How Kahn and the Robinsons Knew for Certain by August 1937, that Keynes's Theory of Interest Rate Determination Combined Liquidity Preference with the Incomplete Neoclassical Theory in Keynes's IS-LP(LM) Model in the General Theory
32 Pages Posted: 6 Oct 2017 Last revised: 5 Nov 2017
Date Written: October 5, 2017
Keynes made it crystal clear in his comments on the draft copy of Pigou’s future 1937 article in the Economic Journal that Pigou’s fundamental error was to have two different theories of the rate of interest, one determined by the demand and supply of money, and the other one determined by the amount of spending out of current income on consumption and investment goods. Keynes made it plain that neither determined the rate of interest alone. Both of Pigou’s ‘theories’ had to be combined together in order to determine the rate of interest. Of course, Keynes’s LP(LM) curve had to be combined with the IS curve to have a determinate theory of the rate of interest.
Keynes sent his formal, unpublished comments to J. Robinson, A. Robinson, and R. Kahn in 1937 before publishing them in the December issue of the Economic Journal. Therefore, J. Robinson, A. Robinson, and R. Kahn knew for certain by 1937 that Keynes’s theory of the rate of interest, as presented in both the General Theory and the Quarterly Journal of Economics reply article, published earlier in February 1937, was an IS-LP(LM) approach. However, J. Robinson, A. Robinson, and R. Kahn never mentioned this and claimed constantly throughout their lifetimes that Keynes’s theory of the interest rate had nothing to do with IS-LP(LM) and that IS-LP(LM) was ‘Bastard Keynesianism’, because Keynes had supposedly denied that formal, mathematical modeling was possible in macroeconomics. This position is directly contradicted by Keynes himself in chapter 21 in sections IV, V and VI on pages 298-306, as well as on pages 199-203, 208-209 of chapter 15 of the General Theory.
The only conclusion possible is that J. Robinson, A. Robinson, and R. Kahn deliberately sought to hide this information in their lifetimes because it contradicted their claims that Keynes would never use a simultaneous equation model, given his Marshallian pedigree. Kaldor’s paper, published in the same issue as Keynes’s, uses a version of Keynes’s IS-LP(LM) analysis to critique Pigou. No economist in the twentieth or twenty first century was able to spot the great contradictions that existed between Keynes himself and J. Robinson, R. Kahn, or A. Robinson. Champernowne and Reddaway, if combined, are vastly superior to the claims of the Robinson’s and Kahn concerning the General Theory.
Keywords: Harrod, Hicks, Keynes, IS-LM, Liquidity preference, QJE 1937, chapter 15, pp. 180-182 of GT, chapter 21
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation