On J M Keynes's Total and Complete Rejection of the Marshallian, Partial Equilibrium Approach to Macroeconomics in the General Theory in 1936: Keynes's Critique of Pigou's Marshallian, Partial Equilibrium Approach to Macroeconomics in the Theory of Unemployment (1933) Is Contained in the Appendix to Chapter 19 of the General Theory

Abstract

Keynes wrote the General Theory in order to create a) a Macroeconomics approach that would incorporate the interdependences and feedback effects between major variables in an explicit system of mathematical simultaneous equations that b) incorporated the decision theoretic problems of uncertainty and expectations that led to multiple equilibria. Point a) was solved by Keynes with his IS-LP(LM) system of mathematical, simultaneous equations that he had first developed, presented, and taught in December, 1933. The final version of this model is contained on pages 298-299 of the General Theory. Keynes’s own critique of the IS-LP(LM) model is presented on pages 299-303 of the General Theory. Point b) was solved by Keynes in Chapter 20 of the General Theory with his D-Z model of expected prices and profits. This model is used to develop the Aggregate Supply Curve, which is a locus of multiple equilibria, one value of which will determine Y in the IS-LP(LM) model. Keynes’s theoretical attack on the Marshallian, partial equilibrium method is explicitly and painstakingly presented in the Appendix to chapter 19 of the General Theory. Keynes shows that Pigou’s theory is based on a mathematical, partial equilibrium, Marshallian model, which is a function of only one major independent variable, the real wage. Keynes points out that Pigou then attempts to “talk about” the other relevant, independent, macroeconomic variables by using a literary, prose, English approach that is never thoroughly grounded in any relevant mathematical formulation. Keynes’s critique of Pigou is not a strawman attack. Keynes’s major point is that Pigou has no way of dealing with aggregate demand correctly because he has no correct theory of the rate of interest and no investment multiplier that would allow him to calculate aggregate income and then aggregate employment. Keynes demonstrated that Pigou’s Marshallian, partial equilibrium approach can’t possibly deal with macroeconomic feedback effects that require an IS-LP(LM) model. Keynes demonstrates that it is impossible for Pigou to develop the needed IS-LP(LM) model within a Marshallian, partial equilibrium approach. The Marshallian, partial equilibrium, approach can, however, be deployed to provide a microeconomic framework upon which to build the needed macroscopic model. Keynes modified Pigou’s mathematical “concoctions” on pages 87-95 from Part II of The Theory of Unemployment (July,1933) in chapter 20 of the General Theory in order to incorporate profit and price expectations and uncertainty. Keynes had no such underlying foundation in December,1933 to support his macroeconomic IS-LP(LM) model. It would have been very improbable for Keynes to have finished writing the General Theory without first seeing Pigou’s complete micro model that Pigou had attempted to also use as a macro model (see Arthmar and Brady, 2009). Recent histories of macroeconomics that claim that the GT was built on Marshall’s, partial equilibrium approach have completely overlooked Keynes’s direct attack on Marshall’s approach in the Appendix to chapter 19 of the GT. Keynes’s major point was that Pigou’s 1933 TTOU is missing a system of simultaneous equations that can deal with complications and interdependencies between multiple, independent variables.Pigou has no IS-LP(LM) model. Involuntary Unemployment is not a microeconomic phenomena. It is a macroscopic result only. It occurs if there is insufficient aggregate investment expenditure. Insufficient aggregate Investment expenditure is liable to happen under conditions of uncertainty where business profit expectations are evaluated pessimistically. Keynes’s GT is a rejection of the partial equilibrium approach and methodology of Marshall. Economists have been misled by the very numerous specious claims made by Joan Robinson.