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In classical theory the equation I (r) = S(Y,r) is the equilibrium condition of the loans market and determines the rate of interest rather than the level of employment (see Keynes's Chapter 14).
This schedule is a characteristic of the current industrial process which Irving Fisher described as representing the 'investment opportunity side of interest theory'; [10] and in fact the condition that it should equal S(Y,r) is the equation which determines the interest rate from income in classical theory. Keynes is seeking to reverse the ...
So the interest rate r in equilibrium will be equal to the marginal efficiency of capital r '. Rather than work with r and r ' as separate variables, we can assume that they are equal and let the single variable r denote their common value. Classical theory of the determination of the interest rate.
The loanable funds doctrine extends the classical theory, which determined the interest rate solely by saving and investment, in that it adds bank credit. The total amount of credit available in an economy can exceed private saving because the bank system is in a position to create credit out of thin air.
Sraffians argue that: the wages fund theory; Senior's abstinence theory of interest, which puts the return to capital on the same level as returns to land and labour; the explanation of equilibrium prices by well-behaved supply and demand functions; and Say's law, are not necessary or essential elements of the classical theory of value and ...
Theory of interest as determined by impatience to spend income and opportunity to invest it, 1930. Fisher is probably best remembered today in neoclassical economics for his theory of capital, investment, and interest rates, first exposited in his The Nature of Capital and Income (1906) and elaborated on in The Rate of Interest (1907).
The equation I (r ) = S (Y ) had been accepted by the classics, who had viewed it as the condition of equilibrium between supply and demand for investment funds and as determining the interest rate (see the classical theory of interest).
The English translation Interest and Prices became available in 1936; a literal translation of the original title would read Money Interest and Commodity Prices. Wicksell invented the key term natural rate of interest and defined it as that interest rate which is compatible with a stable price level. [7]