Post-Keynesian liquidity preference theory four decades later: a reexamination

AbstractTracy Mott was best known as a scholar of the work of Michal Kalecki, but he also made an important contribution to Keynesian liquidity preference theory. In 1983 Tom Asimakopulos generated a firestorm in the Post Keynesian community with a series of articles claiming that while Keynes’s argument is that investment creates an equivalent amount of saving, this is true only ex post, after the multiplier has fully operated. Meantime, lack of savings could inhibit investment as the supply of bonds for long-term finance would exceed the supply of savings, driving up interest rates. Several Post Keynesians vociferously responded in defense of Keynes. Mott’s contribution to the debate approached the subject from a perspective that was more heavily influenced by Kalecki, Robinson, and Marx. Not only does the outcome of this debate impact our view of investment finance, but it also has implications for our view of financing government deficits. In this piece, I look back at Mott’s contribution to our understanding of liquidity preference, taking account of developments in Post Keynesian thought over the past four decades. The two most obvious and relevant are the endogenous money approach and Modern Money Theory.Keywords: Tracy Mottliquidity preferenceAsimakopulosMMTsaving and investment Notes1 Note that I will follow typical Post Keynesian practice in using the term “savings” to refer to a stock, and “saving” to refer to a flow.2 As it happened, Tom Asimakopulos had been one of my mentor’s (John Henry) professors and we met up at several of the Post Keynesian summer schools—first at Trieste and then in Knoxville. Tom was hurt by the reaction to his articles and believed that none of the critics really understood the point he was making. After many discussions, I was never clear on his interpretation of the critiques.3 See Snippe (Citation1985), Terzi (Citation1986), Davidson (Citation1986), Wray (Citation1988), and Kregel (Citation1984, Citation1986, Citation1988) for early critiques, Asimakopulos (Citation1985, Citation1986a, Citation1986b) for some of his responses, Sardoni (Citation2019 and Citation2020) for a recent defense, and Lavoie and Zezza (Citation2020) for a response to Sardoni. I will focus on Mott’s contributions.4 That is, “m” is the marginal propensity to buy bonds out of savings, presumed to be less than one. See Davidson (Citation1978).5 Note also that the investment project and sale of bonds can be completed before “equilibrium” as defined by Asimakopulos to mean full operation of the multiplier, if, for example, inventories have not been fully replaced in the consumption sector.6 Quoted in Kregel Citation2019; equating saving (ex ante or ex post) with finance is a category error. See his chapter for further discussion of this point.7 This follows from the Kalecki profit equation: a reduction of the budget deficit and an increase of a current account deficit reduce profit flows and make it difficult to service debt.8 See Wray (Citation1990, 116–123) for discussion of Keynes’s views, and Wray (Citation1998) for an early exposition of MMT.9 See Wray (Citation1990, 135–138) for discussion of Minsky’s views.10 He went on to argue: “If the structure of government expenditure and taxation is such that the government deficit is a decreasing function of the level of income in the economy, then the increase in saving generated by an increase in investment will be less than this increase in investment. The consequent decrease in the government deficit dampens the multiplier effects of the increase in investment in a manner similar to the increase in imports in an open economy” (1983 231)11 Note that readers should not jump to the conclusion that MMT argues that government spending automatically creates an equivalent amount of tax revenue—as one referee did. In the expanded injection-leakage model, an increase of one injection—such as government spending—raises income sufficiently that the total of the leakages (including taxes) rises to equal the increase of the injection. Further, as the Godley sectoral balance equation shows, an increase of the government’s deficit will increase the surplus of at least one other sector (domestic private sector or foreign sector). However, as Wray and Nersisyan (Citation2020) have shown, a sustained increased of the government budget deficit does increase economic growth, which increases tax revenue so that the deficit falls; as growth slows with the falling deficit, tax revenue growth falls and that opens up the deficit. This process repeats itself cyclically.12 To be clear, I am not accusing Asimakopulos of this confusion—he consistently argued that injections are causally prior to leakages. However, he believed that impacts on interest rates could be induced by injections that outpace desired saving.13 As J. Fagg Foster (Citation1981) put it, saving is the “pecuniary accountancy” of investment—the equality is guaranteed by accounting.Additional informationNotes on contributorsL. Randall WrayL. Randall Wray is at Levy Economics Inst, Annandale on Hudson, New York, USA.