“(2) Rothbard: In other words, people first decide between consumption and saving (in the sense of not consuming); and then they decide between investing and hoarding these savings. But this is an absurdly artificial construction. People decide on all three of their alternatives, weighing one against each of the others. To say that people first decide between consuming and not consuming and then choose between hoarding and investing is just as misleading as to say that people first choose how much to hoard and then decide between consumption and investment.(3) >Hoarding/Rothbard. Allocation/Rothbard: People, therefore, allocate their money among consumption, investment, and hoarding. The proportion between consumption and investment reflects individual time preferences. Consumption reflects desires for present goods, and investment reflects desires for future goods. An increase in the demand-for-money schedule does not affect the rate of interest if the proportion between consumption and investment (i.e., time preference) remains the same. >Time preference/Rothbard. Interest/RothbardVsKeynesianism: The rate of interest, we must reiterate, 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.(4) 1. Modigliani, "Liquidity Preference and the Theory of Interest and Money," pp. 139-40. .” In Henry Hazlitt, ed., The Critics of Keynesian Economics. Princeton, N.J.: D. Van Nostrand, 1960. Reprinted by University Press of America, 1983. 2. Ibid., p. 137. 3. See the critique of the Keynesian doctrine by Tjardus Greidanus, The Value of Money (2nd ed.; London: Staples Press, 1950), pp. 194-215, and of the liquidity-preference theory by D.H. Robertson, "Mr. Keynes and the Rate of Interest" in Readings in the Theory oflncome Distribution, pp. 439-41. In contrast to Keynes' famous phrase that the rate of interest is "the reward for parting with liquidity," Greidanus points out that buying consumers' goods (or even producers' goods in Keynes' sense of "interest") sacrifices liquidity and yet earns no interest "reward." Greidanus, Value of Money, p. 211. Also see Hazlitt, Failure of the "New Economics," pp. 186 ff. 4. Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 529-30._____________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. |
Modigliani I Franco Modigliani Frank J. Fabozzi Capital Markets: Institutions and Instruments. New Jersey 1996 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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