Keynes and international loanable funds

A question from Yahoo! Answers:

How is the international loanable funds market a criticism of Keynes?

Classics thought that supply of loanable funds is a function of interest rate. Keynes posited that it’s a function of disposable income; if everyone has just enough income to get by, they will use their income just to get by and won’t save any, regardless of what the interest rate might be.

Now throw in other countries, and the situation changes somewhat. Somewhere in the world (most of the time anyway), someone has disposable income. That income is (in theory at least) looking for a way to apply itself with the greatest possible payback. So countries with highest interest rates may be able to attract loanable funds from abroad, even if there are no loanable funds domestically.

In practice, however, this argument only works for small countries with credible governments.

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