April 30, 2017

IS-LM ― a crash course for EconoPhysicists

Comment on Jason Smith on ‘The ISLM model’


You define your task: “The economist John Hicks wrote out Keynes’ prose as an economic model that came to be known as the IS-LM model. I already derived this model before in a way that followed the way it is introduced in macroeconomics classes (as an IS and LM market). This derivation will achieve the same result, but approached fundamentally as an information transfer market system.”

This is an idle task because IS-LM is false on all methodological counts. By consequence, it cannot be saved or improved by the misplaced application of information theory.

The formal core of IS-LM can be traced back to the General Theory: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular all I=S and IS-LM models.#1

Let this sink in: Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Worse, Hicks did not get it either. Worst, after 80 years Jason Smith still has not realized that ALL macro models that do not explicitly contain profit are false.#2

An economist who cannot tell how the pivotal concept of economics, i.e. profit, is defined is like a physicist who cannot tell how energy is defined. Persons who neither understand economics nor physics are called EconoPhysicists. Mirowski has given an account of how these clueless folks have messed up economics in his masterpiece More Heat Than Light.

Egmont Kakarot-Handtke

#1 See also ‘Why Post Keynesianism Is Not Yet a Science
#2 For more details see ‘The IS-LM macro imbeciles’ and cross-references Refutation of I=S

ANSWER of Jason Smith


  1. Seems to do ok describing interest rate data, tho.

    So it's a good effective theory regardless of what you think economic theory should look like.

    Let that sink in. Despite all your pompous verbosity, that black line matching up with the blue line above means your criticisms are likely incorrect.

    That's the wonderful thing about data. It can from time to time settle arguments definitively. This is one of those cases. The data says you're wrong, so please display a bit of scientific integrity and admit it.
  2. Please note that a lack of scientific integrity is a violation of my comment policy.

    Additionally, please don't refer to me in the third person when you comment on my blog.
REPLY to Jason Smith on Apr 30

Your understanding of the scientific method is rather superficial. You maintain: “that black line matching up with the blue line above means your criticisms are likely incorrect. That’s the wonderful thing about data. It can from time to time settle arguments definitively.”

Perhaps you have heard of the famous example that the false Geo-centric theory with its 20+ epicycles fitted the data initially better than the true Helio-centric theory. The Geo-centric theory was discarded nonetheless because it was theoretically unsatisfactory.

Genuine scientists know that science is more than a data-fitting exercise: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

Because a theory has to satisfy TWO criteria ― material AND formal consistency ― it is SUFFICIENT to refute it either on material or formal grounds. I have chosen to refute you on formal grounds.

I have delivered the proof that there is NO such thing as an IS curve because I and S are NEVER equal (it holds in the elementary case Qm=I-Sm). Because there is NO such thing as an IS curve your data-fitting exercise is as phantasmagorical as epicyclic data-fitting. (There is NO LM curve either and NO such thing as an equilibrium but this proof is redundant in the given context.)

Your blog is a perfect example of what Feynman called cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

The essential thing that is missing on your cargo cultic blog is a proper understanding of scientific methodology and integrity.

The whole conversation had vanished from the ITE blog at Apr 30, 20:26 MUC time.

Blog capture May 26