J M Keynes Was Very Clear in 1936 in His General Theory and His Correspondence with Joan Robinson That His Theory of the Rate of Interest Was Not a Monetary Theory of the Rate of Interest: J M Keynes Against Joan Robinson and the Pseudo Keynesians
30 Pages Posted: 28 Jul 2018
Date Written: July 8, 2018
Keynes was extremely clear in Section Four of Chapter 21 of the General Theory that his theory of the rate of interest depended on three elements -The Liquidity Preference function, the m.e.c. schedule, and the consumption function-investment multiplier. All three elements determine the rate of interest. Keynes called this model the IS-LP(LM) model. This is, of course, Keynes’s major contribution to economic theory and monetary economics. It is supported my another related model, which Keynes called the D-Z model. Keynes’s section four of chapter 21 follows section three, where Keynes heavily criticized the Marshallian, partial equilibrium approach because it did not include the feedback impacts of the interdependences between the multiple independent variables.
Opposing Keynes’s work in the General Theory and his February, 1937, QJE article, where Keynes again showed that there was an equation missing from the erroneous, neoclassical theory of the rate of interest, is Joan Robinson and a group of supporters whom Hutchison termed “the Pseudo” Keynesians. Joan Robinson and her Post Keynesian supporters, Robert Skidelsky and Victoria Chick, continue to claim, in direct contradiction to Keynes’s clearcut mathematical analysis of his three equation, three element IS-LP(LM) model in chapters 15 and 21 of the General Theory, that Keynes’s theory of the rate of interest is a purely monetary theory of the rate of interest.
The evidence, especially Keynes’s own demonstration in the time period between September and November, 1936, that Joan Robinson’s written work, in her proposed 1937 book, on liquidity preference was “nonsense”, will support the conclusion that Keynes was correct in stating that his theory of the rate of the interest was determined by the intersection of the IS equation and the LP equation in (r,Y) space.
Keywords: IS-LM, IS-LP(LM), J. Robinson, R. Kahn, Keynes, Mathematical Illiteracy, R. Skidelsky, Marginalism, Equilibrium Approaches
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation