J M Keynes’s 1937 Refutation of the Claim That Hicks–Hansen (and Others) Saved Keynes’s General Theory by the Development of the IS-LM Model in His ‘Professor Pigou on Money Wage Rates in Relation to Unemployment’
23 Pages Posted: 16 Feb 2018
Date Written: February 1, 2018
The myth or story regarding the creation of the IS-LM model in the economics profession goes something like this. Keynes correctly showed in the General Theory that you could not specify the rate of interest just from the supply of savings and demand for investment schedules alone because this only provided an IS curve. However, Keynes erred in claiming that it was the demand and supply of money that determined the rate of interest. This meant that Keynes was arguing that the LM curve alone determined the rate of interest.
Thus, Hicks, Harrod, Meade, Champernowne, Reddaway, etc., saved Keynes from error by combining the IS and LM curves together to provide a consistent and coherent theory of the rate of interest.
A more sophisticated version of this myth is that, while Keynes himself did derive and specify the IS-LM model in his student lectures in December, 1933, and included them in the 1934 draft copy of the General Theory, he refused to present this formal model in the General Theory because he was a follower of Marshall’s dictum that required a writer to burn the mathematics after he had used it to confirm the accuracy of the literary analysis. Various additional claims in this version of the myth were that Keynes was an anti-formalist or had an anti-mathematical or anti-quantificationist streak in him that resulted in his not presenting any formal model of his theory in the General Theory. Both of these stories were destroyed by Keynes himself in the draft copy of his 1937 paper, titled “Professor Pigou on money wage rates in relation to unemployment.”
The perpetuation of this myth for over 80 years, combined with the perpetuation of the myth of Adam Smith’s Invisible Hand, exposed repeatedly by G. Kennedy, could lead citizens to question whether economics is even a weak or inexact science. Science and myths can never coexist together if a field of study is truly scientific.
Keynes originated, created developed, applied and taught the IS-LP(LM) model starting in December, 1933. Sections IV of both chapters 15 and 21 contained Keynes’s theory and applications, as well as astute criticisms of his own theoretical work. The myth that there was no IS-LM model in the GT is an anti- scientific claim that directly conflicts with the scientific claims made by the economics profession. The sooner this myth is put to rest, the better it will be in the long run for all economists.
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