An Analysis of Mistakes Made by Economists in their Study of Keynes's Diagram on Page 180 in the General Theory
25 Pages Posted: 31 Jul 2017
Date Written: July 30, 2017
Economists who analyzed Keynes’s Diagram on page 180 of the General Theory erred by (a) reading only the first one-half of page 181 and (b) by using the wrong equation of liquidity preference on page 168 from chapter 13 instead of the correct equation on page 199 of chapter 15. Keynes’s clearly stated qualification that the discussion in chapter 13 was introductory only while the analysis in chapter 15 was complete was simply ignored.
This paper, as well as my other eleven SSRN papers on the topic, ends the so called mystery of why Keynes had no major objections to the partially correct papers of Meade, Hicks, Reddaway, Champernowne, Lange and Harrod on the model of the GT. Keynes had no major objections because he had originated, developed, applied and integrated IS – (LP) LM into the GT. His superb summary of the strengths and qualifications needed to apply IS – (LP) LM on pp. 298-303 of the GT show Keynes to have been the master of his material. Unfortunately, this material has never been covered, much less mastered, by any economist.
Keynes’s analysis on pp. 298-303 of the General Theory demonstrated, the main model of the GT is Keynes’s version of IS - (LP) LM. The Theory of Effective Demand, based on the D-Z model of Chapters 20 and 21, supports Keynes’s IS - LM.
Keynes never expected the economics profession to accept his uncertainty analysis in the General Theory simply because the overwhelming number of economists, then as now, accepted the subjectivist theory of probability. Keynes was the only logical theory of probability advocate –practitioner in the 20th or 21st century. No subjectivist can accept the definition of uncertainty provided by Keynes in the GT and remain a subjectivist.
Keywords: Harrod, Hicks, IS-LM, Liquidity Preference, Patinkin, Chapter 15, pp.180-182 of GT
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation