Money, Banks and Finance in Economic Thought

Keynes's Road to the notion of liquidity prior to uncertainty

Tomo Shigeki, Independent Scholar

This paper will describe Keynes's particular path to the notion of liquidity by demonstrating that his intellectual premise closely matched Hume's scepticism at fin de siècle Cambridge. It provided the subject for Keynes's fellowship dissertation, Principles of Probability (PoP, 1907/08), which aimed to incorporate Hume's notion of probability into the accepted theories on probability. It led Keynes to fall into the so-called Fisherian fetter of statistics during his early 1910s lectures on money at Cambridge. The first step for Keynes to get emancipated from the fetter was to arrive at the notion of true velocity of circulation in the late roaring twenties. His struggle as a member of the Macmillan Committee helped him understand the paradoxical phenomenon of high long-term rate of interests sustained after the Great Depression in the early 1930s. It also oriented Keynes to adopt the notion of liquidity preference of the public as indicated by the rate of interest of the banking system. He propounded this in the Michaelmas lectures of 1932, though at the time, the notion of liquidity lacked any statistical foundation, as did the notion of true velocity of circulation. With a brief summary of the Austrian discrepancy, viz. the longest, but untouched so far, controversy between Carl Menger and Eugen von Böhm-Bawerk on the theory of interest, Keynes’s road to the notion of liquidity will be assessed as being beyond Hume's scepticism, on the side of which Böhm-Bawerk was in criticizing Menger's use/command theory of interest, and as being laid without the concept of uncertainty, at least prior to Hayek's book Price and Production (1931). The book provided Keynes an opportunity to recognise another aspect of Hume's philosophy, as underlining uncertainty rather than scepticism. Böhm-Bawerk's perspective, that Menger assumed the existence of surplus-value phenomena in asserting the existence of immaterial properties, like opportunities to earn (Erwerbsgelegenheit), for the explanation of interest phenomena, could meaningfully be applicable for assessing Keynes’s shift to the unperceptible notion of liquidity beyond Hume's Scepticism. Albeit the complete silence on Carl Menger, Keynes's acceptance of the notion of liquidity can be seen as an atavistic revival of the Mengerian notion of command (Verfügung) of money/capital, regardless of whether he was aware of it or not.


Keywords: John Maynard Keynes, Carl Menger, Böhm-Bawerk, Hayek, liquidity, uncertainty, Hume's Scepticism, Cambridge School, Austrian School

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