Professional Documents
Culture Documents
SSRN Id3063079
SSRN Id3063079
SSRN Id3063079
net/publication/321093654
CITATIONS READS
0 55
1 author:
Michael Brady
California State University, Dominguez Hills
689 PUBLICATIONS 3,142 CITATIONS
SEE PROFILE
All content following this page was uploaded by Michael Brady on 08 January 2020.
there was no IS-LP(LM) analysis provided by Keynes in the General Theory, when
in fact this analysis is central to the entire General theory.
No economist in the 20th or 21st century ,who has written on Keynes’s GT, has
demonstrated any inkling about what Keynes was doing in chapter 21 of the
GT.We can now understand R. Kahn’s efforts ,in his 1978 JEL paper and his 1984
book,in attempting to divert his readers attention away from chapter 21 of the
GT.Chapter 21 provides a reader of the GT with an answer to the question ,”What
did Keynes really mean in the GT.”
The answer is his IS-LP(LM) model incorporating uncertainty as a shift parameter
in the model. Only Champernowne (1936) was able to see the connection
between IS-LM and Keynes’s conception of uncertainty.
Section 1.Introduction
The paper will be organized in the following manner. Section two will examine
Keynes’s analysis on pp.298-299 step by step. Section Three will examine the
economics literature that has dealt with Keynes’s statement on p.299.We will
look at the contributions of Henry Hazlitt, Ingo Barens and Volker Caspari, Robert
Dimand, Kriesler, P. & Nevile, J. W.,and Carabelli and Cedrini .None of these
contributors demonstrates or shows any understanding that Keynes’s three
elements (a),(b),and (c) on page 298 of the General Theory make up the IS-
LP(LM) model used by Keynes throughout the General Theory whenever he
discussed Aggregate Income and the interest rate .Section Four will conclude that
no economist ever recognized Keynes’s unique modeling contribution contained
in Sections IV to VI of chapter 21. The reason for this has been the over eighty
years of success of the Robinsons and R. Kahn in portraying Keynes as a
Marshallian ,who would always burn or destroy his formal , mathematical analysis
after he had assured himself that his literary prose writing covered the points he
wanted to make in his presentation.
In December, 1933, Keynes unveiled his IS-LP(LM) model for the first time in his
student lectures. Young, Dimand and Rubin are the only authors who have
pointed this out, based on the evidence in the 1989 Rymes book (1989).Keynes’s
model also appears in the 1934 draft of the General Theory. However, this
analysis does not include an explicit account and consideration of how the
investment multiplier analysis ,as it appears on p.115 of the General
Theory(GT;1936),fits into the analysis of the IS-LP(LM) model. This only appears in
the GT.Chapter 21 of the GT is the chapter selected by Keynes to bring all of the
elements of his IS-LP(LM) system together at one time:
“The primary effect of a change in the quantity of money on the quantity of
effective demand is through its influence on the rate of interest. If this were the
only reaction, the quantitative effect could be derived from the three
elements—(a) the schedule of liquidity-preference which tells us by how much
the rate of interest will have to fall in order that the new money may be
absorbed by willing holders, (b) the schedule of marginal efficiencies which tells
us by how much a given fall in the rate of interest will increase investment, and
4
(c) the investment multiplier which tells us by how much a given increase in
investment will increase effective demand as a whole.
But this analysis, though it is valuable in introducing order and method into our
enquiry, presents a deceptive simplicity, if we forget that the three elements (a),
(b) and (c) are themselves partly dependent on the complicating factors (2), (3),
(4) and (5) which we have not yet considered. For the schedule of liquidity-
preference itself depends on how much of the new money is absorbed into the
income and industrial circulations, which depends in turn on how much effective
demand increases and how the increase is divided between the rise of prices, the
rise of wages, and the volume of output and employment. Furthermore, the
schedule of marginal efficiencies will partly depend on the effect which the
circumstances attendant on the increase in the quantity of money have on
expectations of the future monetary prospects. And finally the multiplier will be
influenced by the way in which the new income resulting from the increased
effective demand is distributed between different classes of consumers. Nor, of
course, is this list of possible interactions complete. Nevertheless, if we have all
the facts before us, we shall have enough simultaneous equations to give us a
determinate result. There will be a determinate amount of increase in the
quantity of effective demand which, after taking everything into account, will
correspond to, and be in equilibrium with, the increase in the quantity of
money. Moreover, it is only in highly exceptional circumstances that an increase
in the quantity of money will be associated with a decrease in the quantity of
effective demand. “(Keynes,1936,pp.298-299).
