On Keynes's Description of the Elasticity of His LP (LM) Curve on page 207 of the General Theory ('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.'): Why It was Overlooked for 82 Years by Economists
42 Pages Posted: 21 May 2018
Date Written: May 6, 2018
J M Keynes’s clear and exact statement describing the elasticity of his LP (LM) equation can be contrasted with the complete and total failure on the part of the economics profession, for the last 82 years, to grasp what it was that he was talking about. Keynes’s statement on page 207, 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.", can only mean one thing. Keynes was talking about the elasticities of his LP (LM) function. There was a vertical, completely inelastic, range of the LP (LM) function in Aggregate Income, Interest rate space and a horizontal, completely or infinitely elastic range, in Aggregate Income, Interest rate space. Moreover, Keynes supplied two precise, historical case studies describing empirical outcomes that would correspond to events in which either of the two extreme ranges, completely vertical and completely horizontal, occurred. Keynes’s repeated statements that it was possible to increase investment spending without increasing the rate of interest is obvious if you are in the horizontal range of the LP (LM) curve.
It is shown in this paper that no economist grasped what Keynes was saying in spite of the many, many references to page 207 of the General Theory that have appeared in the literature on Keynes’s theory of the rate of interest for the last 82 years.
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