J. M Keynes Was Never a ‘Chapter 12’ Keynesian: The Claim That He Was a ‘Chapter 12’ Keynesian Was Manufactured by Joan Robinson and G. L. S. Shackle After His Death by Changing Keynes’s Definition of Uncertainty to Radical Uncertainty
48 Pages Posted: 15 Nov 2019
Date Written: November 3, 2019
The claim that Keynes regarded himself as a “Chapter 12" Keynesian is inaccurate and misleading. Keynes’s chapter 12 discussion and definition of uncertainty in the General Theory is simply a footnote to his much more general theoretical discussion about uncertainty made in chapter 26 of the A Treatise on Probability in 1921 pages 309-312 which concentrated on economics specifically. This was demonstrated in the 1937-38 Keynes-Townshend correspondence, where there is no discussion of the 1937 QJE article or radical uncertainty.
Keynes had two interrelated and interconnected models in the General Theory. They were the D-Z model, which dealt with expected aggregate demand, D, and the IS-LM(LP) model, which dealt with actual or realized aggregate demand, Y. Keynes incorporated uncertainty and expectations into his D-Z model of chapters 20 and 21 after having provided readers of the General Theory with a very brief introduction to the Theory of Effective Demand in Chapter 3 of the General Theory. Keynes’s use of his IS-LM(LP) model in chapter 15 (pp.199-209) provided a brief introduction to the final, complete presentation of his IS-LM(LP) model in Chapter 21 where Keynes brought all of the elements that made up the IS-LM(LP) model together in Section Four of Chapter 21.
This analysis incorporated the LM(LP) equation missing from the classical and neoclassical model of the rate of interest (r) that Keynes had demonstrated to Harrod, in his letter of August 27th,1935, was only a single downward sloping curve in (r,Y) space that intersected nothing, so that the existence of a quantitative determinate equilibrium in classical and neoclassical theory was an impossibility in (r,Y) space. Harrod capitulated completely in his letter to Keynes of August 30th,1935 and acknowledged that Keynes had indeed come up with a very important missing equation and had made a major advance in economic theory. Keynes incorporated his August 27th analysis, using a version of Harrod’s original diagram, in chapter 14 of the General Theory on pages 179-182. Keynes showed diagrammatically that the classical and neoclassical theory of the rate of interest amounted to a single IS curve in (r,Y) space that intersected nothing. Data (in his February, 1937 QJE article, he reverts to a "missing equation” characterization) was missing that could only be provided by the LM(LP) curve in order to have a quantitative, determinate, unique equilibrium as stated explicitly by Keynes on page 299 of the General Theory.
These interrelated and interconnected models work in harmony together with each other. It is quite impossible to use one without the other and expect to fully grasp Keynes’s mathematical, technical analysis. The D-Z model incorporated expectations and uncertainty in order to analyze the anticipated or expected amount of Effective Demand, D. Based on this analysis, a specific actual or realized amount of Effective Demand, Y, results. Keynes then combines Y with r to show why monetary policy can be completely neutralized if liquidity preference becomes absolute in the highly elastic range of the LM(LP) curve. Keynes decided to present this result on pp.207-208 of the General Theory, as well as in his reply to Viner in the February, 1937 QJE article.
Hicks’s version of Keynes’s IS-LM analysis has no foundation in any type of D-Z model and hence is incomplete, as it provided no microfoundations in the theory of the firm, aggregate production function, labor market or necessary and sufficient first and second order conditions for optimality as provided by Keynes in chapter 20 explicitly.
Keywords: IS-LM,IS-LP(LM), Harrod, Hawtrey, Keynes, chapter 21, pages 179-182 of GT, letter of August 30, 1935
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation