Hyman Minsky and the IS-LM obfuscation

17 Mar, 2019 at 11:18 | Posted in Economics | 39 Comments

As young research stipendiate in the U.S. yours truly had the great pleasure and privilege of having Hyman Minsky as a teacher. He was a great inspiration at the time. He still is.

The concepts which it is usual to ignore or deemphasize in interpreting Keynes — the cyclical perspective, the relations between investment and finance, and uncertainty, are the keys to an understanding of the full significance of his contribution …

miThe glib assumption made by Professor Hicks in his exposition of Keynes’s contribution that there is a simple, negatively sloped function, reflecting the productivity of increments to the stock of capital, that relates investment to the interest rate is a caricature of Keynes’s theory of investment … which relates the pace of investment not only to prospective yields but also to ongoing financial behavior …

The conclusion to our argument is that the missing step in the standard Keynesian theory was the explicit consideration of capitalist finance within a cyclical and speculative context. Once capitalist​ finance is introduced and the development of cash flows … during the various states of the economy is explicitly examined, then the full power of the revolutionary insights and the alternative frame of analysis that Keynes developed becomes evident …

The greatness of The General Theory was that Keynes visualized [the imperfections of the monetary-financial system] as systematic rather than accidental or perhaps incidental attributes of capitalism … Only a theory that was explicitly cyclical and overtly financial was capable of being useful …

If we are to believe Minsky — and I certainly think we should — then when people like Paul Krugman and other ‘New Keynesian’ critics of MMT and Post-Keynesian economics think of themselves as  defending “the whole enterprise of Keynes/Hicks macroeconomic theory,” they are simply wrong since there is no such thing as a Keynes-Hicks macroeconomic theory!

There is nothing in the post-General Theory writings of Keynes that suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thoughts. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE-article there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. So, of course,​ there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” — simply because “Keynes/Hicks” never existed.

To be fair to Hicks, we  shouldn’t forget that he returned to his IS-LM analysis in an article in 1980 — in Journal of Post Keynesian Economics — and self-critically wrote:

sir_john_hicksThe only way in which IS-LM analysis usefully survives — as anything more than a classroom gadget, to be superseded, later on, by something better — is in application to a particular kind of causal analysis, where the use of equilibrium methods, even a drastic use of equilibrium methods, is not inappropriate. I have deliberately interpreted the equilibrium concept, to be used in such analysis, in a very stringent manner (some would say a pedantic manner) not because I want to tell the applied economist, who uses such methods, that he is in fact committing himself to anything which must appear to him to be so ridiculous …

When one turns to questions of policy, looking toward the future instead of the past, the use of equilibrium methods is still more suspect … It may be hoped that, after the change in policy, the economy will somehow, at some time in the future, settle into what may be regarded, in the same sense, as a new equilibrium; but there must necessarily be a stage before that equilibrium is reached …

We now know that it is not enough to think of the rate of interest as the single link between the financial and industrial sectors of the economy; for that really implies that a borrower can borrow as much as he likes at the rate of interest charged, no attention being paid to the security offered. As soon as one attends to questions of security, and to the financial intermediation that arises out of them, it becomes apparent that the dichotomy between the two curves of the IS-LM diagram must not be pressed too hard.

In his 1937 paper Hicks actually elaborates four different models (where Hicks uses I to denote Total Income and Ix to denote Investment):

1) “Classical”: M = kI   Ix = C(i)   Ix = S(i,I)

2) Keynes’ “special” theory: M = L(i)   Ix = C(i)    I = S(I)

3) Keynes’ “general” theory: M = L(I, i)   Ix = C(i)   I = S(I)

4) The “generalized general” theory: M = L(I, i)   Ix =C(I, i)  Ix = S(I, i)

It is obvious from the way Krugman and other ‘New Keynesians’ — what a gross misnomer — draw their IS-LM curves that they are thinking in terms of model number 4 — and that is not even by Hicks considered a Keynes-model! It is basically a loanable funds model, that belongs in the neoclassical camp and which you find reproduced in most mainstream textbooks.

