February 9, 2017

New IS-LM macro ― just another fake revolution

Comment on Larry Christiano on ‘The Great Recession: A Macroeconomic Earthquake’


For all those who thought macroeconomics has been refuted once and for all by the Great Recession Larry Christiano has a tumbler surprise: “The Great Recession is having an enormous impact on macroeconomics as a discipline, in two ways. First, it is leading economists to reconsider two theories that had largely been discredited or neglected. Second, it has led the profession to find ways to incorporate the financial sector into macroeconomic theory.”

Christiano’s claim that the profession has opened a new dimension of macro has zero reality content. In more detail the success story goes: “The return of the dynamic version of the IS-LM model is revolutionary because that model is closely allied with the view that the economic system can sometimes become dysfunctional, necessitating some form of government intervention.”

The warmed-up version of IS-LM will bring economists to nowhere because the whole approach is axiomatically false since 80 years.#1 The representative economist has not realized this until this very day. In methodological terms, axiomatically false is the death sentence for a paradigm, because when the foundational premises are false the whole analytical superstructure is false.#2

The true revolution consists in a paradigm shift, that is, in the full replacement of false Walrasian microfoundations and false Keynesian macrofoundations by entirely new macrofoundations.#3

Egmont Kakarot-Handtke

#1 See ‘How Keynes got macro wrong and Allais got it right'
#2 See ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
and cross-references Refutation of I=S
#3 See ‘Macroeconomics ― dead since Keynes’ and ‘The other half plus the hitherto missing true foundations of macroeconomics’ and ‘Tobin, the tragedy of After-Keynesians, and the indelible mark of incompetence’ and ‘From false micro to true macro: the new economic paradigm