Keynes expects the reader to get element (a), the Liquidity Preference Function
,from p.199 of the GT and element(c),the consumption function –mpc-
investment multiplier analysis, from p.115 of the GT. Element (b),that Investment
is inversely related to the rate of interest, is already defined.
Keynes has clearly and precisely presented his LP(LM) functions,so that L=M holds
and the Y=C+I(C+S), so that I=S holds.
This ,of course ,is a superior model compared to the one presented to the
students in December,1933.For this reason ,Keynes concluded that
5
“…this analysis, though it is valuable in introducing order and method into our
enquiry, presents a deceptive simplicity, if we forget that the three elements (a),
(b) and (c) are themselves partly dependent on the complicating factors (2), (3),
(4) and (5) which we have not yet considered.”(Keynes,1936,p.298).
Section 3.The failure of the few economists who actually read page 299 of the GT
to connect it to Keynes’s discussions on p.298
There are five sources that can be examined in order to check if any of them
recognized that Keynes had presented all of the elements of his IS-LP(LM) model.
These are Henry Hazlitt, Ingo Barens and Volker Caspari, Robert Dimand, Kriesler,
P. & Nevile, J. W.,and Carabelli and Cedrini.We will cover their contributions in
the order that they are listed above.
H. Hazlitt mentions ”… if we have all the facts before us, we shall have enough
simultaneous equations to give us a determinate result.”,but he has absolutely
no idea about what this means. He never refers back to p.298 of the GT. The
reason for this is Hazlitt’s mathematical illiteracy, ineptness, and confusion
.Hazlitt simply lacks the necessary tools and preparation to be able to grasp that
Keynes is talking about his IS-LP(LM) model.
from the General Theory, it would have been rather surprising if Keynes had made
this point:
if we have all the facts before us, we shall have enough simultaneous equations to
give us a determinate result.(Keynes 1936:299).”( Barens & Caspari,1999,p. 227).
Barens & Caspari demonstrate that they do not comprehend that Keynes’s
statement refers to the three elements (a),(b),and(c) that comprise his IS-LP(LM)
model
aggregate demand where rho (ρ) is the interest rate and W is the “state of the
news.” The level of national income (Y) did not appear along with the interest rate
But now Dimand falters and allows himself to fall for one of the myths concocted
by Joan Robinson who never understood anything about Keynes’s model:
“ Keynes did not publish his system of equations himself: as a good Marshallian,
he followed Marshall’s celebrated advice to use mathematics as an aid to
thought, translate the mathematical analysis into English, illustrate with examples
relevant to actual life, and then burn the mathematics. He did, however, assure
his readers that “if we have all the facts before us, we shall have enough
simultaneous equations to give us a determinate result” (1936,p.
299).”(Dimand,2010,p. 292 ).
Dimand demonstrates in his last seven lines of the paragraph above that he has
ignored Keynes’s presentation of the three elements making up his model .Note
that Dimand simply repeats the Joan Robinson concocted myth about Keynes and
Marshall with his claim that
9
“Keynes did not publish his system of equations himself: as a good Marshallian,
he followed Marshall’s celebrated advice to use mathematics as an aid to
thought, translate the mathematical analysis into English, illustrate with examples
relevant to actual life, and then burn the mathematics. He did, however, assure
his readers that “if we have all the facts before us, we shall have enough
simultaneous equations to give us a determinate result” (1936,p.
299).”(Dimand,2010,p.292 ).