Hicksian IS-LM? Maybe. Keynes? No way!


  1. Henry R

    There are certain logical points about the standard construction of the multiplier that you are not getting – mostly having to do with the relationship between macroeconomic and microeconomic saving. That’s what I’m bending over backwards to try and explain to you.

    And you’re responding without any substantive analysis.

    But just think about this:

    The initiating round is an assumed investment injection of 100 for example.

    It is a fact that there cannot be macroeconomic investment without equivalent macroeconomic saving.

    If you disagree with that, then end of discussion.

    So it is undeniable that the upfront investment that starts the multiplier process must result in the same amount of macroeconomic saving.

    And no further macroeconomic saving can occur when the initial investment injection is the only investment assumed.

    Therefore it must be the case that any apparent localized microeconomic saving that occurs over the subsequent consumption phase of the multiplier cycle must be offset by microeconomic dissaving. Otherwise it would infer an addition to macroeconomic saving which in turn would infer an addition to macroeconomic investment – which is a contradiction relative to the assumptions around the initial investment injection.

    You won’t be able to disprove that logic.

    And I’ve described how that happens in detailed step by step.

    The accounting I’ve used is IS correct.

    It is conforms with what is required for macroeconomic aggregated accounting.

    It is not disprovable.

    In fact, it includes consumption spending according to MPC and microeconomic saving in EVERY period following the investment injection.

    It simply constructs the accounting periodicity to prove the point about the net macroeconomic effect.

    And there’s absolutely no departure from either the mathematics of the multiplier or stock flow consistent accounting.

    If I say any more I’ll be repeating myself.

    So that ends my contribution to the discussion.

    Good discussion though.


    • JKH,
      “The accounting I’ve used is IS correct.”
      The accounting might be correct (given your assumptions) but I would argue that your assumptions and the economics are perverse.
      There is one textbook that has a zero income first round but it is assumed that the investment is met by an unplanned draw down of inventories, which is entirely different to your assumption. There is no actual new production of investment goods in the first round.
      Yes, thanks for the discussion.

  2. Henry Rech

    I said the multiplier process was in full accordance with national income accounting.

    I did not say that the typical textbook explanation was effective in depicting this.

    Here’s how the multiplier process can be portrayed according to consistent national income accounting, with all of the mathematics in tact :

    Suppose in period 1 there is investment of 100.

    All the factors that produced that investment are paid 100 as income.

    Denote the factor group that has produced the investment and earned the income of 100 as G1.

    Define period 1 such that there is no further activity.

    This will also be the consistent accounting construction in all subsequent periods.

    So at the end of period 1, investment and saving are both 100.

    And group G1 has earned and saved 100 at that point.

    Now consider period 2.

    Assume at the outset of period 2 that G1 holds cash of 100 that they were paid in period 1.

    Now they spend according to the MPC.

    So G1 spends 70 on C.

    Spending of 70 on C generates period 2 income of 70.

    That income of 70 is paid to a new factor group G2.

    Similar to the treatment for the first period, assume G2 saves 70 until the close of period 2.

    Now consider period 3.

    G2 holds cash of 70 they were paid in period 2.

    They spend 49.

    and so on through all future periods

    The multiplier works itself out.

    And income accounting is coherent and consistent.

    Observations about macro saving:

    The end mathematics for the summation of multiplied income is the same as the textbook result – including total macro investment and saving of 100.

    The typical textbook explanation depicts micro installments of saving at each successive iteration – ie installments of residual income not spent (as per the MPC) by the earners of that income

    But that representation obscures the macro story for saving

    All of the income generated in period 1 is in the form of accumulated savings of 100.

    G1 has not spent any of that income. There is no consumption in period 1. And no consumer goods have yet been produced in period 1.

    G1 doesn’t act according to its MPC until period 2.

    But G1 has no income in period 2.

    So when G1 spends 70 in period 2, it is actually DISSAVING 70 in period 2.

    And it’s net saving over BOTH periods is captured by the combination of 100 saved in period 1 and 70 dissaved in period 2.

