On J M Keynes's Correspondence about His General Theory IS-LM Model with Harrod and Hicks on Their Interpretations of His IS-LM Model: Keynes Had No Major Objections Because IS-LM Was Created, Developed and Applied by Keynes in the General Theory in Chapter 15
27 Pages Posted: 24 May 2017 Last revised: 28 May 2017
Date Written: May 23, 2017
J M Keynes engaged in correspondence over the IS-LM model contained in chapter 15 of the General Theory with R. Harrod and J Hicks in 1937. Keynes had no major objections. How could he? How could Keynes object to interpretations concerning his own model of IS LM in the General Theory, as laid out by Keynes explicitly in chapter 15 of the General Theory? However, he did point out two relative deficiencies that needed to be fixed in his IS LM model. These deficiencies were fixed by Keynes within the broader framework of his Theory of Effective Demand, presented in the General Theory in chapters 3, 20, 21 and the appendix to chapter 19.
The first deficiency was the lack of any microeconomic foundations in the theory of the firm for the IS curve. The second deficiency was that the IS curve had no explicit foundation in expectations concerning future prices and future economic profits. Keynes remedied both of these relative deficiencies in chapters 20 and 21 where he presented a detailed mathematical analysis incorporating a microeconomic foundation based on the theory of purely competitive firms. He explicitly incorporated variables, p for expected price, and P for expected economic profits, into his analysis. Keynes worked in wage units. Thus, pw and Pw appeared explicitly in the analysis in chapters 20 and 21.
Keywords: Harrod, Hicks, IS-LM, Liquidity preference
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation