From Keynes Back to Smith and Aristotle: Liquidity Preference, Hoarding, and Speculation

Abstract

Aristotle, basing his work on Plato (Socrates), was the first to clearly, explicitly and technically identify how an economy at the macro level could fail. There were four possible ways of analyzing the impact of exchange, one without money and three with money. Aristotle’s literary discussion and analysis can be summarized by these four equations-C-C’ (Barter-no money used), C-M-C’ (medium of exchange function of money - using money to assist and expedite the production of consumer and producer goods), M-C-M’ (commodity speculation-real estate and stock bubbles), and M-M’ (usury; hoarding; accumulation of money; using money to make money without any production of consumer and producer goods). Problems are generated at the macro level if speculative and rentier behavior comes to dominant economic behavior, which is aimed at using money to facilitate the production of consumer and producer goods at the micro level. Keynes recognized where Aristotle’s analysis led to. It led to Keynes’s theory of liquidity preference (propensity to hoard) explanation of the rate of interest. Basically, Keynes’s IS equation is a development of Aristotle’s C-M-C’ function, where money is used to facilitate the production of consumer and producer goods. Keynes’s liquidity preference function, LP(LM), is a development of Aristotle’s M-C-M’ and M-M’ equations. Of course, Smith had gotten to the core of Aristotle’s theory of money and the consequent economic problems that resulted from its misuse with his distinction between the sober people and the Projectors, Imprudent Risk takers and Prodigals. The Sober people used money as in C-M-C’ while the Projectors, Imprudent Risk takers and Prodigals used money as described by the M-C-M’ and M-M’ equations. Thus, Smith developed Aristotle’s theory while Keynes developed Smith’s theory. Keynes’s speculators and rentiers are Smith’s Projectors, Imprudent Risk takers and Prodigals, which are Aristotle’s users of money explained by the M-C-M’ and M-M’ equations. Smithian and Keynesian economics are best understood as technical developments of Aristotle’s development of Plato (Socrates). Aristotle, Smith and Keynes all linked the macroscopic problems of deflation and inflation, resulting primarily from a constant and repeated series of bubbles, to the behavior of Projectors, Imprudent Risk takers and Prodigals, who had obtained the aid of the private banking system. The problem will continue to repeat indefinitely until the Central Bank is retaken by representatives of the Sober people and the banking policies of 1934-1978 reinstituted with stronger firewalls incorporated to prevent the central bank from ever being captured again by Wall Street, which represents the modern version of Smith’s Projectors, Imprudent Risk takers and Prodigals.