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utilities: his time preferences decide his allocation between con-
sumption and investment (between spending on present vs. future
consumption); his utility of money decides how much he will keep in
his cash balance. In order to invest resources in the future, he
must restrict his consumption and save funds. This restricting is
2
Dennis H. Robertson,  Mr. Keynes and the Rate of Interest, in Readings in
the Theory of Income Distribution (Philadelphia: Blakiston, 1946), p. 440. Also see
the article by Carl Landauer,  A Break in Keynes s Theory of Interest, American
Economic Review (June, 1937): 260 66.
Keynesian Criticisms of the Theory 39
his savings, and so saving and investment are always equivalent.
The two terms may be used almost interchangeably.
These various individual valuations sum up to social time-pref-
erence ratios and social demand for money. If people s demand for
cash balances increases, we do not call this  savings leaking into
hoards ; we simply say that demand for money has increased. In
the aggregate, total cash balances can only rise to the extent that
the total supply of money rises, since the two are identical. But real
cash balances can increase through a rise in the value of the dollar.
If the value of the dollar is permitted to rise (prices are permitted to
fall) without hindrance, no dislocations will be caused by this
increased demand, and depressions will not be aggravated. The
Keynesian doctrine artificially assumes that any increase (or
decrease) in hoards will be matched by a corresponding fall (or rise)
in invested funds. But this is not correct. The demand for money is
completely unrelated to the time-preference proportions people
might adopt; increased hoarding, therefore, could just as easily
come out of reduced consumption as out of reduced investment. In
short, the savings-investment consumption proportions are deter-
mined by time preferences of individuals; the spending-cash bal-
ance proportion is determined by their demands for money.
THE LIQUIDITY  TRAP
The ultimate weapon in the Keynesian arsenal of explanations
of depressions is the  liquidity trap. This is not precisely a cri-
tique of the Mises theory, but it is the last line of Keynesian
defense of their own inflationary  cures for depression. Keyne-
sians claim that  liquidity preference (demand for money) may be
so persistently high that the rate of interest could not fall low
enough to stimulate investment sufficiently to raise the economy
out of the depression. This statement assumes that the rate of
interest is determined by  liquidity preference instead of by time
preference; and it also assumes again that the link between savings
and investment is very tenuous indeed, only tentatively exerting
itself through the rate of interest. But, on the contrary, it is not a
question of saving and investment each being acted upon by the
40 America s Great Depression
rate of interest; in fact, saving, investment, and the rate of interest
are each and all simultaneously determined by individual time pref-
erences on the market. Liquidity preference has nothing to do with
this matter. Keynesians maintain that if the  speculative demand
for cash rises in a depression, this will raise the rate of interest. But
this is not at all necessary. Increased hoarding can either come
from funds formerly consumed, from funds formerly invested, or
from a mixture of both that leaves the old consumption invest-
ment proportion unchanged. Unless time preferences change, the
last alternative will be the one adopted. Thus, the rate of interest
depends solely on time preference, and not at all on  liquidity
preference. In fact, if the increased hoards come mainly out of
consumption, an increased demand for money will cause interest
rates to fall because time preferences have fallen.
In their stress on the liquidity trap as a potent factor in aggra-
vating depression and perpetuating unemployment, the Keyne-
sians make much fuss over the alleged fact that people, in a finan-
cial crisis, expect a rise in the rate of interest, and will therefore
hoard money instead of purchasing bonds and contributing toward
lower rates. It is this  speculative hoard that constitutes the  liq-
uidity trap, and is supposed to indicate the relation between liq-
uidity preference and the interest rate. But the Keynesians are here
misled by their superficial treatment of the interest rate as simply
the price of loan contracts. The crucial interest rate, as we have
indicated, is the natural rate the  profit spread on the market.
Since loans are simply a form of investment, the rate on loans is
but a pale reflection of the natural rate. What, then, does an expec-
tation of rising interest rates really mean? It means that people
expect increases in the rate of net return on the market, via wages
and other producers goods prices falling faster than do consumer
goods prices. But this needs no labyrinthine explanation; investors
expect falling wages and other factor prices, and they are therefore
holding off investing in factors until the fall occurs. But this is old-
fashioned  classical speculation on price changes. This expecta-
tion, far from being an upsetting element, actually speeds up the
adjustment. Just as all speculation speeds up adjustment to the
proper levels, so this expectation hastens the fall in wages and
other factor prices, hastening the recovery, and permitting normal [ Pobierz całość w formacie PDF ]