Conflicting Interpretations of the Notion of Liquidity Preference : A Review and Synthesis of Post-Keynesian Perspectives

In this paper I review recent Post-Keynesian debates about the notion of liquidity preference in the context both of Keynes' writings on and after the General Theory and also, modern portfolio theory. First, the paper reviews the Hayek-Sraffa debate to focus on certain issues raised by its protagonists which provide a continuing refrain over the years to follow. In particular, this section dwells on Sraffa's comments about the relationship obtaining between asset prices in the transition from one monetary equilibrium to another. The second section of the paper examines the General Theory, in part through the critical, yet obviously sympathetic eyes of Richard Kahn (1984). At this point, Keynes' views about the influence of equity prices on investment are addressed to demonstrate the appropriateness of a portfolio-based approach to the analysis of liquidity preference effects. The next section of the paper takes off from Kahn's concerns about the instability of the demand for money and liquidity preference schedules. Hyman Minsky (1975) and Victoria Chick's (1983) interpretations of the General Theory are brought together. The aim of this synthesis is to unbundle the workings of both the money and capital markets so that each of the individual effects of fluctuations in liquidity preference can be isolated. Both Minsky and Chick follow Keynes in presuming that the monetary authorities can control the money supply, although each question this presumption at certain points in their respective texts. The implications of money supply endogeneity are examined next, in the context of the debates between Randall Wray (a structuralist) and the Horizontalists, Basils Moore (1988) and Marc Lavoie (1985). At this point, the paper examines the implications for liquidity preference theory, of the growth in interest-earning, highly liquid, short-term instruments which can displace money in both its transactions and store-of-value functions. Paul Davidson's 1994 analysis of spot and flow demand prices is then discussed briefly to foreshadow later arguments about the relationship between flow-demand and long-period prices. Wray's analysis of the manner in which liquidity preference influences the relationship between spot and future prices of assets is also reviewed. This analysis provides the basis for a critique of Karacaoglu's efforts to incorporate liquidity preference effects within a Tobin-style portfolio model. The relationship between short and long run prices again comes to the fore in my discussion of Carlo Panico's long period interpretation of liquidity preference effects. Finally, issues for future research are canvassed