On Keynes’s Two Simplifications of His Aggregate Supply Curve Analysis in Chapter 21 of the General Theory: O. Lange (1938) Overlooked Chapter 20 and the Two Simplifications on Pages 295–296 of the General Theory in Chapter 21

Abstract

O Lange’s failure to read chapters 20 and 21 of the General Theory accounts for his failure to use Keynes already worked out simplifications for the case where the Aggregate Supply Curve was infinitely elastic or had a horizontal segment. Chapter 3 of the General Theory only presents an outline of what Keynes actually did later in the General Theory in chapters 20 and 21. No Aggregate Supply Curve was constructed in chapter 3 of the General Theory or even mentioned. Keynes gave general functional relationships for D and Z. Only in chapter 20 and the footnote on pp.55-56 does Keynes define what D and Z actually are, which is that D=pO and Z=P wN, where p is an expected price and P is expected profit. Keynes’s introduction of the aggregate supply curve occurs in chapter 6 on pages 55-56 in footnote two. The chapter in which his aggregate supply curve is fully analyzed is in chapter 20. Keynes then presents two simplifications of his aggregate supply curve in chapter 21. These simplifications specify a horizontal range of his aggregate supply curve that was completely elastic. However, Keynes never assumed that his aggregate supply curve was horizontal. He allowed for various simplifications to be made after he had presented his complete D-Z theory in chapter 20.A number of economists, such as Lawrence Klein and Franco Modigliani, have incorrectly followed Lange’s analysis, who failed to make it clear to the readers of his 1938 Economica article, that what was involved was actually two simplifications made by Keynes to Keynes’s chapter 20 analysis. Keynes never assumed a completely elastic or horizontal aggregate supply curve anywhere in the General Theory or his post General Theory writings.