How the Economics Profession Overlooked Keynes’s IS-LM (LP) Model in Chapter 21 of the General Theory in the 20th and 21st Centuries
40 Pages Posted: 17 May 2019
Date Written: April 18, 2019
J M Keynes’s brief and detailed summaries of his original IS-LM(LP) models in Chapters 15 and 21, respectively, of the General Theory were overlooked by the economics profession in the 20th and 21st centuries due to three main reasons.
The first reason was the claims made by the Keynesian fundamentalists,Joan Robinson and GL S Shackle, that Keynes’s supposed definition of uncertainty as complete and total ignorance of the future precluded the use of formal mathematical and statistical models of the macro economy. Therefore, any IS-LM model in the General Theory was an impossibility.
The second reason was based on the supposed claim ,made by Backhouse,Young, Dimand, and Rubin, that Keynes was an adherent of the Marshallian view of formal mathematical exposition, which supposedly emphasized presenting only verbal chains of exposition that were based on mathematical analysis, which was then removed from the published work. Therefore, although Keynes created earlier versions of IS-LM to work with in 1933,1934, and 1935, Keynes decided to remove his formal IS-LM model by scattering the three components of his IS-LM model throughout the General Theory in 1936. Keynes substituted a strictly verbal, literary, prose analysis in its place.
The third reason was based on the claim, made by Hawtrey, Robertson, Robinson, Viner, Hansen and Ahiakpor, that Keynes’s liquidity preference analysis was restricted only to chapter 13 of the General Theory alone ,where the crucial analysis was based on the equation specified on page 168 of the General Theory, M=L(r),so that the demand and supply for money is identical to the demand and supply for liquidity. Keynes’s chapter 15 definition of liquidity preference on p.199 is ignored. Adherents of this view likewise overlooked Keynes’s analysis on pages 207-209 of chapter 15 and pages 298-306 of chapter 21 of the General Theory.
All three of these reasons are badly flawed because they all ignore Keynes’s analysis on pages 199, 207-209 of Chapter 15 and pages 298-306 of chapter 21 of the General Theory. Once these pages are studied carefully, it becomes clear that Keynes incorporated an improved IS-LM(LP) model in the General Theory that was superior to the earlier 1933,1934,and 1935 versions he had presented in his student lectures and the mid 1934 draft copy of the General Theory.
Keynes makes it crystal clear in his discussion on pages 298-299 that he was presenting a mathematical model that had the following characteristics :
• One can calculate a quantitative answer using it
• The model is composed of three elements a), b), and c). a) is the consumption function, C, with both the mpc and investment multiplier specified. b) is the Investment function, I, which is a downward sloping function of the rate of interest, r. c) is the Liquidity Preference equation from page 199 of chapter 15, which is a function of both of Y and r, where Y=C+I.
• The three elements provide an analysis that is valuable in introducing order and method to the enquiry
• The three elements define a set of simultaneous equations
• The equations provide a determinate answer or result.
• This result is an equilibrium position
• There is no uncertainty /expectations in Keynes’s chapter 21 model of IS-LM(LP)
Keynes perfectly described his IS-LM(LP) model in the General Theory on pp.298-299. It is a major improvement over his earlier 1933, 1934, and 1935 versions.
The Hicksian IS-LM version, like Harrod’s version, of Keynes’s General Theory, which was published in Econometrica,1937, is an inferior version of Keynes’s IS-LM model in chapter 21 of the General Theory because the Hicksian version has no supporting, micro, D-Z analysis that incorporates expectations and uncertainty, as presented by Keynes in chapters 20 and 21 of the General Theory.
Keywords: IS-LM, IS-LP(LM), J. Robinson, Keynes, Mathematical Illiteracy, Equilibrium Approaches, Simultaneous Equations
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation