A Keynes-Robinson Controversy: A Methodological Matter

Abstract

This paper examines a minor methodological foray by Keynes: his 1941 reaction to what is now a well-known conclusion of price theory, the so-called “below-capacity theorem” first advanced by Joan Robinson’s 1933 Economics of Imperfect Competition. By the graphical analysis that has now become universal, the theorem “proves” that any profit-maximizing firm faced with a downward-sloping demand curve will produce to the left of the average cost curve’s lowest point, the difference between this lowest-cost output and the output determined by MC=MR being a measure of excess capacity. The paper will conclude that Keynes’ denigration of the theorem is wholly due to his different cast of mind, to a methodology that preferred observation and history over deductive methods.