    It’s net saving is 30.

    That is its final micro share of the macro saving of 100 that was created in full back in period 1.

    And the story ends there for group G1.

    Now consider the opening process for G2 as it overlaps with the completion of the process for G1 – both of those processe stages occurring in period 2.

    G2 has produced C goods of 70 and earned income of 70 in period 2.

    But G2 doesn’t spend until period 3.

    So G2 has saved 70 in period 2.

    Now calculate total period 2 saving :

    G1 (70)
    G 70

    Total period 2 saving
    S2 = 0

    Accumulated macro savings remain at 100 as earlier established in period 1.

    There is no further macro saving in subsequent periods.

    But the multiplier works.

    And the national income accounting works.

    It’s not that the multiplier process doesn’t match national income accounting.

    It’s just that the textbooks don’t reveal the net macro effect of the micro installments of MPC.

    Renember that the typical textbook version comes from the same folks who gave us the bogus central bank reserve multiplier.

    The disregard for macro accounting is similar.

    In summary, in order to show the macro depiction of saving, accounting periods can be constructed consistently as follows:

    In period t, group G (t -1) spends according to MPC some if the cash they earned and saved from income in the previous period.

    They spend it on consumption goods produced and sold in that current period t by group G(t).

    The consumption goods produced and sold to group G (t – 1) in period t create income in period t for group G (t), some of which they will spend in period (t + 1) according to MPC

    And so on.

    • JKH,
      “Define period 1 such that there is no further activity……….So at the end of period 1, investment and saving are both 100.”
      You are bending over backwards to have the process be accounting consistent – defining the process to suit. This just is not reality. As income is earned some is consumed, some is saved, in a given time period.

  3. Bruce Wilder

    Just looking at your last comment

    a lot of excellent points

    Which I think I agree with for the most part

    I’d tweak this part just a bit :

    “In the circular flow, there can only be spending: consumption or investment. There can be no saving, per se, because there is no transactional act of saving. The total of all spending, all expenditure is always equal to income — by definition of the accounting conventions. It is not an “equilibrium” only condition; it obtains in every moment, in equilibrium or out, because income equals expenditure in every transaction being accounted by double-entry national accounts bookkeeping.”

    yes to all that with the emphasis that saving does exist and when identied properly is seen as a residual (as you later say) and not a transaction

    failing to understand as Keynes did that saving is a residual plays no small part in 80 years of confusion in economics

  4. “If you are saying that the mathematics of the iterative multiplier process is not in accordance with national income accounting, I think you might have a point and I have to say it’s giving my neurons apoplexy.”

    In fact Im saying that the multiplier process is in perfect accord with national income accounting.

    Simple example:

    First round :

    Investment 100
    Income 100
    Saving 100

    Second round:

    MPC .5 (example)
    Consumption 50
    Income 50

    There is no change in accumulated macro saving of 100

    and so on

    work through the steps

    (if you don’t agree I can come back with more breakdown of the stepwise algebra)

    The entire accumulated macro savings of 100 is over and done with at the first stage of investment injection

    i.e. before the multiplier process even starts

    There is no further change in macro savings of 100

    So it is incorrect to think that an IS curve can have anything to do with some equilibrium process between investment and saving

    It shouldn’t even be called an IS curve because it is misleading on this very point

    it DOES have to do with the interest rate sensitivity of I

    which is a separate idea

    The actual equilibrium process for any new I consists of the multiplier effect on starting I = S

    not on the relationship between I and S

    Some may push back and say that things aren’t that simple

    To which I say – just try and reverse engineer some more complicated example and show me something different

    it can’t be done differently

    complication is just a matter of the evolving granularity of investment (and it’s accounting granularity)

    The accounting identity of I and S must hold fast throughout the process – however complicated the real world example

