What is Wrong with the Following Statement? 'Just See What Hicks and Hansen Did with Keynes's Elaborate Analysis. Keynes Needed an Entire Book to Get His Point Across. Hicks and Hansen Needed Only a Few Pages and Got it All in One Diagram.' Arjo Klamer (2007). Hicks and Hansen Missed a Lot from 'Keynes's Elaborate Analysis'
22 Pages Posted: 9 Jan 2018
Date Written: January 4, 2018
While Hicks and Hansen got some of "Keynes elaborate analysis" down correctly, they also got some of the analysis wrong. Hicks and Hansen needed a lot more than "only a few pages and got it all in one diagram." for them to have been able to grasp Keynes's complete IS-LP(LM) model, as presented, summarized, critiqued, and mathematically developed by Keynes on pp. 298-306 of the General Theory. While Hicks did consider and mention a few of the possible problems with IS-LM, his discussion of problems pales into insignificance when compared to Keynes's three pages of criticism in chapter 21 of the General Theory of his own IS-LP(LM) model. The Hicks (Hansen) diagram was already completely described mathematically by Keynes on p. 207 of the General Theory. Any competent economist in 1936 could have drawn an upward sloping curve in Y,r space and then have taken into account Keynes's statement that "The most striking examples of a complete breakdown of stability in the rate of interest, due to the liquidity function flattening out in one direction or the other, have occurred in very abnormal circumstances."(Keynes,1936; bold face added) by simply adding a vertical segment and a horizontal segment to the upward sloping part of the curve if they had actually read page 207 of the General Theory.
More importantly, Hicks, like Modigliani in 1944, totally overlooked Keynes's mathematical development of his D-Z aggregate demand-aggregate supply model in chapter 20 of the General Theory. Hansen did a little bit better, but overlooked Keynes's aggregate production function and labor supply analysis. Hicks and Hansen thus had no underpinnings in microeconomics, in terms of aggregate production functions, theory of the firm, marginal analysis, and expectations of profit and price changes, for their version of IS-LM.
Finally, both Hicks and Hansen removed Keynes's integration of uncertainty as a shift parameter from both the IS and LM curves. Hicks and Hansen got some parts right and got some parts wrong.
Keynes's "three elements", are, of course, the two IS equations and one LM(LP) equation explicitly derived on p.115 and p.199 of the GT along with the aggregated Y=C I version. All of these equations are superior in construction to the comparable equations that Keynes gave to his students in his December, 1933 lecture. Keynes expected an alert, competent, mathematically trained economist to be able to recognize that the three equations could be solved to yield a quantitative, determinate, equilibrium solution in (Y,r) space that would be "…valuable in introducing order and method into our enquiry…" Keynes was mistaken.
Keynes already had figured out that his UNCERTAINTY VARIABLE WAS GOING TO BE DROPPED from his GT analysis by all readers of the GT because they had no idea about what the weight of the evidence concept was. Economists still lack a basic understanding 81 years later. Nevertheless, Keynes was satisfied that both Harrod's and Hicks's versions of his original IS-LM(LP) work represented a major improvement in the manner that unemployment analysis was handled in the mid 1930's. That was why Keynes offered both Harrod and Hicks the possibility of creating and constructing a Keynes–Neoclassical Synthesis 19 years before Samuelson created his Keynes-Neoclassical synthesis. Unfortunately, both Hicks and Harrod failed to accept Keynes's offer.
Keywords: Hicks, Hansen, Modigliani, Keynes, IS-LM, Liquidity preference, weight, chapter 15, pp. 298-299 of GT, chapter 21, pp. 297-303
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation