Giancarlo Bertocco on Keynes’s criticism of the Loanable Funds Theory

Recently, Lars P. Syll posted a critique of the loanable funds theory (see here), and Matias Vernengo provides his take here. Below is a paper by Giancarlo Bertocco, in which he provides an analysis of Keynes' criticism of LFT.

From the abstract:
Contemporary monetary theory, by accepting the theses of the Loanable funds theory, distances itself from Keynes, who considered the rate of interest as an exclusively monetary phenomenon, and overlooks the arguments Keynes used, following publication of the General Theory, to respond to the criticism of supporters of the Loanable funds theory such as Ohlin and Robertson. This paper aims to assert that the explicit consideration of the role of banks in financing firms‘ investments connected with the specification of the finance motive does not imply acceptance of the LFT, which holds that the interest rate is a real phenomenon determined by saving decisions, but makes it possible to elaborate a theory of credit alternative to the LFT and a sounder theory of the non neutrality of money than the one based on the liquidity preference theory. 
Read rest here and here.


  1. Just a clarification, in that post I do not provide any critique of LFT, it's just an exposition Wicksell's ideas in simplified form. A critique demands a discussion of the idea o the natural rate implicit in LFT. By the way, the issue of what finances investment, once one has the multiplier (Effective Demand) story is a completely different thing. Keynes' stuff, including the finance motive and all that, gets complicated by his acceptance of the Marginal Efficiency of Capital, and hence, w/o knowing of the natural rate.

    1. I mistakenly posted the wrong the article; I linked to Bertocco's 2007 piece, not his 2009 one, which I referred to. At any rate, links to both papers are now up.

    2. I agree. I think the relevance of LFT depends on the existence of a natural rate of interest, more specifically whether there is a rate of interest at which saving and investment decisons will ensure full employment. Otherwise most of the discussion of LFT seems to be people talking past one another.

  2. Great paper of Fernando Cardim de Carvalho:


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