Clower and His 'The Effective Demand Fraud': An Example of What Happens to a Competent Economist Who Takes Joan Robinson's Myth of Keynes As a Marshallian Seriously

Abstract

Robert Clower’s “The Effective Demand Fraud” is a good example of what can happen when a solid macroeconomist takes the myths of Joan Robinson about J. M. Keynes and the General Theory too seriously. The basis for many of Robinson’s many myths about Keynes was her claim that Keynes was a rabid Marshallian, who would only use partial equilibrium analysis because Keynes realized that a formal, mathematical, simultaneous, general equilibrium, macroeconomic model of the economy was impossible to use due to the pervasive existence of radical, fundamental and irreducible uncertainty. Exactly the opposite is the case. Keynes was heavily influenced in his views about how to apply and use mathematics in economics by William Ernest Johnson and A C Pigou, as well as Marshall. Keynes was a Johnsonian, Pigouvian, and Marshallian economist. He was never, ever simply a Marshallian economist. Clower completely overlooks Keynes’s IS-LP(LM) model in chapters 15 and 21 of the General Theory, as well as Keynes’s own, initial, original, earlier December, 1933 model of IS-LP (LM) presented to his students and incorporated in the 1934 Draft copy of the General Theory. The important Y equation, actual or realized Aggregate Income, that appears in all of the equations in Keynes’s IS-LP (LM) model except one, is one of a set of possible, expected values defined by Keynes’s Aggregate Supply Curve, which is a locus of all expected D and Z equilibrium outcomes that satisfy the necessary and sufficient first and second order equations for a profit optimum. This is derived by Keynes in footnote 2 on pp.55-56 of the General Theory and in chapter 20 on pp.283-284 of the General Theory. Clower relies only on chapter 3 of the General Theory, which is only an outline of what Keynes said he would do later in the General Theory. Clower is completely ignorant about the D-Z model of chapter 20 and the IS-LP (LM) model in chapters 15 and 21. The D-Z, aggregate demand-aggregate supply, Theory of Effective Demand is the foundation that supports Keynes’s IS-LP (LM) macro model, which is the central construction of the General Theory. Keynes’s D-Z model supplies a Pigouvian microeconomic analysis, based on the theory of purely or freely competitive firms. Keynes then integrated expectations about future prices and profits into this Pigouvian model. Keynes devoted an entire appendix to chapter 19 comparing the basic, Pigouvian format with his improved version that appeared in chapter 20 of the General Theory. It is imperative that historians of economic thought remove Joan Robinson’s preposterous “tall tales” from the economics literature by exposing her myths about Keynes and the General Theory, which continue to mislead macroeconomists 81 years after the publication of the General Theory by Keynes in 1936. Clower’s paper is a good example of how a competent economist can publish incomprehensible analysis about Keynes’s modeling of his IS-LP (LM) model and his D-Z model once he has accepted the myths of Joan Robinson. Of course, Clower should have been very suspicious of Robinson’s claims, given her constant refrain that she knew no mathematics. If she knew no mathematics, then how could she possibly have understood Keynes’s IS-LP (LM) model and his D-Z model? Of course, the only correct answer is that she never understood what Keynes’s models were about. The main argument presented in the General Theory by Keynes is not Keynes’s analysis of aggregate demand (D) and aggregate supply(Z) in Chapter 3. It is Keynes’s analysis and derivation of the Liquidity Preference Function that Keynes combined with his Y=C plus I (C plus S) and investment multiplier to obtain his IS-LP (LM) model in r and Y space to provide a complete theory of the rate of interest. The Y in the equation Y=C plus I comes from the set of all possible, expected D=Z combinations.