Joan Robinson on Keynes's Liquidity Preference Function and the Rate of Interest and Her Failure to Grasp the Connection between the General Theory, the Liquidity Preference Function, Uncertainty, and the Weight of the Evidence from the a Treatise on Probability

Abstract

Joan Robinson did not understand the connection between Keynes’s concept of the weight of the evidence from the A treatise on Probability and the concept of the weight of the evidence from the General Theory. She mixed up Keynes’s concept of uncertainty, which is based on missing evidence or knowledge, with Shackle’s concept of uncertainty, which is based on the individual decision maker’s imagination and dreams about outcomes where all evidence is missing. For Keynes, the rate of interest is determined by his IS equation and his LP(LM) equation. Uncertainty is brought in as a shift parameter for both equations, schedules, or curves. Joan Robinson had to have seen Keynes’s 1937 article responding to Pigou in the Economic Journal that was sent to both Austin Robinson and Richard Kahn. Keynes explicitly states that his theory of the rate of interest is NOT that the interest rate is determined by the demand and supply of money. Keynes’s theory of the interest rate is an advanced version of his December, 1933 student lecture where he first put forth his IS and LP equations. The two places that Keynes brings all of the elements of his theory together is in Section IV of both Chapter 15 and 21. Section IV of Chapter 15 is brief. Section IV of chapter 21 is extremely detailed. R. Skidelsky has recently stated that the Post Keynesian school of economics is built on Joan Robinson’s work. Her work on Keynes’s theory of Liquidity preference is partially flawed. It is unclear how the flaws that currently exist can be fixed.