The Foundation of the 2003 History of Political Economy Conference on IS-LM, That J M Keynes Was a Marshallian in 1936, Is Fundamentally Wrong: J M Keynes’s General Theory Is Not Based on Marshallian, Partial Equilibrium, Ceteris Paribus Analysis
47 Pages Posted: 8 Oct 2018
Date Written: September 16, 2018
J M Keynes wrote the General Theory in 1936 to break away from the methodological and theoretical constructs of Marshallian economics at the Macro level that were based on a partial equilibrium, ceteris paribus analysis centered on functions that dealt with only one independent variable at a time. Keynes realized that the drastic simplifications used in the Marshallian approach failed completely at the macro level because the interactions of a number of independent variables led to complicated feedback impacts that were impossible to deal with effectively by the Marshallian use of literary pose to “discuss” these interactions without any technical analysis to support the policy recommendations that were provided at the end of the analysis.
Pigou’s July,1933 book, The Theory of Unemployment, deployed exactly this type of Marshallian, partial equilibrium, ceteris paribus methodology and theoretical analysis, combined with a literary discussion of other variables, as did the work of Lavington, Henderson, Robertson, Hawtrey, Harrod, Joan Robinson, A. Robinson, and R. Kahn.
Keynes intellectually challenged what he considered to be the best exposition of the Marshallian approach, A C Pigou’s July,1933 book, The Theory of Unemployment, in the Appendix to chapter 19 and chapter 21 of the General Theory. He showed that Pigou’s theoretical analysis was incomplete because Pigou had failed to incorporate all the relevant variables in his Macro analysis. Pigou had merely used his micro theory at the macro level. Equations were thus missing from Pigous’s macro model, which was misspecified. Keynes pointed out that what Pigou was missing in his 1933 book was the consumption function (mpc), the investment function, the investment multiplier, and the Liquidity Preference Function, functions which comprised Keynes’s IS-LP(LM) model of chapters 15 and 21 that rested on the D-Z model. The D-Z model of chapters 20 and 21 dealt with expectations, uncertainty, the production function, the labor market, and the theory of the purely competitive firm.
All 11 of the contributions to the 2003 HOPE conference on IS-LM, published in 2004 in HOPE, are completely oblivious to the fact that Hicks’s three equations are not Hicks’s three equations, but Keynes’s. Hicks’s three equation system is copied directly in the exact same order of presentation as made by Keynes on page 298 of the GT in February, 1936 in the GT.
The continually expanding “What did Keynes mean in the General Theory” literature, running to many, many thousands of papers, articles, and books, of which the 2003 HOPE Conference is a very, very, tiny portion, is now objectively explained. The economics profession erred in 1936 in assuming that Keynes was a Marshallian when, in fact, Keynes, by 1936, was an Anti–Marshallian and mistakenly accepting Hicks “suggested interpretation” of Keynes in his 1937 Econometrica article as being Hicks’s work when in fact it is taken directly from pages 298-299 of the GT.
The so called Hicksian foundations of the IS-LM model are a myth. Hicks’s 3 equation model is identical to the three elements presented by Keynes on pages 298-299 of the GT. The same thing can be said for the Harrod and Meade “interpretations”. They deploy the same three equations that were first deployed by Keynes on pp.298-299 of the GT. This fact very severely calls into question the accuracy and reliability of the history of macroeconomics written by De Vroey in 2016.
The only original contribution Hicks made to the IS-LM model was to draw four graphs for the use of mathematically, illiterate 1930’s economists. Samuelson continued to point out from the mid 1930’s through the 1960’s how poor the mathematical training of economists was. The myths of Robinson and Hicks only certify and confirm how right Samuelson was.
Keywords: IS-LM, IS-LP(LM), J. Robinson, R. Lucas, Keynes, Mathematical Illiteracy, De Vroey, Y=C I, D-Z Model
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation