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The loanable funds fallacy: saving, finance and equilibrium

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  • M. G. Hayes

Abstract

The loanable funds controversy cannot be settled without prior agreement on the meanings of income and equilibrium. The essential claim of loanable funds theory is that disequilibrium in the goods market affects the rate of interest. This paper introduces financial accounting concepts and a new understanding of the principle of effective demand to clarify that loanable funds theory relies on a concept of income other than current income, namely yesterday's income in the case of Robertson, or full-employment equilibrium income in the case of Hicks. In Robertson's case, this is a matter of bad accounting, a confusion between an income statement and a balance sheet. In Hicks's more subtle case, it is about the inapplicability of Walras' Law to a monetary economy. Keynes's principle embodies a Marshallian concept of system equilibrium under which the goods market is treated as never in disequilibrium in the sense required by loanable funds theory. Copyright The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

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  • M. G. Hayes, 2010. "The loanable funds fallacy: saving, finance and equilibrium," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 34(4), pages 807-820.
    • Handle: RePEc:oup:cambje:v:34:y:2010:i:4:p:807-820
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    File URL: http://hdl.handle.net/10.1093/cje/bep073
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    Cited by:

    1. Fabian Lindner, 2015. "Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory," World Economic Review, World Economics Association, vol. 2015(4), pages 1-1, February.
    2. Giancarlo Bertocco & Andrea Kalajzić, 2023. "A critical analysis of the loanable funds theory: some notes on the non-neutrality of money," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 40(1), pages 35-55, April.
    3. Fabian Lindner, 2012. "Saving does not finance Investment: Accounting as an indispensableguide to economic theory," IMK Working Paper 100-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Spahn, Peter, 2019. "Keynesian capital theory: Declining interest rates and persisting profits," Hohenheim Discussion Papers in Business, Economics and Social Sciences 10-2019, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    5. Icefield, William, 2020. "Liquidity preference in the Walrasian framework," MPRA Paper 98538, University Library of Munich, Germany.
    6. Kehrwald, Bernie, 2014. "The Excess Demand Theory of Money," MPRA Paper 57603, University Library of Munich, Germany.

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