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On Keynes's Criticism of the Loanable Funds Theory

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  • Giancarlo Bertocco

Abstract

By accepting the claims of the loanable funds theory, contemporary monetary theory distances itself from Keynes's view of the rate of interest as a monetary phenomenon, and overlooks the arguments Keynes used to respond to the criticism of supporters of the loanable funds theory such as Ohlin and Robertson. This paper argues that the explicit consideration of the finance motive and the role of banks in financing investment does not imply acceptance of the loanable funds theory, but instead facilitates the elaboration of an alternative to the loanable funds theory. Associated with this alternative theory of credit is an explanation of the monetary nature of the fluctuations in income and employment, which is different from and more persuasive than accounts based only on the liquidity preference theory.

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  • Giancarlo Bertocco, 2013. "On Keynes's Criticism of the Loanable Funds Theory," Review of Political Economy, Taylor & Francis Journals, vol. 25(2), pages 309-326, April.
    • Handle: RePEc:taf:revpoe:v:25:y:2013:i:2:p:309-326
    DOI: 10.1080/09538259.2013.775829
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    1. Bindseil, Ulrich, 2004. "Monetary Policy Implementation: Theory, past, and present," OUP Catalogue, Oxford University Press, number 9780199274543.
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    1. alberto, botta, 2011. "Fiscal policy, eurobonds and economic recovery: some heterodox policy recipes against financial instability and sovereign debt crisis," MPRA Paper 33860, University Library of Munich, Germany.
    2. Marc Lavoie, 2014. "A comment on 'Endogenous money and effective demand': a revolution or a step backwards?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(3), pages 321-332, July.
    3. Gloria Dhahabu & Gitonga Doreen & Barasa Eliakim & Moses Kiarie & Ruth Kibaara & Dismas Omimi & Evusa Zablon & Ngeta Jacqueline, 2022. "Effect of Financial Risks on Financial Performance of Tier One Commercial Banks in Kenya," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(6), pages 261-270, June.
    4. Faruk Ülgen, 2015. "From liberal finance inconsistency to relevant systemic regulation : an institutionalist analysis," Post-Print halshs-01166696, HAL.
    5. Giancarlo Bertocco & Andrea Kalajzić, 2022. "On the monetary nature of savings: a critical analysis of the Loanable Funds Theory," Working Papers PKWP2206, Post Keynesian Economics Society (PKES).
    6. 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.
    7. Pesenti, Amos, 2015. "The origin of inflation in a domestic bank-based payment system," FSES Working Papers 457, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    8. 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.
    9. Kehrwald, Bernie, 2014. "The Excess Demand Theory of Money," MPRA Paper 57603, University Library of Munich, Germany.

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