On Keynes’s Painstaking Slow Instruction of Harrod on the Technical Aspects of His IS-LM Model in July-September, 1935:Harrod Only Finally Understood Keynes’s IS-LM Model After He Had Read the Postscript to Keynes’s Letter of August 27th, 1935 to Harrod

Abstract

Keynes spent a tremendous amount of time and energy attempting to tutor Harrod on the mechanics of his IS-LM model between July to September, 1935. Keynes’s painstaking slow attempts finally led Keynes in desperation to write a three point postscript to his letter of August, 1935, that is written at a grammar school level of exposition. Only after reading Keynes’s three point postscript, written at a grammar school level of exposition, did Harrod finally grasp the point that Keynes was making, which is that it is impossible for there to be any equilibrium in Aggregate (Effective) Demand, Y, interest rate, r, space of Investment(I) and Savings(S) because the IS curve was a SINGLE, downward sloping line in (Y,r) space. There is ,obviously, a missing equation.

Harrod’s continual resort to ceteris paribus assumptions about a constant or fixed level of aggregate income ,Y, in order to support the existing classical (neoclassical ) theory of the rate of interest in (r;I,S ) space, is very similar to Pigou’s assumption of ceteris paribus in his 1933 The Theory of Unemployment, so that he could apply his Marshallian apparatus of partial equilibrium. Keynes’s main point in the appendix to Chapter 19 of his General Theory (1936) was that Pigou had no IS-LM model.

The critical problem is that Harrod, starting with his January,1937 Econometrica article, sought to cover up Keynes’s IS-LM model, just as he attempted to cover up Keynes’s multiplier – accelerator model provided by Keynes to Harrod in correspondence in August,1938.

The unanimous belief among economists that Hicks was the inventor of the IS-LM model in his April, 1937 Econometrica article is simply a myth that is easily falsified by any economist who reads the correspondence of August 27th and August 30th, 1935 between Harrod and Keynes.