The last contribution is the Carabelli and Cedrini paper.Their paper includes an
extensive coverage of the material on pp.298-299 of the GT. Carabelli and Cedrini
,however,are completely oblivious to the fact that Keynes presented his IS-LP(LM)
model in great detail and covered many of the complications caused by the
interactions of variables not in the model with those in the IS-LP(LM) model on
pp.298-299 of the GT.Their article shows a complete lack of knowledge of
Keynes’s original December,1933 model presented to his students that was also
in the 1934 draft of the GT(See Rymes,1989). This is, of course, a repeat of the
exact , same error Carabelli originally made in her 1988 book on pp.153-159 :
“Once these “simplifying assumptions” are introduced, the second stage of the
analysis requires the economist to allow for those “possible complications which
in fact influence events” :
ib. (1) Effective demand will not change in exact proportion to the quantity of
money. (2) Since resources are not homogeneous, there will be diminishing, and
not constant, returns as employment gradually increases. (3) Since resources are
not interchangeable, some commodities will reach a condition of inelastic supply
whilst there are still unemployed resources available for the production of other
commodities. (4) The wage-unit will tend to rise, before full employment has
10
been reached. (5) The remunerations of the factors entering into marginal cost
will not all change in the same proportion (ib., emphases added).
As evident from this catalogue, Keynes is reaffirming the complex character of the
economic material: the assumptions of proportionality on which the quantity
theory of money rests are in truth not satisfied, since the “complex real world” is
characterized by lack of proportionality between causes and effects, as well as of
homogeneity and interchangeability. But there is even more to be noted: it is in
fact no coincidence that Keynes explains the “nature of the economic thinking”
(implying the need for the two-stages analysis in economics) immediately after
discussing the nature of these “complicating factors” (CW 7, p. 297). As seen,
Keynes has accustomed his readers to interpret the ensemble of the “simplifying
assumptions” introduced from time to time in the course of the analysis as the
first logical step of a more complicated work, requiring the economist to remove
them and allow for probable repercussions. In chapter 21, Keynes wants the
reader to avoid supposing those same “possible complications” introduced to
correct the illusory simplicity of the classical theory as “strictly independent” only
in reason of their being considered “each of them in turn”: We will consider each
of them in turn. But this procedure must not be allowed to lead us into supposing
that they are, strictly speaking, independent. For example, the proportion, in
which an increase in effective demand is divided in its effect between increasing
output and raising prices, may affect the way in which the quantity of money is
related to the quantity of effective demand. Or, again, the differences in the
proportions, in which the remunerations of different factors change, may
influence the relation between the quantity of money and the quantity of
effective demand (p. 297). The above is an example of ordinary discourse at work,
permitting to “keep 'at the back of our heads' the necessary reserves and
qualifications and the adjustments which we shall have to make later on, in a way
in which we cannot keep complicated partial differentials 'at the back' of several
pages of algebra which assume that they all vanish” (CW 7, pp. 297-298).
Reserves, qualifications and adjustments are necessary if the objects of
investigation are “the complexities and interdependences of the real world” (p.
11
298). “The primary effect of a change in the quantity of money”, writes Keynes
using a variant of his concept of causa causans, “is through its influence on the
rate of interest” (ib.).
The reader may note that Keynes introduces a recursive argument into the
analysis (“the schedule of liquidity-preference itself depends on how much of the
new money is absorbed into the income and industrial circulations, which
depends in turn on how much effective demand increases”, emphasis added), and
might give importance to the fact that the catalogue of possible repercussions, as
often in the General Theory, is partial (“Nor, of course, is this list of possible
interactions complete”, p. 299). Nevertheless, he argues, if we have all the facts
before us, we shall have enough simultaneous equations to give us a determinate
result. There will be a determinate amount of increase in the quantity of effective
demand which, after taking everything into account, will correspond to, and be in
equilibrium with, the increase in the quantity of money (ib.). Yet, this is of little
interest to Keynes.”(Carabelli and Cedrini,unpublished,n.a.,pp.24-26;note that the
bold faced material is not in the GT .It has been made up by Carabelli and Cedrini
and substituted in place of Keynes’s actual comment involving the existence of a
quantitative answer.)
