On Hicks’s Failure to Grasp the Importance and Significance of the Keynes – Viner Exchanges Over the Extreme Elasticity - Instability of the LM(LP) Curve in Keynes’s February, 1937 Quarterly Journal of Economics

Abstract

Hicks’s April,1937 Econometrica article purported to provide a unique and different “interpretation” of Keynes’s liquidity preference theory of the rate of interest that centered on the highly elastic range of the LL (LM or LP) curve as being the central, critical and distinct element in Keynes’s liquidity preference theory of the rate of interest that was really original. Supposedly, this was not clearly discussed by Keynes in chapter 15 or anywhere else in the General Theory according to Hicks and the economists who followed Hicks.

However, a careful reading of pages 207-208 of the General Theory, combined with Keynes’s February, 1937 Quarterly Journal of Economics article reply to Viner’s claim that the LM curve had to be drawn as having a highly inelastic shape, published two months before Hicks’s Econometrica article, demonstrates that Hicks’s “interpretation” is identical to analysis presented by Keynes in the General Theory in 1936 on pages 207-208 and The General Theory of Employment in 1937.
The only unique accomplishment that Hicks made in his April,1937 Econometrica article is to have been the first economist to have actually drawn a LL (LM or LP) function with both highly inelastic and highly elastic ranges in Aggregate Income-rate of interest space that is identical to Keynes’s technical description on pp. 207-208 of the General Theory. His Figures are identical to the explicit, technical descriptions written by Keynes in the General Theory and The General Theory of Employment, where Keynes discussed the elasticities and shapes of the LM (LP) curve.
Hicks’s “interpretation” of IS-LM(LP) turns out to be identical to Keynes’s earlier analysis and conclusions, although Hicks failed to see the connection of Keynes’s work on IS-LM (LP) with the D-Z model of the Theory of Effective Demand that was the foundation for Keynes’s IS-LM (LP) model that was presented completely in chapter 21 in section four on pp.298-303 of the General Theory.

The correct historical description of the IS-LM model is the Keynes-Hicks-Hansen model and not the Hicks-Hansen IS-LM model. All introductory and intermediate macroeconomics textbooks, as well as all current history of economic thought perspectives on IS-LM, needed to be completely rewritten.

Current assessments of Keynes’s original role in the development and construction of the IS-LM model are due to a failure to read what Keynes clearly wrote in 1936 in the GT on pp.207-208 and on pp.218-219 in his GTE.Much of Hicks’s 1937 article is simply rewriting Keynes’s conclusions in different words. The only contribution Hicks made that had not been done by Keynes was to actually draw the curves.