There Was No IS-LM Enigma: Both Keynes’s IS-LM(LP) and D-Z Models of Chapters 20 and 21 Together Make Up Keynes’s General Theory

Abstract

All of J .M .Keynes’s earlier 1933-1935 versions of his IS-LM(LP) model contained a serious inconsistency. These earlier models all incorporated both actual and expected outcomes in the same model. The units did not match up. Keynes solved this problem by himself by splitting off the D-Z model from the IS-LM(LP) model. The D-Z model incorporated an analysis of expected results, expectations, uncertainty, and confidence.The major result that Keynes made use of in his analysis of the D-Z model was the Aggregate Supply Curve, which is a locus of all possible, expected D=Z outcomes. Only one of these expected outcomes could actually occur. The one outcome that actually occurred was called Y. Keynes then combined the actual Aggregate Income or Demand, Y, with r, the nominal long run rate of interest, to form the IS-LM(LP) model.

The misbelief that IS-LM(LP) had to incorporate expectations in order to actually represent what Keynes meant was a catastrophic error made by the Pseudo Keynesians-Joan Robinson, Austin Robinson, Richard Kahn, and Roy Harrod, as well as by the economics profession at large. Unfortunately, no other economist, except Hugh Townshend, had grasped the necessary connections that had to exist between the two models.