How J M Keynes Presented the Technical Analysis of His IS and LM Curves in the General Theory in 1936: Why D. Champernowne Got It Right in 1936 and Hicks (Harrod, Meade, Lange) Got a Big Part of It Wrong in 1937 and 1938
22 Pages Posted: 24 Apr 2017 Last revised: 26 Apr 2017
Date Written: April 22, 2017
Keynes carefully, clearly and cogently derived his IS and LM curves in the General Theory. They are practically identical to the simultaneous , four equation model that he taught his students in 1933 and 1934. However, Keynes placed the formal IS derivation in chapters 6 and 10 while he derived the formal LM curve in chapter 15 before combining them in section IV of chapter 15.
The ”state of the news' variable appears in chapters 12 and 15. Keynes ‘s discussion of the role of expectations and confidence, an independent variable that no economist was able to comprehend, except David Champernowne, was integrated into the investment function (IS-MEC) by Keynes in chapter 12.Keynes integrated the independent “the state of the news” variable into the LM curve in chapter 15.
The claim that the IS –LM model is scattered throughout the GT in a haphazard fashion because Keynes could not support economists blindly manipulating mathematical equations ,or because he was a Marshallian who burned his technical analysis before publishing, is both a myth and false.
Keynes’s IS and LM curves were not correctly identified in the GT because economists in 1936 did not understand the connection between Keynes’s 1921 A Treatise on Probability’s decision model incorporating both probability (expectation) and weight (confidence), called by Keynes his c coefficient in chapter 26 of the A Treatise on Probability, and the General Theory. Champernowne, faithfully following the lectures of Keynes exactly as he was taught, integrated the State of the News into both the IS and LM curves. Hicks, Harrod, Meade ,and Lange, who were not Keynes’s students and had no idea about what Keynes was talking about in the A Treatise on Probability, severely erred in removing the ”State of the News” variable from their IS-LM models.
Keywords: curve, function, schedule first derivative, second derivative, Keynes, Hicks, Champernowne
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation