Keynes's March 31, 1937 Message to Hicks About the IS-LM Model: 'At One Time I Tried the Equations, as You Have Done, with I in All of Them'

Abstract

Keynes told Hicks very clearly on March 31st, 1937 that Keynes had already done what Hicks had done on page 156 of his 1937 Econometrica paper, which was to add Aggregate Actual Income I (Keynes’s Y) into the three equation set comprising Hicks’s later version of Keynes’s IS-LM model. However, Keynes then told Hicks that that was an error that he had already rectified in the General Theory. He clearly told Hicks that it was Expected Aggregate Income, and not Actual Income, that belonged in the Investment equation. Unfortunately, Hicks refused to follow Keynes’s advice until 1981. Forty-five year later, Hicks admitted in a retraction published in the Journal of Post Keynesian Economics that he had erroneously altered the IS-LM model of Keynes by removing expectations and uncertainty from it. It is quite impossible for Hicks, or Hicks-Hansen, to be regarded as the creators of a model that Keynes had already presented and applied in Section IV of Chapter 21 of the General Theory in 1936. It is also quite impossible to view Keynes’s IS-LP(LM) version as a neoclassical model. I suggest that the correct way of categorizing the model is as the Keynes-hicks-hansen IS-LM model with Keynes’s name capitalized and Hicks’s and Hansen’s names not capitalized. Keynes made it crystal clear that his model was a set of “equations”. Keynes then told Hicks that “present income has a predominant effect in determining liquidity preference and savings that it does not possess in its influence over the inducement to invest.” It is quite impossible to support the Joan Robinson claim that Keynes’s Theory of the rate of interest was a purely monetary one. Joan Robinson’s lack of even a basic understanding of pre-algebra explains her complete failure to grasp Keynes’s crucial sentence to Hicks, “I tried the equations, as you have done, with I (Keynes’s Y-authors insert) in all of them.”