Pilkington: Keynes Was Misinterpreted from the Start

September 8th, 2014
in econ_news, syndication

Econintersect: Philip Pilkington's latest article posted in GEI Analysis is not the first to discuss the abuse of John Maynard Keynes' 'General Theory', but he has selected an earlier paper than others have often cited, Mr. Keynes and Traditional Theory, Roy Harrod (January, 1937). This preceded by three months the paper more often cited , by John R. Hicks (April, 1937). In his article Pilkington clearly defines the single most significant factor that led to the improper application of supply and demand theories undertaken as representations of the 'General Theory'.

John Maynard Keynes

Follow up:

Perhaps Hicks has been a popular source of researchers seeking to understand the early impact of Keynes' treatise because Hicks later won a Nobel Prize for his work in economics. And he was credited as the formulator of the ISLM supply and demand model, which has erroneously been attributed to deriving from Keynes' 'General Theory'.

But there is no doubt that Harrod was similarly interpreting Keynes at least contemporaneously if not before, according to Pilkington. In addition, there are several letters exchanged between Keynes and Harrod at the time in which Keynes, disputed the usage of specific language in formulating his (Harrod's) economic logic. (See Besomi.)

And it is exactly specific words that Pilkington has in focus in his article. Whereas Keynes specifically used the term marginal efficiency of capital (mec), which he defined to be related to the present value of the expected return from the investment of that capital. Whereas Harrod, and Hicks as well, not able to accept that there could be a workable model with that definition, chose to "interpret" it as the marginal productivity of capital (mpc) which has an entirely different meaning.

The mpc is readily determined from the incremental increase in production from the incremental increase of investment; it is an experimentally determined quantity.

The mec is an unknown quantity that can only be estimated by the judgment of the investor; this makes for very indeterminate modelling.

So Keynes 'General Theory' was essentially still-born and replaced by a surrogate which fitted the convenience of the model builders of the day (and has continued to do so to the present). The key element of the 'General Theory' that the future is uncertain was lobotomized following delivery of the baby. Later Hicks apologized for his part in the surgery in a 1980 paper.

This discussion has wandered from the superb focus Pilkington has developed in the GEI Analysis article Keynes’ General Theory, the ISLM and Roy Harrod’s ‘Dynamics’.

This is an article that everyone should read who wishes to get a much more thorough and yet succinct development of the removal of uncertainty about the future from the heart of Keynesian theory.

And when the heart is removed but the body is still animated, isn't that the essence of a Zombie? Zombie Keynesism - now there's a thought.

Note: The removal of uncertainty about the future from Keynes' theory is discussed in detail in Steve Keen's book, Debunking Economics. It is a central component of Chapter 10, "Why They Didn't See It Coming".  Keen does not discuss the Harrod paper which Pilkington has found to have especially clear discussion of mec and mpc.

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