Keynes' General Theory of Interest

The theory of interest is one of the most controversial areas in economic theory. Keynes’ liquidity preference theory has been largely ignored but this original and provocative work shows that it is worthy of reconsideration. Although the inspiration is derived from Keynes’ original thoughts, the theory has been recast from the ground up, starting with more exacting definitions of liquidity and liquidity preference. A theory relevant to modern economics must take account of the motivations of speculative wealth-holders and show how they interact with time preferences of savers and the capital productivity considerations of producer-investors. Fiona Maclachlan reaches the unconventional result that liquidity preference, in itself, can explain the existence of interest, but that time preference and capital productivity cannot. This result is reinforced with a model showing how, under assumptions plausible for an economy with developed financial institutions, speculative wealth-holders can dominate over savers and producer-borrowers in determining the level of interest.
The central argument is also supported by Keynes’ writings, particularly those in his recently published correspondence. Indeed it is the insights which are drawn upon in this book, rather than those which are subsequently developed in the Keynesian literature, that Keynes considered the most important.