On the Role of Mathematical Illiteracy in the R. Hawtrey-D. Robertson-J. Robinson Critique of Keynes’s Liquidity Preference Theory of the Rate of Interest in the General Theory

Abstract

Extreme mathematical illiteracy played a basic, fundamental role in the assessments made by Joan Robinson, Ralph Hawtrey and Dennis Robertson of Keynes’s Theory of Liquidity Preference, which Harrod described in an August 30 1935, letter to Keynes as a major reconstruction of interest rate theory. Harrod stated that the classical (neoclassical) theory of the rate of interest was “…either indeterminate or has to be determined by some new equation not provided for in the classical system. Thus the way is clear for a radical reconstruction. Your new equation is the liquidity preference schedule.” Of course, Harrod is talking about the equation on page 199 of the General Theory which had two independent variables, Y and r, M = M1 plus M2 = L1( Y) plus L2(r) [=L], and not the equation on page 168 of the General Theory, which had one independent variable, r, where M=L(r). Robertson, Hawtrey,and Robinson did not understand the mathematics involved in Keynes’s M = M1 plus M2 = L1( Y) plus L2(r) [=L]. (1) But Robertson, Hawtrey, and Robinson did understand how to work mathematically with M=L(r) (2) because it lends itself to the Marshallian, ceteris paribus, partial equilibrium approach, where only functions with one independent variable are analyzed. I will show that later economists, discussing Keynes’s pages 179-182 demonstration that the classical system was missing (1), for example, Boianovsky (2004), Besomi (2000), O’Donnell (1999), and Ahiakpor (1999), are using (2) and not (1). They also are only working with the Marshallian, ceteris paribus, partial equilibrium approach, where only functions with one independent variable are allowed to be specified. Other economists, who work with (2) and not (1), are, for a few examples, Hansen (1953, pp.140-141;147-148), Clower and Howitt (1998, p.8), and King (2002 ,pp.13-15,17-18,31-32).