    • JKH,
      This is the way I understand the multiplier process:
      Let’s assume the MPC is 0.7 (MPS = 0.3) and a $100 increment in investment.
      When the multiplier process is all said and done the new equilibrium position has moved and the income level has increased by $333.33 (100/(1-0.7)) and saving increased by $100 (333.33*0.3). S = I. Everything in accord with national accounting and Keynesian income determination model.
      But that’s not how we get there according to the standard textbook explanations. As you know, there is an iterative round of income increments.
      The investment increment of $100 creates $100 of income of which $70 is consumed and $30 saved.
      So the first round does not generate $100 of saving as you would say. It generates $30 of saving.
      In the next round, the $70 of increased consumption increases income by $70. This results in extra consumption of $49 (70*0.7) and extra saving of $21 (70*0.3).
      And so on, until the total income increment is $333.33 and the total saving increment is $100.
      But here’s the problem. S not= I through this iterative process, as national income accounting should have it.
      So the standard way of calculating the multiplier process through each round is not accounting consistent. (I can’t imagine that no-one has seen this before – I must be missing something – so I expect to get my butt kicked in on this one – perhaps more cogitation required.)
      As far as I am concerned you are confused about the multiplier mechanics. I was going to nominate us both for the Nobel when I thought I understood what I thought was your insight except that it is my insight and that you refute what I argue anyway so I can no longer include you in the nomination. Sorry.
      That you say the IS has nothing to do with equilibrium is nonsense in my book. Go back and look at the textbook derivation of the curve. It is the locus of S = I points as changes in the interest rate changes investment. No ifs, not buts (except that expectations and other variables are held constant).

  5. Interesting back-and-forth between Henry Rech and JKH.
    Can you save money?
    In National Accounts terms there can be consumption and investment, because both are spending — the difference is what is being purchased: consumption goods or investment goods. The National Accounts are compiled by observing transactions where spending is taking place and recording each transaction with at least two entries. To save, in the sense of refraining from consumption or of hoarding currency does not necessarily involve an observable transaction. In this the act of saving is fundamentally unlike the act of spending, whether that spending is for consumption or investment.
    In the circular flow, there can only be spending: consumption or investment. There can be no saving, per se, because there is no transactional act of saving. The total of all spending, all expenditure is always equal to income — by definition of the accounting conventions. It is not an “equilibrium” only condition; it obtains in every moment, in equilibrium or out, because income equals expenditure in every transaction being accounted by double-entry national accounts bookkeeping.
    To say that Income = Expenditure (Y = C + I for a wholly private economy) is an “equilibrium” condition is a misnomer, but a very common misstatement. It is sometimes called, a Keynesian equilibrium, which surely causes the great man to spin in his grave. A true Keynesian Equilibrium for the economy as a system is full-employment in production of all available resources. No doubt there may be deep puzzles to solve before full-employment can be recognized as such, as some resources are necessarily “employed” in transition or in reserve or in fallow; but ordinary people with ordinary sense recognize that if people are willing to work for money at prevailing wages and cannot, a state of full-employment does not obtain.)
    In the National Accounts, because some implicit saving involves no transaction at all, saving in the accounts must be a residual: it is assumed that, if investment spending is observed at some rate, there must, by definition, be corresponding saving happening at the same rate, even if no transactional act of saving presents itself for observation. And, saving as recorded in the national accounts is arbitrarily topped up accordingly.
    The ghost in the machine is money. People save money out of current income and they spend money out of past saving. And, if that isn’t bad enough, money in the form of credit can be conjured out of nothing in anticipation of future income but spent in the present, effectively creating additional current income, assuming that the resulting addition to the circular flow draws additional resources into productive activity. Or, on the down side, money — ordinarily rather like Newtonian energy, neither created nor destroyed in use — can disappear in the extinguishing of credit.
    In this Keynesian machine, money makes demand effective and additional demand can cause the rate of productive economic activity to rise, employing additional resources up to a point of full employment of resources, beyond which point, additional money giving effect to demand for goods can drive inflation, as prices and wages rise in money terms until full employment or less is achieved with the money in circulation.
    It is into this setup that IS / LM crashes, with a wan promise of restoring some faith that the economy can be (made?) self-regulating, with an “automatic” tendency to move toward full-employment, instead of wandering like a drunken fool thru the business cycle, periodically falling on its face in the gutter or knocking itself out by bumping its head too hard on the capacity ceiling. I really do not see how IS / LM can work as a model except with a concept of loanable funds, within which the velocity of money in the circular flow is some kind of variable inverse to holding money as a hedge. Maybe I am wrong — may be it can be done without the utter nonsense of loanable funds — I just do not see how.
    I think part of the problem is that we tend to intuitively to lean in the direction of loanable funds by thinking of money in terms of “quantity” of tokens for exchange. I just did it above, talking about money making demand effective. But, in a pervasively uncertain world, money serves as a hedge, incentives are always framed contingently (“do as I say or you’re fired” “customer satisfaction or your money back”) and expectations are certain to be disappointed as often as they are realized. Human behavior is driven by perceptions of risk, not the quantity of tokens on hand for exchange. Incentives are not conditioned on the reward, but rather on the contingency; people make bets . . . with money. That’s what speculative demand or demand for liquidity is all about, no?

