On Pigou’s 1950 Reassessment of Keynes’s General Theory: Correct Conclusion, but All of the Premises Are Completely Wrong

Abstract

Pigou’s 1950 reassessment of the major contribution made by Keynes’s General Theory is surprisingly accurate. Unfortunately, none of the supporting materials ha cites from the General Theory to buttress and support his conclusion is correct. Pigou’s main support for his conclusion comes from a reliance on chapters 13,18,and 23,with pages 246-247 of chapter 18 and pages 167-171 of chapter 13 serving as the major sources supporting his conclusion. The only correct foundation for Pigou’s reassessment consists of the appendix to chapter 19, where Keynes demonstrated to Pigou that he had no IS-LM model to determine the rate of interest and hence no way of dealing with the amount of investment or investment multiplier. Pigou also failed to grasp Keynes's chapter 20 and chapter 21, section Four, which contains Keynes’s formal analysis of his IS-LM model on pages 298-299, followed by Keynes’s own critique of his model on pp. 300-303 and his mathematical extension on pages 304-306 that integrated liquidity preference into the Aggregate demand (D)-Aggregate Supply (Z) model of chapter 20 that supported the IS-LM model of chapter 21’s section four.

Pigou’s decision to ignore the appendix to chapter 19, chapter 20 and chapter 21 of the General Theory in his 1950 reassessment, which is the material that actually supports his reassessment on page 65, were probably a result of his recognition that it would just be too intellectually painful for him to have to reconsider material once more that demonstrated Keynes’s complete, absolute and total intellectual superiority over him in the time period of 1935 to 1940.

Pigou appeared to show his grasp of Keynes’s IS-LM(LP) model in section four of chapter 21 with his famous 1950 reassessment that presented a revision of his earlier 1936 review of the GT that made no mention of any such thing as an IS-LP(LM) model:

“Nobody before him, so far as I know, had brought all the relevant factors, real and monetary at once, together in a single formal scheme, through which their interplay could be coherently investigated.” However, this conclusion can’t possibly follow from pp.246-247 of the GT as claimed by Pigou: “The kernel of Keynes’s contribution to economic thinking is to be found, as I have already said, in the short passage quoted from page 246 of his book.”

Pigou’s 1950 reassessment, then, while correct, is supported only by Keynes’s analysis in chapter 21 on pp.298-306 of the GT and has absolutely nothing to do with pp. 246-247 of the GT. There is no formal model of the interplay between the real and monetary factors that can be investigated on pp.246-247 of the GT. Pigou’s supporting analysis for his claim is very misleading because chapter 18 has no formal presentation of Keynes’s IS-LM (LP) model. Only chapter 21 makes such a formal presentation.