Posted by: Dirk | September 11, 2007

The IS-LM model

The annual supplement of History of Political Economy 2004 focuses on the IS-LM model. I haven’t gone through the texts yet, but for students who are interested in a little extra knowledge they seem suitable. Most modern textbooks devote only a couple of sentences to the history of the model, but it would make sense to invest some time in order to grab the situation in which the IS-LM model was created, and how we look at it today.

UPDATE 15/09/2007: An overview of the IS-LM model can be found at the History of Economic Thought website, or at the website of Roubini and Backus.

UPDATE 04/12/2007: Economist’s View has transformed an exchange of thoughts on crowding out by Brad DeLong, Paul Krugman, and Greg Mankiw into a readable post.

UPDATE 11/02/2008: Here’s an excerpt from Colander and Landreth’s The Coming of Keynesianism to America on the question of whether Keynes would be happy with the diagrams from Hicks and the resulting equilibrium:

Interviewer: Would you like to comment on Hicks’ contribution? You recently suggested that Hicks put Keynes back into general equilibrium analysis, and this was not what Keynes was trying to do at all. It was essentially disequilibrium, not equilibrium, analysis. And yet Hicks with his IS/LM…

Abba P. Lerner: I don’t think there’s any disagreement; the IS/LM curve accurately describes what Keynes had in mind. Nor is the idea of disequilibrium a point of disagreement. The IS/LM curve gives you an equilibrium without full employment, which before Keynes was never called equilibrium. Maybe it shouldn’t be called an equilibrium. It doesn’t matter what you call equilibrium; I myself think it should be called equilibrium because, to me, equilibrium means a situation which tends to stay where it is. And unemployment does tend to stay where it is because of the reasons given by Keynes, although it wouldn’t stay there where it was if you had perfect flexibility of prices. But you don’t have perfect flexibility, and so it’s equilibrium. I prefer to call it equilibrium, but it is a matter of language. There are people who say Keynes shouldn’t have called his situation one of equilibrium; rather they should have called it disequilibrium. All this means is it is not the same as the classical story. Well, it isn’t the same. And the reason for it is rigidity.

UPDATE 19/02/2008: This is from the keynote address to the 2003 HOPE conference, by self-described Keynesian (at least back then in 1963) Bob Lucas (p.12 ff.):

I thought when I was trying to prepare some notes for this talk that people attending the conference might be arguing about Axel Leijonhufvud’s thesis that IS-LM was a distortion of Keynes, but I didn’t really hear any of this in the discussions this afternoon. So I’m going to think about IS-LM and Keynesian economics as being synonyms. I remember when Leijonhufvud’s book2 came out and I asked my colleague Gary Becker if he thought Hicks had got the General Theory right with his IS-LM diagram. Gary said, “Well, I don’t know, but I hope he did, because if it wasn’t for Hicks I never would have made any sense out of that damn book.” That’s kind of the way I feel, too, so I’m hoping Hicks got it right.

UPDATE 19/02/2008: Alan Blinder defines Keynesian Economics at Econlib, and the History of Economic Thought website reports on the IS/LM model. Also, I recently read and reviewed The Coming of Keynesianism to America by David Colander and Harry Landreth (1996). Recommended for those who want to dig deeper.


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