Correcting A. Hansen's Errors on pp. 140-141, 147-148 of His <i>A Guide to Keynes</i> in 1953: How A. Hansen's Errors Changed the Course of Economic History and Thought for the Worse

Abstract

A. Hansen’s gross error concerning J M Keynes’s analysis in chapter 14 on pp. 180-181 of the General Theory in his A Guide to Keynes changed the course of economic thought and economic history for the worse due to the millions of economics students who, instead of reading the General Theory, read Hansen’s A Guide to Keynes instead. Hansen’s book then became accepted in the economics profession as the correct assessment of Keynes’s General Theory. Hansen did an excellent job in general, but not in chapter seven. Hansen’s errors start on pp. 140-141 of his chapter 7. His chapter six, while not erroneous, did not take into account Keynes’s clear cut discussions on pp. 199-202 and pp. 208-209 showing how to apply Keynes’s version of IS LM based on Keynes’s liquidity preference equation that was specified on p. 199. The fundamental errors made by Hansen occurs on pp. 147-148, due to his extremely sloppy misinterpretation of Keynes’s correct analysis of the diagram on p. 180 that extends to p. 182. Hansen simply skipped this analysis. This paper corrects Hansen’s errors and demonstrates that Keynes never claimed that the interest rate was determined only by liquidity preference macroscopically. The neoclassical loanable funds theory was short by one equation. It needed one more equation so that it would be determinate. Keynes’s liquidity preference equation on p. 199 of the General Theory is the missing equation that needs to be incorporated into the loanable funds partial theory in order to present a general theory of the rate of interest.