    • This is excellent. A privilege to read even. Thank you for writing it Bruce.
      For whatever it is worth- I can’t see how IS / LM can work without the concept of loanable funds either. And like you say, loanable funds idea is nonsense.

    • Bruce,
      Can you explain this more fully?
      I can’t see your reasoning given the underlying construction of the LM curve.

      • “I really do not see how IS / LM can work as a model except with a concept of loanable fund”

        I meant explain this statement.

      • I am not sure how to approach answering your query.

        Separating the demand for money into a transactions demand (a quantity of money as tokens need to facilitate exchange) and liquidity demand (another quantity of tokens to use as precautionary balances or for unspecified speculative purposes) does crack open the door to reality a bit, but it is only a crack at best. And, the conventional presentation is to embed IS / LM in a larger model that leads to AS / AD balanced by an equilibrium “price level” — surely one of the most uncritical ideas in the economics curriculum (which is fully stocked with uncritical ideas).
        Liquidity preference is in the model, but nothing in the model explains why actors in the economic system might want liquidity or what factors might explain how their preference for liquidity might vary with circumstances. Oh, there’s always classroom handwaving, to be sure, but the model still stubbornly specifies, at least in the initial narrative, that the LM curve slopes up: higher rates of economic activity and increased “real” income drive up the demand for money — no word on what might drive up the demand for liquidity, particularly in the out-of-equilibrium circumstances not under consideration because this is an equilibrium model.

        And, even though there’s a grudging concession to money as an independent factor in the economy in the admission of an (un?)motivated preference for liquidity, the conventional presentation emphasizes the “real” at every turn, including “the” “real” interest rate.

        To me, an analysis with a singular and “real” interest rate is always a tell that the analyst is still in loanable funds territory.

        And, even though a preference for liquidity has been admitted hinting that people are willing to pay for liquidity, money doesn’t make money in IS / LM absent the deus-ex-machina of deflation or zero-lower-bound conditions: the interest rate is conditioned on the marginal efficiency of (“real” again!) capital investment.

        I actually have a somewhat vague memory of being introduced to IS / LM in Gardiner Ackley’s Intermediate Macro class, sometime late in the Mesolithic Era. Professor Ackley did wield it effectively as a classroom gadget and it did help me gain some insight (“light dawns on Marblehead” as they say). We departed from it pretty quickly to think about how an actual money market would have to have many interest rates and a yield curve, and none of those interest rates would be “real” in any but a transitory, disequilibrium sense.

        It is really, really hard to think thru how an economy uses money to cope with pervasive uncertainty, because it is deeply complex and always dynamic. But, that’s the actual, institutional economy we live with, an economy in which the institutionalized capacities of money, financial markets and administrative processes in business generate a numeraire and insurance and leverage and revealed information as well as fraud and crises and all the messiness.

