# J M Keynes's Assessment of the Strengths and Weaknesses of his IS-LM Model in Chapter 21 of the General Theory: Comparing this Assessment with his 1937 Quarterly Journal of Economics Article

23 Pages Posted: 2 Aug 2017

Date Written: August 1, 2017

### Abstract

Keynes made a final reassessment of his chapter 15, Section IV simultaneous, four equation IS-LM model in Section IV of chapter 21 of the General Theory that is duplicated in his 1937 Quarterly Journal of Economics article .

In his 1937 reply, his summary of the two main reasons for his disagreement with Classical and Neoclassical theory were connected and not in conflict with each other as has been supposed in the economic literature.

The first reason for his break with the Classical and Neoclassical school was the decision theoretic problem of uncertainty. The neoclassical failure to deal with uncertainty then led to the second problem, which was an incorrect model of the rate of interest. The Neoclassicals only had an IS curve and no Liquidity Preference (LM) curve. The missing equation in the Neoclassical model was Keynes’s Chapter 15 p.199 Liquidity Preference equation. The claim that the summary in the 1937 Quarterly Journal of Economics article is in conflict with the General Theory is simply false with no support. The Neoclassical failure to deal with uncertainty caused the neoclassicals to make erroneous claims about the rate of interest.Keynes’s IS-LM model fixes the problem if the D-Z model of chapters 20 and 21 is used to deal with price and profit expectations.

Keynes’s summary on the last two pages of his 1937 Quarterly Journal of Economics article is the same as his extensive final analysis of his IS-LM model on pp.298-303 of the General Theory.

**Keywords:** Harrod, Hicks, IS-LM, Liquidity Preference, Patinkin, Chapter 15, pp.180-182 of GT, Chapter 21, pp. 297-303

**JEL Classification:** B10, B12, B14, B16, B20, B22

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