On Some Possible Explanations for the Continuing Denial of the Existence of Keynes’s IS-LM Model in Section 4 of Chapter 21 of the General Theory: Propaganda (from Joan Robinson), Ignorance (of the Keynes-Harrod Correspondence in Volume 13 Of the CWJMK in Late 1935), Anchoring (on Keynes’s Mention of Robinson’s Name in the Preface to the General Theory), Groupthink, and Cognitive Dissonance
39 Pages Posted: 2 Feb 2020
Date Written: January 5, 2020
The following is a summary of Keynes’s main contribution in his General Theory. The General Theory traces its initial beginning to December, 1933. J. M. Keynes presented his first public version of his IS -LM model in December,1933 in a lecture to his students at Cambridge University, England. However, Keynes’s IS-LM model went through a number of different versions that incorporated various improvements before the final version was inserted into Section Four of Chapter 21 of the General Theory in February,1936.
A second version appeared in 1934 in the first draft of the General Theory where Keynes had replaced his state of the news variable, W, with E, where E represented the confidence a decision maker had in his expectations about future prices and profits. In the third, late 1935 version of his IS-LM model, available from Lorie Tarshis’s student notes, Keynes had incorporated Y into the LM equation.
Keynes’s final, fourth version adds an explicit mpc term and Investment multiplier to his consumption function, so that the I=S(IS curve )equation from page 63 of the General Theory is explained in a more complete, mathematical model on pages 114-115 of chapter 10,where C=f(Y) and Y=C+I, and page 137 of chapter 11 of the General Theory ,where I =g(r). Keynes’s LM equation, on page 199,is identical to the third version of his 1935 IS-LM model ,so that M=M1+M2=L1(Y) +L2 (r), where it is obvious that L1(Y) +L2 (r) must equal L. Keynes had removed E, expectations, from his IS-LM model, for two reasons. First, it is not possible to include a third independent variable in any type of two dimensional graph, figure, or diagram, as was used by Keynes on page 181 of the General Theory. Second, it is mathematically incorrect to mix actual or realized variables, like Y, actual aggregate Income and r, with expected or anticipated variables, like D,Z and p, expected price, together in the same equation. Keynes incorporated expectations of future prices, p, and expected profits, P, into a separate ,supporting D-Z model ,which generated an ASC, an aggregate supply curve,that specified a set of expected D values, which represented expected or anticipated Aggregate Income. Only one member of the set of expected D outcomes will match the actual Y value that is explicitly used in the IS-LM model because the D=Z locus( ASC) is continuous and monotonically increasing in N,aggregate employment. Hicks’s IS-LM model is identical to Keynes’s IS-LM model in chapter 21 if we eliminate Keynes’s D-Z model.
J. Robinson, due to her extraordinary and extreme mathematical illiteracy ,had absolutely no clue about what Keynes was doing with his IS-LM and D-Z models in chapters 20 and 21 of the General Theory. J. Robinson, aided by R. Kahn, A. Robinson, and R Harrod, started claiming that there was no IS-LM model in the General Theory because complete and total uncertainty of the future made any type of mathematical representation of any possible position of macro equilibrium an impossibility. Keynes discovered Robinson’s complete and total ignorance of his General Theory only in correspondence with her in the September-November, 1936 time period when he concluded that her exposition of his Liquidity Preference theory of the rate of interest in her forthcoming book in 1937 was complete “nonsense” . J. Robinson continued to claim during her entire career that Keynes’s theory of the rate of interest was a function of the interest rate,r, only in spite of Keynes’s explicit correction.
Economists, writing on Keynes’s theory of the rate of interest ,have universally overlooked the tedious and time consuming task engaged in by Keynes in his instruction of Harrod about his IS-LM model in the July-August - Septemeber,1935 time period, where Harrod conceded that Keynes had totally reconstructed the neoclassical theory of the rate of interest by showing that the neoclassicals had no LM equation to intersect their poorly developed IS equation. Without an understanding of the Keynes-Harrod correspondence of late 1935, the Keynes Townshend correspondence of 1936-1938 or an understanding of Section 4 of Chapter 21 of the General Theory, economists anchored on Keynes’s mention of J. Robinson’s name in the Preface to the General Theory ,which was used by Robinson to support her claim that she had worked closely with Keynes on the writing of the General Theory,to conclude that Keynes must not have had any IS-LM model in the General Theory because J. Robinson said that such a model conflicted with Keynes’s theory of fundamental uncertainty. This type of defective logical argument can be found in the work of Patinkin, Clower, Leijonhufvud, and all Post Keynesians.
Both orthodox and heterodox schools of macro economics studying Keynes unanimously accepted the argument made by Robinson that the existence of complete and total uncertainty of the future made it impossible for Keynes to have created any type of formal mathematical analysis. All that was possible was to talk about macro in a common discourse language like English, using prose and literary exposition.
This misbelief among both orthodox and heterodox schools of macroeconomics became self reinforcing as both orthodox and heterodox schools of macroeconomics accepted that any starting point for studying Keynes’s macro contribution had to be based on the fact that there was no IS-LM model in the General Theory, although they conceded that there was a purely literary, English prose discussion, in completely non mathematical terms, presented by Keynes on pp. 246-248 of chapter 18 in the General Theory that would support being put into a mathematical form that would lead to some type of IS-LM model. However, such a model was actually a perversion of what Keynes meant because it allowed neoclassical economists to subvert the true meaning of the Keynesian revolution that Keynes had personally taught to Joan Robinson, along with R. Kahn and A. Robinson, over a period of years.
This led to a group think-cognitive dissonance result on the part of the economics profession. All evidence to the contrary that showed that J. Robinson had no idea about the technical details of Keynes’s Liquidity Preference theory of the rate of interest ,that was determined by Keynes’s IS and LM equations, was ignored.
This excluded evidence included Keynes’s own step by step ,explicit instruction of Harrod in July-September, 1935 of the mechanics of his IS-LM equations,his complete rejection of J. Robinson’s interpretation of his theory of liquidity preference in November, 1936, and Keynes’s own, explicit IS-LM model on pages 298-299 of the General Theory. This overwhelming evidence gravely challenges economists acceptance of J. Robinson’s claim that Keynes’s mention of her name in the preface of the General Theory meant that J. Robinson was in an excellent position to know exactly what Keynes had to have really meant even if Keynes himself had described her understanding as “nonsense" on November 9th,1936. The fact that J. Robinson could not have possibly understood Keynes’s General Theory models ,due to her own extreme, mathematical illiteracy, was also ignored.
Keywords: Mathematical exposition, IS and LM curves in the GT, simultaneous equation model, mathematical illiteracy
JEL Classification: B10, B12, B14, B18, B22
Suggested Citation: Suggested Citation