On Heterodox Attempts to Cover Up Joan Robinson’s Failure to Comprehend Keynes’s Liquidity Preference Theory of the Rate of Interest and Keynes’s IS-LM Model in Their Correspondence of September through November,1936

Abstract

In September, 1936, Keynes started reviewing materials sent to him by Joan Robinson for publication as a book, titled” Essays in the Theory of Employment”, which was published in 1937 .Keynes discovered some significant misunderstandings on J. Robinson’s part regarding exchange rate and price adjustments of foreign securities between two countries. However, the much more severe problem, from Keynes’s point of view, was that, in the course of the exchanges, J. Robinson demonstrated her complete failure to grasp Keynes’s liquidity preference theory of the rate of interest, as presented by Keynes using his original IS-LM (LP) model discussed extensively in chapter 21 in Parts IV -VI on pages 298-306 of the General Theory.

This was due to Robinson’s having latched on to the initial, introductory, beginning discussions of liquidity preference in chapter 13 on page 168, where Keynes defined M=L(r). M=L(r) is what Joan Robinson over her entire life believed determined the rate of interest. It is impossible to combine this equation with Keynes’s IS equation from p.63, that I=S, as analyzed further by Keynes on p.115 and p.137 of the General Theory, which leads to the equations C=f(Y ) ,or S=h(Y), and I=g(r) ,where one can conduct an analysis in Keynes’s (r,Y) space. Only the equation on p.199 of the General Theory, M=L(r,Y) ,can be combined in (r,Y ) space with the IS equation to form Keynes’s version of IS-LM(LP),which Keynes based on the D-Z model of chapter 20. This equilibrium then determines the nominal, long run rate of interest.If the nominal, long run rate of interest falls to 2 % or less, monetary policy will in totally ineffective because the intersection of the IS equation will fall in the elasticity range of the LM equation that exhibited virtually absolute liquidity preference

Robinson did not have the mathematical training needed to grasp what Keynes was doing in chapters 15 and 21(20) of the General Theory. The problem of her mathematical illiteracy, that had originally shown up in 1932-1933 regarding Pigou’s seeking some clarification from her about mathematical work that had actually been performed for her by either A.Robinson or Richard Kahn in her 1933 book, the Theory of Imperfect Competition,reared its head again in 1936. However, this time neither R. Kahn nor A. Robinson would be able to save her from the intellectual mess she had made out of the General Theory. J. Robinson never raised any concerns to Keynes in 1935 when she was reviewing the Second draft copy of the General Theory regarding chapters 15,20 and 21. However, in 1936, Keynes discovered that Robinson actually had no better idea about his liquidity theory of the rate of interest than R. Harrod, D. Robertson and R.Hawtrey.

Her total failure to grasp Keynes’s theory of the rate of interest was on complete display in these exchanges. This is why adherents of heterodox economics have sought to cover up these exchanges because anyone reading them in their entirety will know that Joan Robinson does not know what she is talking about in 1936.