Sunday, December 7, 2014

What to Read on Liquidity

In comments, someone asks for references behind "the point is liquidity, the point is liquidity, the point is liquidity." So, here are my recommended readings on liquidity.

Mike Beggs: "Liquidity as a Social Relation." This is the best single discussion I know of the Keynesian view of liquidity. Beside laying out the fundamental conceptual issues, and sketching the historical development of the concept, this piece also has a good discussion of how the definition of liquidity used in monetary policy has been transformed over the past couple decades. This is the first thing I'd recommend to anyone who wants to understand what exactly those of us in the left-Keynsian tradition mean by "liquidity."

John Hicks: "Liquidity." A lucid and intelligent summary of where the discussion of liquidity stood 20 years after Keynes' death.

Jorg Bibow: “Liquidity preference theory revisited: to ditch or to build on it?” A rigorous analysis of the role of liquidity in the Keynesian theory of interest rates, with particular attention to the dynamics of conventional expectations. If you want to know how Keynes' ideas about liquidity fit into contemporary debates about monetary policy, Bibow is your man. Also worth reading: "On Keynesian Theories of Liquidity Preference," and Bibow's book.

J. M. Keynes: chapters 12, 13, 15, 17 and 23 of the General Theory. Also: "The General Theory of Employment"; "The Ex-Ante Theory of Interest." The original source. I think  the presentation in the articles is clearer than in the book. Beggs and Hicks and Bibow are even clearer.

Jean Tirole, "Illiquidity and All Its Friends." Within the mainstream, Tirole has by far the best discussion of liquidity that I'm aware of. I have profoundly mixed feelings about his approach but I've certainly learned from him -- for example, the distinction between funding liquidity and market liquidity is genuinely useful. If you're tempted to criticize "mainstream" economics' treatment of liquidity, you need to seriously engage with Tirole first -- he incorporates a surprisingly large part of the Keynesian vision of liquidity into an orthodox framework.

Jim Crotty, "The Centrality of Money, Credit and Intermediation in Marx's Crisis Theory". Addresses liquidity in a somewhat different context than most of the above -- he asks how the specifically monetary character of capitalist production shapes the dynamics of accumulation as described by Marx and his followers. It's a bit askew to the other pieces here, but the underlying questions are, I think, the same. And it is one of the most brilliant scholarly essays I have read.

Perry Mehrling, "The Vision of Hyman Minsky." I think this lays out the logic of Minsky's work better than anything by Minsky himself. Also see Mehrling's book, The Money Interest and the Public Interest. Everything we need to know about liquidity is in there, though you may have to read between the lines to find it. His "Inherent Hierarchy of Money" is also useful, making the point that any system of payments is inherently hierarchical, with the same instrument appearing as credit at one level and as money at the level below.

EDIT: Should also include Joan Robinson, "The Rate of Interest," which has a useful taxonomy distinguishing illiquidity in the strict sense from capital uncertainty, income uncertainty and lender's risk.

By the way, the phrasing the post starts with is taken from Tree of Smoke, Denis Johnson's Vietnam war novel. (I know that's not what you were asking.) It's the best novel I read this year, I recommend it almost unreservedly. There of course the point is Vietnam.


  1. "the point is liquidity, the point is liquidity, the point is liquidity."

    Or as Andrew Mellon is reported to have advised Hooover:

    "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people,"

  2. Since this is an "educational" post, I'll ask a question that is totally OT:

    In Keynesian economics, is there any relationship between unemployment, stimulus etc and the wage share of total output?

    I know that in orthodox economics the wage share is supposed to be determined by tecnological factors, and since neo-Keynesian economics is about downward stickiness of wages, I assume that the idea of the neo-Keynesians is that if the wage share becomes "excessive" inflation can help by bringing down wages (nice, isn't it?), but in other Keynesyan theories, is there any effect on the wage share?

    I ask because I always assumed that high unemployment brings the wage share down, and low unemployment brings it up, but it occurred to me that the idea that inflation is caused by excess demand (when there is excess stimulus) implies that the wage share cannot rise (otherwise one could have rising wages with fixed prices, i.e. a rising wage share).

    1. As an amateur who doesn't have a clear grasp of the issues and mechanisms, I tend to focus on hysteresis and what Mason and others refer to as anti-hysteresis.

      With hysteresis as we've seen these past seven years, when inflation is too low - you don't need actual deflation - and with years of a large output gaps with the economy running far below potential because of unused resources, not only does it keep wages down but it reduces the potential output of the economy over time as skills are degraded etc.

      With a high-pressure economy which is showing signs of inflation, you can have the opposite effect. Of course at some point inflation is too high and becomes detrimental.

      High unemployment means workers have no bargaining power and can't bargain for higher wages. Tight labor markets means the reverse.

      So there's an argument about when labor markets are tight. Capitalists don't like seeing labor making claims on revenue that it meant for profits. Democrats small d like myself would like to see labor share in productivity gains as they did in the tight labor markets of the late 90s.

      During his first run for the Presidency, Obama told Businessweek that labor hadn't been sharing in productivity gains except for a brief period in the late 90s and that was unfair. It's determined by politics and institutions ultimately, not technological or demographic factors.

    2. Ok, and thanks for the answer, but: we have a recession when business stops to invest (basically), because there is no demand for more products.
      If the government stimulates demand during a recession (thus keeping profits high) but stops stimulating when it looks like that inflation could kick in (often one hears that "wages grew faster than inflation" as a reason to tighten, however it should be normal for wages to grow at inflation+growth), then the only result of stimulus is to keep profit high (and unemployment low, but not null).

    3. the idea of the neo-Keynesians is that if the wage share becomes "excessive" inflation can help by bringing down wages

      This seems logical but I don't think I've ever encountered this view. Usually, the causal logic runs from nominal wages to inflation, with real wages assumed constant. The benefit of higher inflation -- in the orthodox view -- is not to reduce the wage share across the board, but to facilitate relative wage decreases in particular sectors.

      often one hears that "wages grew faster than inflation" as a reason to tighten

      Actually no, one doesn't. What we hear is that "wages grew faster than labor productivity." Inflation in this line of reasoning is the outcome.

    4. Thanks for the answer!
      However, "with real wages assumed constant": if one assumes that real wages are constant, with positive growth, on the long term the wage share is still falling.

      Though I understand that this isn't your position.

      "Actually no, one doesn't.": Unfortunately in Italy I did! Though this is more "austerian" economics than "new Keynesian" economics.

  3. Amazing what I've learned here, and without paying a penny of tuition at that. It really is a kind of miracle -- the promise of the Internet fulfilled. I can't thank you enough.

    1. Thanks! I really appreciate hearing that. I am hoping to shift the mix of content here a bit more toward posts like this one.

  4. Thanks for this post - very helpful indeed! Only last month I read Johnson's short story collection, Jesus' Son. I might go for Angels next though, based on David F Wallace's recommendation where he quotes the line from the book: "All around them men drank alone, staring out of their faces." The guy can write.


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