Re: Liquidity Preference and State Theory of Money

["Esteban Perez" <eperez@xxxxxxxxxxxx>]

As Keynes wrote and we all know: ¨In what follows I use the term finance to mean the credit required in the interval between planning and execution¨ CW, XIV, Note 1. P. 261. Who said anything different???.
The point is that Keynes as he admitted in 1939 had made a fault in the GT by not introducing the process of capital formation and that to remedy this omission he introduced finance in his 1937 article. That is all. The further question is does this support the view that the Transactions demand in the GT was misspecified (as pointed out by P.D.)?.

Esteban Perez

<<< Ted Winslow <egwinslow@xxxxxxxxxx>  5/ 4  1:05p >>>

Esteban Perez wrote:

> In his 1938 letter to Shaw, Keynes wrote: ¨I described it (finance) as
> the coping stone and attached importance to it in my article mainly
> because it seemed to me that it provided a bridge betweeen my way of
> talking and the way of those who discuss the supply of loans and
> credits etc.¨ CW.XXIX, p282.
> Yet one year later, 1939, Keynes states that finance was introduced to
> remedy an omission in the GT: ¨In my General Theory of Employment,
> Interest and Money, I was seriously at fault in omitting any
> discusion...of the process of capital formation. Under spur of
> criticism I have since endeavoured to remedy this omission in an
> article published in this Journal (1937). I there introduced a
> conception serving the same purpose as, but not identical with, that
> of funds available for investment under the name of finance..´ CW,
> XIV, p.283.

The "finance motive" is a component of the transactions demand for
cash.  It's one of the reasons increased activity tends to increase
interest rates by reducing the amount of money available for "inactive
balances".

The motive has nothing to do with "financing" investment in the sense
of it being possible for funds for investment additional to saving out
of current income to be made available through money supply creation or
"dishoarding" and hence for investment to differ from saving out of
current income.  It is a matter of national income accounting that
saving (Y - C) must necessarily be identically equal to "investment"
i.e. that part of output which isn't purchased by consumers.  This
point is repeated in the context from which you've taken the second
passage.

"They [the League of Nations Committee of Statistical Experts] are
concerned with the amount of saving set aside out of current income at
a date appreciably prior to that of the current investment which they
have in view; and they point out, quite correctly, that there is no
reason to expect equality between such saving and such investment
(after correcting the latter for the fact that it is gross and not
net).  But they do not point out that it follows no less clearly from
the definitions which they have adopted that the amount of saving which
is taking place *at the same time* as the investment must be exactly
equal to it (both reckoned net).
	"This corollary is not merely a neat truism.  For unless it is kept in
mind, the reader is very likely to be led to false conclusions.  For
example, he might naturally suppose - for anything the Committee say to
the contrary - that the right way to prepare for an increase of
investment is to save more at the appropriately prior date.  But the
corollary shows that this is impossible.  Saving at the prior date
cannot be greater than the investment at that date.  Increased
investment will always be accompanied by increased saving, but it can
never be preceded by it.  Dishoarding and credit expansion provides not
an *alternative* to increased saving, but a necessary preparation for
it.  It is the parent, not the twin, of increased saving." (XIV, p. 281)

The realized investment may, of course, not have been intended.  If
it's greater than what was inte