On Keynesian Theories of Liquidity Preference

This essay offers a macroeconomic perspective on the interaction between the financial system and the level of economic activity, focusing on the relationship between liquidity preference, investment and the role of confidence. The analysis builds on the distinction between portfolio decisions on the one hand, and production and spending decisions on the other. Two prominent Keynesian theories of liquidity preference, those of Tobin and Hicks, are assessed. It is argued that while both of these theories offer illuminating insights into particular aspects of Keynes’s monetary thought, they must be qualified in respect of their bearing on the theory of liquidity preference.