February 26, 2016

IS-LM is dead and waiting to be buried

Comment on Nick Rowe on ‘IS-LM pictures with interest on money’

Blog-Reference and Blog-Reference

“But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281) Curiously, neither proponents nor opponents of Keynesianism have grasped until this very day what is actually in the Keynesian system (2011; 2014).

The formal foundations of Keynesianism are logically defective since the General Theory. Keynes’ fundamental equations of macroeconomics (1973, p. 63), i.e. “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” is provably false.

The deeper reason is that Keynes — just like his predecessors, fellows, and successors — 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., 2010, pp. 12-13, 16)

All IS-LM models suffer from the same fundamental defect and are dead since Hicks’ prototype. Economists, though, have still not fully grasped this.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
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.
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

Related 'I=S: Mark of the Incompetent'. For details of the big picture see the cross-references Refutation of I=S.