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In Keynes’ General Theory is is famously stated that the demand for money relies on three distinct functions. These are: the transactions demand for money; the precautionary demand for money; and the speculative demand for money. Or, more formally:

M = Mt + Mp + Ms

In that work Keynes — as he regularly did in his monetary theories — laid rather a lot of emphasis on the speculative demand for money and not a great deal of emphasis on the precautionary demand for money. In chapter 13 of his General Theory he wrote,

It may illustrate the argument to point out that, if the liquidity-preferences due to the transactions-motive and the precautionary-motive are assumed to absorb a quantity of cash which is not very sensitive to changes in the rate of interest as such and apart from its reactions on the level of income, so that the total quantity…

Everybody seems to be talking about Michael Lewis’s new book (Flash Boys), which has been featured on 60 Minutes and reviewed twice by the New York Times. The book is about something called high-frequency trading, which, I will admit, with some, but not too much, embarrassment, I know almost nothing about. Actually, the first time I heard of the existence of high-frequency trading was from a commenter on a post I wrote almost two years ago, about which I will have something more to say in a moment. Michael Lewis’s book is a polemic against high-frequency trading, alleging that it enables high-frequency traders to rig the stock market and exploit ordinary traders. Lewis makes his case by telling the story of a group of hedge-funds that have banded together to create an alternative trading platform IEX, thereby avoiding contact with the high-frequency platforms, which, according to Lewis…