Her claim that ” Yet,this is of little interest to Keynes” is a mind boggling blunder
,since this model is central to an understanding of the entire GT.Keynes’s
statement above that “But this analysis, though it is valuable in introducing
order and method into our enquiry…” demonstrates precisely the opposite of
what is claimed by Carabelli and Cedrini.
“Yet, this is of little (if any) interest to him. Keynes limits himself to observe that
“it is only in highly exceptional circumstances that an increase in the quantity of
money will be associated with a decrease in the quantity of effective demand.”
This last sentence is a complete non sequitor and has nothing to do with Keynes’s
point that the use of the IS-LP(LM) model is” valuable.”
13
The published version of the article has some small changes that do not result in
any different assessment :
“Hence a theory of money assuring changes in employment (prices) “in the same
proportion” (p. 296) as the quantity of money so long as there is unemployment
(when there is full employment). Once these “simplifying assumptions” are
introduced, however, the economist has to allow for those “possible
complications which in fact influence events” (ib.): (1) Effective demand will not
change in exact proportion to the quantity of money. (2) Since resources are not
homogeneous, there will be diminishing, and not constant, returns as
employment gradually increases. (3) Since resources are not interchangeable,
some commodities will reach a condition of inelastic supply whilst there are still
unemployed resources available for the production of other commodities. (4) The
wage-unit will tend to rise, before full employment has been reached. (5) The
remunerations of the factors entering into marginal cost will not all change in the
same proportion (ib., emphases added). In truth, the “complex real world” is
characterized by lack of proportionality between causes and effects, by
dishomogeneity and incommutability. It is no coincidence that Keynes outlines
the “nature of the economic thinking” (implying the two-stages analysis)
immediately after discussing such “complicating factors” (p. 297). Having
accustomed his readers to interpret the “simplifying assumptions” introduced in
the course of the analysis as the first logical step of a more complicated work,
Keynes wants them to avoid supposing that the “possible complications” are
“strictly” independent only in reason of their being considered “each of them in
turn”. In Keynes’s own words (a perfect illustration of ordinary discourse at work):
We will consider each of them in turn. But this procedure must not be allowed to
lead us into supposing that they are, strictly speaking, independent. For example,
the proportion, in which an increase in effective demand is divided in its effect
between increasing output and raising prices, may affect the way in which the
quantity of money is related to the quantity of effective demand. Or, again, the
differences in the proportions, in which the remunerations of different factors
14
change, may influence the relation between the quantity of money and the
quantity of effective demand (ib.). “The primary effect of a change in the quantity
of money”, writes Keynes using a variant of his concept of causa causans, “is
through its influence on the rate of interest” (ib.).
This makes the analysis quite easy:
it suffices to derive this effect from the schedule of (a) liquidity-preference
(which gives the reduction of interest rate needed to induce holders to absorb the
new money); (b) the schedule of marginal efficiencies (for the relationship
between the reduction of interest rate and the increase of investments), and (c)
the investment multiplier (for the relationship between increased investment and
consequent increment of effective demand). But this analysis, though it is
valuable in introducing order and method into our enquiry, presents a deceptive
simplicity, if we forget that the three elements (a), (b) and (c) are themselves
partly dependent on the complicating factors (2), (3), (4) and (5) which we have
not yet considered. For the schedule of liquidity-preference itself depends on how
much of the new money is absorbed into the income and industrial circulations,
which depends in turn on how much effective demand increases and how the
increase is divided between the rise of prices, the rise of wages, and the volume
of output and employment. Furthermore, the schedule of marginal efficiencies
will partly depend on the effect which the circumstances attendant on the
increase in the quantity of money have on expectations of the future monetary
prospects. And finally the multiplier will be influenced by the way in which the
new income resulting from the increased effective demand is distributed between
different classes of consumers (pp. 298-9). The reader may note that Keynes
introduces a recursive argument into the analysis of the schedule of liquidity-
preference, and that also this catalogue of possible repercussions is partial (“Nor,
of course, is this list of possible interactions complete”, p. 299). True, Keynes
argues, “if we have all the facts before us” (which is indeed a strong requirement),
“we shall have enough simultaneous equations to give us a determinate result”
(ib.). Yet, this is of little (if any) interest to him. Keynes limits himself to observe
that “it is only in highly exceptional circumstances that an increase in the quantity
of money will be associated with a decrease in the quantity of effective demand”
(ib.).”(Carabelli and Cedrini,2014,pp.37-38; note that the bold faced material is
not in the GT .It has been rewritten by Carabelli.)
