July 28, 2015

Oh no! How could this happen?

Comment on ‘IS-LM vs. Minsky’


“I=S is the epitome of economists’s scientific incompetence. If this were as plain as a meteorite hitting the earth the problem would have been fixed long ago; it is, though, just the contrary: subtle, unspectacular, counter-intuitive, subterranean, and rather involved.” *

Of course, IS-LM from Hicks to Krugman is unacceptable because of multiple defects (2014). Keynesians, though, have to admit that it all started with this two-liner in the General Theory: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

For the ultimate explanation of how the IS-LM embarassement could happen see the post ‘Mental messies and loose losers’ *

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

* See here or at the RWER blog