the Criticisms of liquidity preference Theory

  1. (1) Reed factors ignored:

  2. Keynes held that interest is purely a monetary phenomenon as it is determined by the monetary forces of supply and demand. Hazlitt criticized the theory on the ground that Keynes did not take into consideration the real factors on the determination of the rate of interest. Keynes believed that real factors like productivity, time preference had no influence on the rate of interest. Thus liquidity preference is one-sided.

  3. (2) No liquidity without saving:

  4. Keynes held that interest is the reward for parting with liquidity. He believed that interest is the amount of compensation for surrendering liquidity. He did not say that interest is a price for saving without saving no ingestible funds can be crated. Thus he ignored the abstinence waiting and time preference as the sole cause of interest payment. According Jacob Viner without saving there can be no liquidity to surrender. Thus rate of interest and saving are related.

  5. (3) In determinate theory:

  6. Keynes liquidity preference theory interested is indeterminate. According to him, the rate of interest is determined by the supply of money and liquidity preference. The position of liquidity preference depends on the level of income. Thus the rate of interest cannot be known without knowing the income level, on the other hand, cannot be known without knowing the volume of investment and volume of investment can not be determined without the knowledge of interest rates. Thus liquidity preference is indeterminate.

  7. (4) Long period ignored:

  8. Liquidity preference theory cannot explain the level of interest rate in the long run. He gives due importance on short period.

  9. (5) Contrary of facts:

  10. Liquidity preference theory is contrary to facts. According to Keynes when liquidity preference is high, But what is seen at the time of depression people want to have more cash balance with them. This means the liquidity preference of the people is high but in depression rate of interest is generally very low. This means the liquidity preference theory of interest is contrary to facts.

  11. (6) Self contradictory:

  12. According to Keynes interests the reward for parting with liquidity. But it is found that people who deposited money in form of fixed depositor any other short term bills can withdraw at any time or after a fixed period of time. Thus he gets back his liquidity and interests. He, therefore, receives interest without parting with liquidity.

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