ABSTRACT
The acceptance of a liquidity preference theory of interest forces one to reexamine the commonly held notion that the interest rate serves to allocate resources intertemporally through its coordination of saving and investment. This enduring idea informs much of the current discussion on topics such as the government deficit, the shortage of savings, and the low level of investment. To a large extent, however, the theory of intertemporal coordination on which people base their policy judgments is only vaguely understood. Journalists, politicians and even some professional economists often appear as confirmation of Keynes' (1936: 383) remark about hard-headed practical people being slaves to some defunct economist. In this chapter, we wish to unearth the ideas of these defunct economists and examine them in the light of our liquidity preference theory of interest.
