On the J M Keynes-Joan Robinson Correspondence Between September and November, 1936: How Keynes Finally Came to Realize That Joan Robinson Had No Understanding Whatsoever About His Liquidity Preference Theory of the Rate of Interest or the General Theory

Abstract

In the course of examining papers sent to him by Joan Robinson for review and comments before publication in late 1936, Keynes discovered that Joan Robinson had absolutely no understanding whatsoever about his theory of the rate of interest, which was based on the Liquidity Preference Function, in the General Theory. Despite repeated attempts by Keynes to correct her errors, Joan Robinson persisted in resisting Keynes’s attempt to repair her deeply flawed work on liquidity preference. Keynes finally realized in November 1936 that his acknowledgment of her on page xii of the General Theory regarding her comments on the draft copies of the General Theory he had sent her was mistaken. Keynes had no alternative in his letter to J. Robinson of November 9th, 1936, but to state to her bluntly that “… your argument as it stands is most certainly nonsense.” Robinson’s argument was that the rate of interest is determined by the demand and supply of money alone. Keynes had finally come to realize over the three month time period of their correspondence that Joan Robinson had no grasp whatsoever about his IS-LM(LP) (Hicks’s 1937 IS-LL and Hansen’s 1953 IS-LM are distorted versions of Keynes’s model) model of interest rate determination in Effective Demand (Y) and interest rate (r) space. Robinson viewed Keynes’s Liquidity Preference theory of the rate of interest of the General Theory as a purely monetary theory of the rate of interest that was determined only by the demand for money and the supply of money. According to Robinson, Keynes in the General Theory had shown that the rate of interest is a purely and uniquely determined monetary variable only. Keynes’s Y=C plus I and Y=Cplus S model, leading to the conclusion that I=S, which generates the IS equation on pages 63,115 and page 298 of the General Theory, had no role to play in determining the rate of interest. Therefore, the rate of interest can only be determined by the speculative demand for money,M= L2(r). Keynes had already seen this faulty description of his theory described to him in correspondence with Hawtrey in the January-March, 1936 time period. Keynes ‘s response to Hawtrey was that Hawtrey’s summary was completely wrong. Keynes was surely shocked to see Robinson making the same, identical mistake as Hawtrey. Interestingly, this correspondence between Keynes and Robinson has never been examined at any time by any economist or academic since it first appeared in print in Volume 14 of the CWJMK in 1973. For instance, the only mention made by Skidelsky about this correspondence (1992, p.627) was that the slowness of trains in Europe gave Keynes a chance to “…read the proofs of Joan Robinson’s new book.” The footnote provides no additional information. The reason why this correspondence has never been examined should be obvious. It completely destroys the strident claims, made by the Post Keynesian and Institutionalist schools of economics, that Keynes never presented an IS-LM type model in the General Theory because his theory was a purely monetary theory of the rate of interest only. Practically all of Skidelsky’s work on the General Theory, which was directly based on Joan Robinson, can now be seen to be completely flawed. One comes to the truly bizarre conclusion that the Post Keynesian and Institutionalist schools have, for the last 82 years, based their understanding of the General Theory, not on Keynes, but on Joan Robinson’s badly flawed “interpretation” of Keynes and the General Theory.