Confusing Keynes's Theory of the Rate of Interest in the General Theory with Keynes's IS-LM (LP) Model: There is No IS-LM (LP) Model in Chapter 18 of the General Theory Because Keynes Put His IS-LM (LP) Model in Chapters 15 and 21 of the General Theory
23 Pages Posted: 16 Nov 2017
Date Written: November 14, 2017
There is no IS-LM (LP) model of Keynes’s theory of the rate of interest and liquidity preference in chapter 18 of the General Theory. Keynes made it very clear in Section IV of chapter 15 that he was going to give a brief summary of his theory and application of the model there while he would give a much more detailed summary in Chapter 21. He applied his model at the end of chapter 15 by showing that the neoclassical theory ignored his Liquidity Preference Function (LP) that specified the LM or LP curve. Neoclassical Theory was an inferior version of his IS curve.
Thus, at best, the neoclassical theory was only a special case of his much, much more general theory of the rate of interest incorporating the LP function.
Chapter 18 is used by Keynes to provide a discussion of the three “ultimate” factors upon which his theory rested. However, nowhere in chapter 18 does Keynes present, or make any reference to, the model of his theory of the rate of interest, which would require explicit reference to the LP function on page 199 of the GT, which determines the LM (Keynes’s LP) curve and the consumption function, marginal propensity to consume, the change in investment and investment multiplier analysis in his income expenditure - Y =C I - model on page 115 in chapter 10 of the GT that specifies the IS curve (Y=C I; Y=C S; I=S).
Economists have a very severe, over 200 years, problem that occurs when attempting to read the work of Adam Smith, Karl Marx, or John Maynard Keynes, all of whom rejected the Benthamite Utilitarian calculus of Max U thinking. Economists, who attempt to read into the pages of these works there own versions of utilitarian analysis will never be able to get a correct assessment of Smith, Marx, or Keynes.
Keywords: IS-LM, IS-LP(LM), Reddaway, Champernowne, Keynes, chapter 21, chapter 15, Keynes's views of math
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation