J M Keynes's General, Multiple, Macro Equilibria Approach in 1936 Against the Marshallians (Harrod, Hawtrey, Henderson, Pigou, and Robertson) Ceteris Paribus, Partial Equilibrium, Approach to Macro

Abstract

J M Keynes’s General Theory (1936) represented the culmination of his anti-Marshallian approach to both economic methodology and formal economic modeling in macroeconomics. Keynes rejected, at the marco economic level, the Marshallians’ emphasis on ceteris paribus analysis that concentrated on using an approach to analysis that relied on analyzing only one independent variable at a time. The Marshallians would then supplemented their one independent variable analysis by a prose or literary discussion, in which other variables, that had been held fixed, were discussed, but not analyzed in a rigorous, technical, mathematical manner. This type of analysis was published by Dennis Robertson, Ralph Hawtrey, A C Pigou, Hubert Henderson, and Roy Harrod in the early and mid 1930’s. This type of Marshallian, partial equilibrium, approach to analysis is on display in the correspondence of Robertson, Hawtrey, Henderson, and Harrod with Keynes over the General Theory as contained in Volumes 13,14, and 29 of the CWJMK. This kind of Marshallian approach reached its highest level, in the opinion of J M Keynes, in Pigou’s 1933 The Theory of Unemployment. All of Pigou’s technical analysis in Part II of The Theory of Unemployment is based on an analysis where only one independent variable is specified mathematically in his macro economic model, which is based directly on the underlying micro model, both of which were functions of only one single variable, the real wage.Pigou supplemented his Part II analysis with a verbal, prose, literary discussion that attempted to discuss other factors that would impact the macro economy. Unfortunately, Pigou had no multiplier function, consumption function, or Liquidity Preference function that would allow him to analyze total output or employment accurately. Neither did Hawtrey, Robertson, or Henderson. Harrod’s Marshallian defense of the neoclassical theory of the rate of interest, made in his August-September, 1935 exchanges with Keynes over Keynes’s new IS-LP(LM) theory, based on a system containing three simultaneous, mathematical equations, which Keynes explicitly specified in sections four of both chapters 15 and 21 of the General Theory, in Volume 13 of the CWJMK, makes no sense because his sets of shifting savings and investment functions can only specify a set of downward sloping IS curves. No Marshallian, especially Robertson, ever grasped that Keynes’s IS-LP(LM) model of chapters 15 and 21 of the General Theory has absolutely nothing to do with Keynes’s initial, introductory discussion using Keynes’s simplified, liquidity preference function in chapter 13 of the General Theory on page 167, where the demand and supply of money alone determined the interest rate. Keynes’s complete, simultaneous, three equation IS-LP(LM) model is provided on pages 298-299 of the General Theory. Keynes’s IS-LP(LM) is superior to the simultaneous three equation models of Hicks (1937), Harrod (1937), and Meade (1937), which have no D-Z model supporting them that incorporates expectations and uncertainty. Both Robertson and Hawtrey completely overlooked Keynes’s clear description of the vertical and horizontal ranges of the LP(LM) curve provided by Keynes on pages 207-208 of the General Theory. Keynes’s theory is not a partial equilibrium, Marshallian theory.