15
“If this were the only reaction, the quantitative effect could be derived from the
three elements….”(Keynes,1936,p.298;boldface added).It is this one sentence
that completely refutes and destroys the Carabelli and Cedrini claim,which is
why it was deliberately left it out of both papers. Keynes is stating that a
quantitative ANSWER can be obtained from the analysis based on the three
elements.The only way that a quantitative ANSWER can be obtained from the
analysis is if the three elements represent three mathematical equations,which is
precisely what Carabelli and Cedrini are trying to hide.
Carabelli and Cedrini are trying to perpetuate the myths created by Joan Robinson
and Richard Kahn about the GT not having any formal mathematical model of
Keynes’s theory .
Section 4.Conclusions
16
No economist in the 20th or 21st century ,who has written on Keynes’s GT, has
demonstrated any inkling about what Keynes was doing in chapter 21 of the
GT.We can now understand R. Kahn’s efforts ,in his 1978 JEL paper and his 1984
book,in attempting to divert his readers attention away from chapter 21 of the
GT. Chapter 21 provides a reader of the GT with an answer to the 81 year old
question ,”What did Keynes really mean in the GT.”
The answer is that what Keynes really meant is shown by his IS-LP(LM) model
that also incorporated uncertainty as a shift parameter in the model. Only
Champernowne’s (1936) review was able to see the connection between IS-LM
and Keynes’s conception of uncertainty.All of the other reviewers of the GT –
Hicks,Harrod, Meade, Lange, Modigliani, Hansen, and Reddaway-failed to
incorporate uncertainty,as defined by Keynes and not Joan Robinson,Shackle or P.
Davidson,into the formal model .
Bibliography
Brady, Michael Emmett, Who were the Real ‘Bastard Keynesians’? The
Neoclassical Synthesis Keynesians (Samuelson, Hansen, Hicks, Klein, Solow) or the
Post Keynesians (Joan Robinson, Austin Robinson, Richard Kahn, G L S Shackle,
Sydney Weintraub, Paul Davidson) (September 16, 2017). Available at SSRN:
https://ssrn.com/abstract=3037836.
18
Brady, Michael Emmett, What J. Viner (and Everyone Else) Overlooked in His 1936
and 1964 Reviews Concerning Keynes's Liquidity Preference Analysis in the
General Theory and the 1937 Quarterly Journal of Economics Article: "…The
Orthodox Theory is One Equation Short of What is Required to Give a Solution ."
(July 2, 2017). Available at SSRN: https://ssrn.com/abstract=2996054.
Brady, Michael Emmett, J. Hicks's 'Famous' IS-LM Figures 1 and 2 on Page 153 of
His 1937 Econometrica Paper are Based Directly on Page 207 of the General
Theory (October 6, 2017). Available at SSRN: https://ssrn.com/abstract=3048665.
Brady, Michael Emmett, J M Keynes, 'The State of the News (The Change in the
Weight of the Evidence)' and the Weight of the Evidence: From Keynes's
December, 1933 Student Lectures to Chapter 12 of the General Theory in
February, 1936 (September 2, 2017). Available at SSRN:
https://ssrn.com/abstract=3031314.
