What J. Viner (and Everyone Else) Overlooked in His 1936 and 1964 Reviews Concerning Keynes's Liquidity Preference Analysis in the General Theory and the 1937 Quarterly Journal of Economics Article: ""The Orthodox Theory is One Equation Short of What is Required to Give a Solution ."

Abstract

J. Viner, as well as all other economists who have written on Keynes’s analysis of the rate of interest in the General Theory, erred in not taking into account Keynes’s detailed, painstaking analysis on pp.180-182 of the General Theory, where Keynes clearly and carefully derived and identified two different rates of interest, r1 and r2 , derived from (r;I,S) space, but analyzed in (r,Y) space. r1 lies on one IS curve and r2 lies on another IS curve. Keynes asks which one is the effective rate of interest, r1 or r2? Of course, the answer is that the neoclassical theory is unable to pick out either r1 or r2 . The answer is indeterminate because the neoclassical theory is “… one equation short of what is required to give a solution.” What is this equation? The missing equation is specified by Keynes in chapter 15 of the General Theory in (r,Y) space. Only Keynes’s chapter 15 liquidity preference equation in (r,Y) space will provide the “missing data” or the data “ from some other source” or the missing equation which is clearly specified and analyzed carefully in (r,Y) space. The missing equation is M = M1 M2 = L1( Y) L2(r) as specified on p.199. Keynes NEVER EVER claimed that there was a separate theory of the rate of interest that was specified only by M = M1 M2 = L1( Y) L2(r). Viner, much like Hansen, overlooked the analysis by Keynes on pp. 180-182 dealing with r1 and r2 ,as well as Keynes’s analysis and application on pp.199-202 and 208-209, respectively.