        • Bruce,
          I still don’t see the connection to loanable funds. Thick as a brick I guess.
          The IS is based on the MPC and MEC (with expectations held constant).
          The LM curve is based on the transactions demand for money (money demand as a function of income) and the speculative demand for as a function of the interest rate (expectation held constant).
          All these are found in the GT. This is native Keynesian theory.
          Uncertainty is difficult to model. Expectations exist because there is uncertainty. Varying expectations could be a surrogate for modelling uncertainty. Varying expectations around shifts the curves around.
          The slope of the curves can be modified to follow specified interest rate elasticities, so that Keynesian and classical perspectives can be examined.
          The ISLM might be a classroom gadget but it is an all singing, all dancing gadget.
          What else is there that performs so?
          If we jettison ISLM, how do we do economics? Seriously, can you answer that one? Can Lars answer that one?
          What do economists use as a pedagogical tool? How do economists test policy options? What is the basis for empirical macro research?.
          It would be great to see some answers to these questions rather than just ISLM is junk.

  6. Henry,

    Consider an ‘autonomous investment injection’ of X

    now consider the accounting facts + the multiplier math at the macro level

    the investment produces immediate income and saving of X

    it has to according to undeniable income accounting

    in fact, just suppose an MPC of 0 to make the point

    then the multiplier stops

    and I = S = income

    (all changes)

    now assume MPC greater than zero

    that starts a multiplier process

    but macro saving never changes in that process

    the multiplier causes a dynamic process that expands income and consumption

    but it only redistributes the quantity of macro saving of X

    the multiplier does not change or set off an equilibrium process in the actual macro quantity of S = X

    that’s already established at the outset when new I = X must create new S = X

    whatever the MPC, it has no effect on the quantity of X from there on

    so it is nonsense to speak of an equilibrium process for the quantity of S at the macro level

    at best there is only an indirectly implied equilibrium process for the distribution of S

    but not an equilibrium process for the quantity of S

    and if anybody ever suggested that the IS curve meant an equilibrium between a planned macro quantity of I and the macro distribution of an ALREADY determined equal macro quantity of S …

    well … I’ve never seen it

    and I think it’s pretty far fetched to think that the inventor of the IS curve thought of it that way

    in fact, your reverse engineering of equations attempts to make such a point of macro S quantity equilibrium

    which is the idea I reject

    it doesn’t work precisely because S is a residual in income accounting

    and forcing an idea of MPS flirts with a loanable funds thought process

    accounting logic always matters

    including when dealing with the future

    • “so it is nonsense to speak of an equilibrium process for the quantity of S at the macro level”
      If you are saying that the mathematics of the iterative multiplier process is not in accordance with national income accounting, I think you might have a point and I have to say it’s giving my neurons apoplexy.
      “I think it’s pretty far fetched to think that the inventor of the IS curve thought of it that way”
      The IS curve is the locus of equilibrium points (given by the MPC and MEC as interest rates are varied). It’s in every textbook I’ve read. It is how the IS curve is constructed.
      How do you explain it?
      “forcing an idea of MPS flirts with a loanable funds thought process”
      The MPS is the corollary of the MPC – can’t see a problem.
      “accounting logic always matters……..including when dealing with the future”
      Yes, I agree. But it doesn’t and can’t say anything about causality.

    • JKH,

      Thinking about your multiplier insight, the conclusion has to be that the mathematics has to be wrong. In all time periods, the accounting identities must apply. The multiplier equation/iterative process has to be modified to take account of this. And strictly speaking, it presumably should be stock flow consistent. Taking a look at Wynne and Godley to see how they treat it.

  7. There is a sense in which investment and consumption are in equilibrium – according to MPC and the multiplier, etc. Which suggests an equilbrium state of total income C + I

    But that’s not the same idea as investment and saving being in equilibrium.

    Of course it might be derived as a backaswards accounting equivalent result.

    But it’s the combination of I and MPC that’s driving the equilibrium process directly in Keynes.

    And it starts with exogenous I = S in the model I’m familiar with, with total income developing according to MPC.

    In fact, the multiplier math produces no incremental saving beyond the starting I = S injection assumption.

