Keynes’s Anti Marshallian, General Theory Analysis Against the Marshallians, Robertson and Pigou, in 1937: Pigou’s 'Money Wages in Relation to Unemployment'

Abstract

In August 1937, Keynes discovered that Pigou, with the very explicit and rabid support of Dennis Robertson, was planning on publishing a paper in the Economic Journal which deployed the same type of Marshallian, partial equilibrium,ceteris paribus (constant money income) analysis with functions containing only one independent variable that he had used in his 1933 Theory of Unemployment. In 1937, Pigou argued that there were two separate theories of interest rate determination. The first was that M=L(r), so that the demand and supply of money alone determined the rate of interest. The second was that M=L(Y), so that only aggregate income determined the rate of interest. Of course, there are no such functions in Aggregate Income-rate of interest (Y,r) space. Keynes correctly pointed out that the missing equation in Pigou’s paper was Keynes’s Liquidity Preference Function M=L(Y,r). Only this function exists in (Y,r) space. A subsidiary point in Pigou’s 1937 paper was that Pigou also argued that the rate of interest was equal to a constant rate of time preference. This, of course, is consistent with the deployment of a Marshallian ceteris paribus assumption about constant money income. Kaldor apparently believed that this was the central issue involved and the more important. Now Keynes knew better,but he,as the referee, allowed Kaldor to proceed because Kaldor correctly deployed Keynes’s IS-LP(LM), although Kaldor believed that it was Hicks’s model, to prove decisively in a diagram relegated to a footnote near the end of the article, that money wage cuts could only work by shifting the LP(LM) curve, which Hicks had renamed the LL curve ,to the right, so that Mw ,money in terms of wage units, would increase Y and lower as LP (LM) shifted to the right. Pigou’s 1938 comment in a note, that “I have not been able to follow the reasoning of Mr. Keynes’s short note, which preceded Mr. Kaldor’s”, demonstrates that Pigou, and Robertson, were still not able to break away from the Marshallian, partial equilibrium,ceteris paribis type of analysis that was worthless at the macro level. Pigou and Robertson could not deal with a function that had two independent variables. Pigou never mentioned Kaldor’s graphical summary in his 1938 reply because he could not understand what was being done in Keynes’s IS-LP(LM) model. Keynes used the 1937 Kaldor comment on the erroneous assumptions and analysis of Pigou,who was fully supported by D. Robertson (see letter from A. Robinson to Keynes, CWJMK, vol.14,p.239), to set up a test for the Pseudo Keynesians. Keynes offered them publications in the EJ if they would reply to Pigou’s 1938, March article by simply deploying Keynes’s LP function from p.199 of the GT to show that Pigou’s model was completely misspecified. The Pseudo Keynesian response was to reject Keynes’s extraordinarily favorable offer and attempt to sabotage the Keynesian revolution in order to advance their own false, petty, and opportunistic claims.