This was developed by Knut Wicksell.
Wicksellian monetary theory was widely accepted in the period before Keynes’ General Theory, and indeed Keynes himself accepted the natural rate of interest in the Treatise on Money.
The real natural rate of interest lies at the heart of Wicksell’s version of loanable funds theory to equilibrate saving and investment, and links Wicksell’s capital theory with his monetary theory (Rogers 1989: 22). Wicksell’s monetary theory was an attempt to extend the quantity theory to an economy with credit money and loans (Rogers 1989: 23).
For Wicksell, when the money rate of interest at which demand for investment credit and the monetary supply of savings is equal, there is a monetary equilibrium rate. And, when this monetary equilibrium rate is also equivalent to the expected yield on new capital, then the money rate of interest and the real Wicksellian natural rate of interest are equal (Rogers 1989: 39).
In the Wicksellian system, there is a long-run tendency to monetary equilibrium, and Wicksell’s monetary equilibrium approach was adopted and developed in diverse ways by different schools of economists who followed him, as follows:
(1) the Stockholm School;Wicksellian loanable funds was of course developed in distinct ways by these various schools, and in particular the concept of the natural rate has gone through various incarnations.
(2) the Marshallian neoclassical school;
(3) the Austrians and
(4) neoclassical synthesis Keynesianism and modern neoclassical theory.
I am starting a Post Keynesian bibliography critiquing the Wicksellian loanable funds theory below, which is a work in progress.
Suggestions are welcome:
Bibow, Jörg. 2001. “The Loanable Funds Fallacy: Exercises in the Analysis of Disequilibrium,” Cambridge Journal of Economics 25.5: 591–616.Realist Left
Cuaresma, Jesús Crespo and Ernest Gnan. 2007. “The Natural Rate of Interest: Which Concept? Which Estimation Method? Which Policy Conclusions?,” Journal of Post Keynesian Economics 29.4: 667–688.
Davidson, Paul. 1968. “Money, Portfolio Balance, Capital Accumulation, and Economic Growth,” Econometrica 36.2: 291–321.
Gaynor, W. B. 1992. “The Transformation of the Natural Rate of Interest into The General Theory’s State of Long-Term Expectations,” Cambridge Journal of Economics 16.1: 55–68.
Hayes, Mark. 2006. The Economics of Keynes: A New Guide to The General Theory. Edward Elgar, Cheltenham. 80–81, 108–117, 184–185.
Hayes, M. G. 2010. “The Loanable Funds Fallacy: Saving, Finance and Equilibrium,” Cambridge Journal of Economics 34.4: 807–820.
Hicks, John. 1980–1981. “‘IS-LM’: An Explanation,” Journal of Post Keynesian Economics 3.2: 139–154.
Keen, Steve. 2011. Debunking Economics: The Naked Emperor Dethroned? (rev. and expanded edn.). Zed Books, London and New York.
Keynes, J. M. 1937. “Alternative Theories of the Rate of Interest,” The Economic Journal 47.186: 241–252.
Lavoie, Marc. 2009. Introduction to Post-Keynesian Economics (2nd rev. edn.). Palgrave Macmillan, Basingstoke, UK. 55–56.
Lavoie, Marc. 2014. Post-Keynesian Economics: New Foundations. Edward Elgar, Cheltenham.
Palley, Thomas I. 1996. Post Keynesian Economics: Debt, Distribution, and the Macro Economy. St. Martin’s Press, New York. 151–153.
Pivetti, Massimo. 2012. “Rate of Interest,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 474–478.
Pollin, Robert. 2012. “Saving,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 484–489.
Richardson, David R. 1986. “Asimakopulos on Kalecki and Keynes on Finance, Investment and Saving,” Cambridge Journal of Economics 10.2: 191–198.
Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge. Chapter 2.
Rousseas, Stephen. 1985. “A Markup Theory of Bank Loan Rates,” Journal of Post Keynesian Economics 8.1: 135–144.
Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.
Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.
Werner, Richard A. 2014. “Can Banks individually create Money out of Nothing? – The Theories and the Empirical Evidence,” International Review of Financial Analysis 36: 1–19.
Wray, L. Randall. 2003–2004. “Loanable Funds, Liquidity Preference, and Endogenous Money: Do Credit Cards Make a Difference?,” Journal of Post Keynesian Economics 26.2: 309–323.
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