ABSTRACT
This chapter focuses on Modigliani’s famous paper ‘Liquidity Preference and the Theory of Interest and Money’ (1944, hereinafter ‘Liquidity’). Like Hicks, Modigliani also claims that the General Theory is a particular case of Classical theory and relies on the canons of general equilibrium. However, unlike Hicks, Modigliani’s contribution concerns not ‘pure theory’, but only ‘pragmatic’ macroeconomics. In this field he makes at least two innovations with respect to ‘Mr. Keynes and the “Classics”’. First, he no longer regards aggregates as being ‘autonomous’ and introduces the labour market and the production function to the basic model. Second, he rejects the temporary equilibrium perspective and restores the Marshallian distinction between short-and long-run equilibrium.