Brady, Michael Emmett, How J M Keynes Presented the Technical Analysis of His
IS and LM Curves in the General Theory in 1936: Why D. Champernowne Got It
20
Right in 1936 and Hicks (Harrod, Meade, Lange) Got a Big Part of It Wrong in 1937
and 1938 (April 22, 2017). Available at SSRN: https://ssrn.com/abstract=2956744.
Carabelli, Anna M. & Cedrini, Mario A. (2014). Chapter 18 of The General Theory
‘further analysed’: economics as a way of thinking”. Cambridge Journal of
Economics, 38 (1), 2014, pp. 23-47 .
21
Dimand, Robert,W. 2007. “Keynes, IS-LM, and the Marshallian Tradition”, History
of Political Economy, 39 (1) : 81-95.
Hahn, F.H., 1982, Money and Inflation, Oxford: Basil Blackwell. 24 Hahn, F.H.,
1985, ''Some Keynesian reflections on monetarism", in Keynes's Relevance Today,
ed. by F. Vicarelli. London: Macmillan.
Hansen, A.. 1953. A Guide to Keynes. NewYork: McGraw-Hill. Harrod, Roy. 1937.
“Mr Keynes and Traditional Theory”, Econometrica, 5 (1): 74- 86.
24
Harrod, Roy. 1946. “Price Flexibility and Employment by Oscar Lange”. The
Economic Journal. 56 (221): 102-7.
Keynes, J.M., 1964, The General Theory of Employment, Interest and Money,
Harcourt, Brace and World: New York.
-- !973a, The General Theory and After: Preparation, Vol. 13 of the CWJMK, ed. by
D. Moggridge. London: Macmillan.
---, 1973b, The General Theory and After: Defence and Development, Vol. 14 of
the CWJMK, ed. by D. Moggridge. London: Macmillan.
---, 1973c, The General Theory of Employment, Interest and Money, Vol. 7 of the
CWJMK, ed. by D. Moggridge. London: Macmillan.
--, 1979, The General Theory and After: A supplement, Vol. 29 of the CWJMK. ed.
by D. Moggridge. London: Macmillan. Keynes, J.M. 1921. A Treatise on
Probability. The Collected Writings of John Maynard Keynes, Vol. VIII. London:
Macmillan, 1973.
Krugman, P. 1998. It’s Baaack: Japan’s Slump and the Return of the Liquidity
Trap.Brookings Papers on Economic Activity, no. 2:137–205.
Krugman, P.. [1999] 2000. The Return of Depression Economics. 2nd ed. London:
Penguin.
Krugman, P.. 2000a. Thinking about the Liquidity Trap. Journal of the Japanese
andInternational Economies 14:221–37.
Krugman, P.. 2000b. How Complicated Does the Model Have to Be? Oxford
Review of Economic Policy 16:33–42.
27
Lange, Oskar. 1938. “The rate of interest and the optimum propensity to
consume”,Economica, 5: 12-32.
Modigliani, Franco. 1944. “Liquidity Preference and the Theory of Interest and
Money”.Econometrica 12: 45-88.
28
Neville J. W., (2000) “What Keynes Would Have Thought of the Development of
IS-LM,” in Young and Zilberfarb (2000), 133-49.
O'Donnell, R., 1992, ''The unwritten books and papers of J.M. Keynes'', History of
Political Economy, 24, 4: (767-817).
Patinkin, D., 1993, "On the chronology of the General Theory", Economic Journal,
103, 417, 647- 663.
____ .1982, Anticipations of the general theory? and other essays on Keynes,
Chicago: University of Chicago Press.
29
_____ . 1977, 'The process of writing the General Theory: a critical survey", in D.
Patinkin and J.C. Leith, ed., 1977, Keynes, Cambridge and the General Theory: the
process of criticism and discussion connected with the development of the
General Theory. London.
___ .1976, Keynes' monetary thought: a study of its development. Durham. N.C.
____ . 1973, ''What has become of the Keynesian revolution?" in After Keynes,
Oxford: Basil Blackwell
----- and Ben Zion Zilberfarb, eds. (2000) IS-LM and Modern Macroeconomics.
Boston: Kluwer.