What is the debate between Classical Theorists and Keynes on Demand for Money?

(i) According to classical economists money is a signed a passive role. It's treated as a mediator of transaction. Hence their emphasis is on the role of money as a medium of exchange. They consider money to be neutral implying that it has no influence on output.

(ii) Classical theorists? deals with a national economy where they regard interest as a reward for capital on one hand and savings on the other. Interest is payment made for the productiveness of capital and payment for the sacrifice involved in
savings. Interest rate equates investments and savings.

(iii) Classical economists debate on money demand on the assumption of full employment. In that case an increase in money supply is seen to drive general price level up due to constant volume of transactions.

(iv) Keynes disagrees with classical theorists as he assigns a key role to money. To him money is a mobilizer of resources and full employment is only a limited condition. The normal condition of the economy is one of under full employment equilibrium. There is always excess capacity in the economy where some resources are idle. (Include men and machines) money activates these idle resources, to full employment in the excess capacity and increase output and takes the economy to the road of full employment.

(v) According to Keynes money is more than a medium of exchange; it's a store of value. It not only buys goods and service now, it also stores value or purchasing power for the future with deterioration in value due to inflation. Money links the present and the uncertain future. Its one form in which to hold an asset. Money has thus an asset value in addition to its exchange value. He argues that it?s desired for its own seek and not only for its purchasing power.

(vi) Keynes challenges the classical interest rate theory. He separates the interest from Classical determinants i.e. savings and investment. He sees savings as only not spending. Individuals saves what they cannot spent it entails no genuine sacrifice.
Saving is a negative act and hardly merits reward. Saving is determined by the level of income and not the rate of interest. The demand for capital does not arise out of its productiveness for capital is not productive. It?s only productive because it?s scarce. To him capital is only labour working on resources with a given technology and getting involved in material assets.

(vii) He regards interest as the price of money. The rate of interest is fixed by the supply of money on one hand and the demand arising from the liquidity preference of money on the other. According to him money is demand because it?s a liquid asset. Liquidity is readily ex-changeability of goods / service into final utility hence money is one asset that is nearest to the final utility compared to bond, equities, real estates etc.

(viii) Keynes agrees that interest and its efficient management, determines the volume of investment but he argue that the rate of interest is determined by the money stock.

(ix) Thus his transmission mechanism is that the money supply determines the rate of interest which determines the volume of investment and investment determines level of output (y). Keynes put money in the centre of the economic stage. His economy is a monetary economy which money plays a crucial role.

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Wilfykil answered the question on March 8, 2019 at 11:13