The Essential Rothbard - Ludwig von Mises Institute

20 The Essential Rothbard
Rothbard maintains that Keynes wrongly thinks that the speculative
demand to hold money determines the rate of interest.
Instead, the demand to hold money is a speculative response:
One grave and fundamental Keynesian error is to persist in
regarding the interest rate as a contract rate on loans, instead
of the price spreads between stages of production. The former,
as we have seen, is only the reflection of the latter. A
strong expectation of a rapid rise in interest rate means a
strong expectation of an increase in the price spreads, or rate
of net return. A fall in prices means that entrepreneurs expect
that factor prices will fall further in the near future than their
selling prices . . . all we are confronted with is a situation in
which entrepreneurs, expecting that factor prices will soon
fall, cease investing and wait for this happy event so that their
return will be greater. This is not “liquidity preference,” but
speculation on price changes. 31
At this point, Rothbard advances the crucial point that anticipates
Lucas. He argues that such speculation is not a source of
instability. To the contrary, the “expectation of falling factor prices
speeds up the movement toward equilibrium and hence toward the
pure interest relation as determined by time preference.” 32
But what if the demand to hold money increases to an unlimited
extent? What if entrepreneurs do not invest at all? Rothbard
again counters with a “rational expectations” point:
The Keynesian worry is that people will hoard instead of
buying bonds for fear of a fall on the price of securities . . .
this would mean . . . not investing because of expectation of
imminent increases in the natural interest rate. Rather than
act as a blockade, however, this expectation speeds the ensuing
adjustment. Furthermore, the demand for money could not
be infinite since people must always continue consuming,
whatever their expectations. 33
31
Man, Economy, and State with Power and Market, pp. 789–90; emphasis
in the original.
32
Ibid., p. 790.
33 Ibid., p. 791.