Uncertainty and Liquidity-Preference

The prominent place which the concept of liquiditypreference has been occupying in recent literature on economics may be regarded as an indication of the urgent desire for an exhaustive investigation into the forces determining the demand for Money. The importance of the problem for both theoretical and practical purposes need not be stressed. In monetary theory no satisfactory progress can be hoped for without the help of marginal utilityanalysis, a type of investigation which is inapplicable as long as we remain ignorant of the character of the need which the possession of Money satisfies. For monetary policy, on the other hand, it is vital to have a satisfactory criterion for the division of the total quantity of Money into the effective (business-funds) and the ineffective (hoards) circulation, if we want to be able to form reliable estimates of the efficacy of monetary measures. In analysing the forces which determine the demand for cash-balances the economic theorist cannot hope to accomplish his task adequately, if he confines himself to the enumeration and classification of the various reasons for holding Money . In this field, as we shall see presently, motives are, indeed, a tricky subject. For in examining the causes of liquidity-preference we are actually side-stepping from the highroad of economic science, where preferences are identical with motives and must not be further analysed. Whereas, in general, economic theory strives to reduce all economic phenomena to consumers' (and savers') preferences, in the case of Money this procedure will not do. Why the connoisseurs of modern painting prefer pictures by Picasso to pictures by Utrillo is a question with which it has been generally agreed that the economist is not concerned. But why sometimes owners of wealth prefer holding their assets in form of cash-balances to other

Econometrics · Economics · Liquidity preference · Market liquidity · Microeconomics · Monetary economics · Preference · Economic theories and models · Economic Theory and Institutions · Economic Theory and Policy

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