Psychology 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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John Maynard Keynes on Liquidity Preference - Dictionary of Arguments
Kurz I 114 Liquidity Preference/Keynes/Kurz: Keynes starts the chapter by pointing out “that the rate of interest on money plays a peculiar part in setting a limit to the level of employment.” Wherein lies “the peculiarity of money as distinct from other assets” (CWK 7, p. 222)(1)? Keynes defines the money rate of interest à la Wicksell and adds that with regard to all durable goods there is an analogue to the money rate of interest: “Thus for every durable commodity we have a rate of interest in terms of itself, a wheat-rate of interest, a copper-rate of interest, a house-rate of interest” (pp. 222–223)(1). In a footnote he adds: “This relationship was first pointed out by Mr Sraffa, Economic Journal, March 1932, p. 50”(2 (p. 223n)(1). At any given moment of time, these rates will generally not be equal to one another: the ratio between spot and future price will be “notoriously different” between different commodities: This, we shall find, will lead us to the clue we are seeking. For it may be that it is the greatest of the own-rates of interest … which rules the roost …; and that there are reasons why it is the money-rate of interest which is often the greatest (because, as we shall find, certain forces, which operate to reduce the own-rates of interest of other assets, do not operate in the case of money). (pp. 223–224)(1) Why is this so? Surprisingly, Keynes approaches the question by defining the own rates of different commodities not in terms of expected changes of prices but in terms of three characteristics that supposedly can all be translated into interest rate equivalents. These are 1) the “yield or output q... by assisting some process of production or supplying services to a consumer”; 2) the costs of holding the object or “carrying cost c”; and Kurz I 115 3) the “liquidity premium” l, expressing the amount, in terms of the object, its proprietor is willing to part company with for the “potential convenience or security” associated with the “power of disposal over an asset during a period” (p. 226).(1) Keynes concludes: It follows that the total return expected from the ownership of an asset over a period is equal to its yield minus its carrying cost plus its liquiditypremium, i.e. to q – c + l. That is to say, q – c + l is the own-rate of interest of any commodity, where q, c and l are measured in terms of itself as the standard. (p. 226)(1). SraffaVSKeynes: Sraffa spots immediately that the usual choice of money as standard of value has an important implication: “The point is, that in the case of the rate of the article chosen as standard, the effect upon it of the expected depreciation is concealed”.(2) Kurz: This is a crucial point, which Keynes apparently had lost sight of and which had seriously misled him. 1. Keynes, J. M. (1971–1989). The Collected Writings of John Maynard Keynes, D. Moggridge (ed.), London: Macmillan. 2. Sraffa, P. (1932). “Dr. Hayek on Money and Capital,” Economic Journal, 42, 42-53. Kurz, Heinz D. „Keynes, Sraffa, and the latter’s “secret skepticism“. In: Kurz, Heinz; Salvadori, Neri 2015. Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). London, UK: Routledge._____________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. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Kurz I Heinz D. Kurz Neri Salvadori Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). Routledge. London 2015 |
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