Hicks rejection of IS-LM

4 Oct, 2012 at 18:28 | Posted in Economics | Comments Off on Hicks rejection of IS-LM

In my post On Krugman’s reading list I found Paul Krugman’s defending the old and dear IS-LM model somewhat perplexing, given the fact that John Hicks, the man who invented it in his 1937 Econometrica review of Keynes’ General Theory returned to it in an article in 1980 in Journal of Post Keynesian Economics and self-critically acknowledged that his original review totally ignored the very core of Keynes’ theory – uncertainty.

After my piece had been reposted earlier today on the Real-World Economics Review Blog, Paul Davidson wrote a very interesting comment to it:

To provide some background to the Hicks article in the JPKE.
I originally published an article about Keynes’s finance motive — which in 1937 Keynes added to his other liquidity preference motives (transactions, precautionary, speculative motives) , I showed that adding this finance motive required that Hicks’s IS curve and LM curves to be interdependent — and thus when the IS curve shifted so would the LM curve.
Hicks and I then discussed this when we met several times.
When I first started to think about the ergodic vs. nonergodic dischotomy, I sent to Hicks some preliminary drafts of articles I would be writing about nonergodic processes. Then John and I met several times to discuss this matter further and I finally convinced him to write the article — which I published in the Journal of Post Keynesian Economics– in which he renounces the IS-LM apparatus. Hicks then wrote me a letter in which he thought the word nonergodic was wonderful and said he wanted to lable his approach to macroeconomics as nonergodic!

So – again – it’s about time neoclassical economists set the record straight and stop promoting something that the creator himself admits was a total failure. Study the real thing itself – General Theory – in full and without looking the other way when it comes to non-ergodicity and uncertainty!

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