Criticism of Liquidity Preference Theory

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Criticism of Liquidity Preference Theory
Keynes theory, too, has met with criticism: Firstly, it has been pointed out that the rate of interest is not purely a monetary phenomenon. Real forces like productivity of capital and thrifting css or saving by the people also play an important role in the determination of the rate of interest. Secondly~’. Keynes makes the rate of interest independent of the demand for investment funds, Actually, it is not so mdpc dcnt. The cash-balances of the businessmen are largely influenced by their demand for saving for capital investment. This demand for capital investment depends upon the marginal revenue producti\ ity of capital. Therefore, the rate of interest s not determined independently of the marginal prod k'(t. of capital or marginal efficiency of capital, e) call it. ·rdl .• liquidity preference is nor the only conceming the rate of interest. There arc several r which influence the rate of interest by declining the demand for and supply of investible funds. f rthly, the liquidity preference theory does not in the existence of different rate of interest pre- ‘I in the market at the same time. Owing to the eel homogeneity of cash balance, the rates of in, ha e to be uniform. Actually it is not so. Fin!I~.Keynes ignores saving or waiting as a means or source of investible fund. To part with Ii· kidney without there being any saving is meaningless. . the Keynesian theory only explains interest in the short run. It gives no clue to the rates of interest in the long run.  the borrower’s intention is not ‘0 much to reward parting with liquidity as to get a return on investment.

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Criticism of Liquidity Preference Theory