Blog-Reference and Blog-Reference and Blog-Reference on Dec 21
Economists think they can solve any problem by painting the triad SS-function―DD-function―equilibrium. Leijonhufvud called this analytical tool totem of the micro/totem of the macro. What economists do not understand is that there is NO such thing as an economic equilibrium and NO such thing as SS and DD functions.#1 The totem of micro/macro is a NONENTITY. And this means that the history of IS-LM from Keynes to Hicks to Davidson to Krugman and beyond is a perfect example of economists’ absolutely vacuous model bricolage.#2
Keynesianism in general, and IS-LM, in particular, has always been methodologically unacceptable and its proper place for 80+ years is the wastebasket.#3
What economists’ in their innate scientific incompetence fail to realize is that the economy as a system is defined by the interrelationship of a number of elementary variables. Every model, no matter how differentiated, must contain these OBJECTIVE interrelationships as its hardcore. This is an imperative methodological necessity.
The false Walrasian microfoundations and the false Keynesian macrofoundations have to be replaced with the true macrofoundations. This is achieved as follows
(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
The graphical representation of this absolute formal minimum is given on Wikimedia AXEC31:
This chart replaces the hare-brained totem of SS-function―DD-function―equilibrium. A detailed description of the elementary macro relationships has been given elsewhere.#4
The systemic macro axiom set (A1) to (A3) is the one stone that kills, for a start, the Keynesian multiplier, ALL IS-LM models from Hicks onward, the stickiness argument, and the (bastard-) Phillips Curve including the natural rate hypothesis.#5
This, though, is forever beyond the horizon of the representative economist who flunked the intelligence test already by accepting the totems of micro and macro.
Egmont Kakarot-Handtke
#1 Ground Control to David Glasner
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 Keynesianism is broken: Get over it!
#4 Getting out of IS-LM = Getting out of despair
#5 The final smackdown of blahblah-Keynesianism
For details of the big picture see cross-references Refutation of I=S.