Criticisms
Murray Rothbard rejected Keynes' theory of liquidity preference. In his book America's Great Depression, Rothbard argued that interest rates are instead determined by time preference. Says Rothbard, "Increased hoarding can either come from funds formerly consumed, from funds formerly invested, or from a mixture of both that leaves the old consumption-investment proportion unchanged. Unless time preferences change, the last alternative will be the one adopted. Thus, the rate of interest depends solely on time preference, and not at all on "liquidity preference." In fact, if the increased hoards come mainly out of consumption, an increased demand for money will cause interest rates to fall—because time preferences have fallen."
Read more about this topic: Liquidity Preference
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