    • Total income is a function of the MPC and the MEC.
      At equilibrium expected income = planned consumption plus planned investment.
      Rearranging we have:
      Expected income minus planned consumption equals planned investment.
      Expected income minus planned consumption equals planned savings (by definition).
      So at equilibrium:
      Planned savings equals planned investment.
      QED. (Not rocket science!)
      “In fact, the multiplier math produces no incremental saving beyond the starting I = S injection assumption.”
      The increment in investment produces income out of which there is new consumption and new savings. Not all the new income is consumed.

  8. “To be fair to Hicks…..”
    I have also read somewhere that he relapsed.
    Looking for references to this.

    • See his last book, “A Market Theory of Money”.

      • Thanks.

        Do you have any page references?

  9. The Day Orthodox Economists Lost Their Minds and Integrity
    by William Black- Professor of Law and Economics University of Missouri Kansas City

    “Something extraordinary happened yesterday. Orthodox economists, frustrated by their inability to intimidate progressive elected officials, have launched a coordinated assault on MMT in hopes of making it politically dangerous for elected officials to embrace MMT. Yesterday brought three remarkable revelations about orthodox economists’ willingness to engage in naked intellectual dishonesty in their desperation to find something to discredit MMT.

    The orthodox economic attack on MMT should be a ‘slam dunk’ – if orthodox economists were correct about MMT. There are two obvious ways to deliver the ‘slam dunk.’ First, orthodox economists preach that a theory’s predictive ability is the test of its validity. MMT scholars have been making predictions for decades, so orthodox economists should be able to produce a large number of falsified predictions by MMT scholars and declare victory. There is only one problem with this option – MMT scholars have an exceptionally fine predictive record and orthodox macro scholars have such a terrible predictive record that prominent economists deride “modern macro” as the “dark ages” (Paul Krugman) and a religion unsuccessfully posing as a pseudo-science (Paul Romer). .

    The second way orthodox economists could ‘slam dunk’ on MMT scholars would be by quoting them (not contrary to context) and then presenting objective evidence or logic proving that the MMT scholars’ quoted statements were indisputably false. If, as the orthodox economists repeatedly assert, MMT positions are ludicrous, then this ‘slam dunk’ should not require orthodox economists to even work up a sweat. Orthodox economists religiously fail to cite and quote MMT scholars.

    Actually, I have been hiding the ball on you. As a white-collar criminologist, I study the third ‘slam dunk’ strategy – the strategy orthodox economists actually use to discredit MMT – fraud. As white-collar criminologists, we emphasize that “accounting control fraud” is a “sure thing.” A strawman argument is a fraudulent debate tactic that becomes a sure thing if you get to be prosecutor, judge, and jury. The orthodox ‘scholars’ have found it impossible to quote MMT scholars writing something that is demonstrably false. It is child’s play (a ‘sure thing’), however, for an orthodox economist to create a strawman claim that is obviously, demonstrably false. The orthodox economist crafts the strawman to be demonstrably and obviously false. The orthodox ‘scholar’ then fraudulently claims that the strawman represents MMT scholars’ position.

    The obvious needs to be stated. Creating a strawman is intellectually dishonest, unethical, and represent a “revealed preference” – it reveals that orthodox scholars know they cannot win an honest debate. If the facts and your predictive successes support your orthodox theory, you have no need to create and ascribe strawman arguments to smear rival scholars and theories.

    Yesterday, dozens of orthodox economists, many of them prominent, collectively lost their minds and their integrity. They coordinated their actions to create a show trial that would have warmed Stalin’s spleen. The show trial purported to judge the validity of MMT. The sole ‘evidence’ allowed in the show trial consisted of two strawman claims written by orthodox ‘scholars,’ but falsely ascribed to MMT. MMT scholars do not simply not make the two strawman claims – MMT scholars say the opposite of the strawman claims. These are not new strawman claims, they are identical to the false claims Krugman has been making for eight years. In plain English, a show trial of orthodox economists proclaimed MMT false based on the ‘prosecutors’ crafting two statements the prosecutors falsely claimed represented MMT theory, even though MMT scholars have repeatedly written the opposite. Further, MMT scholars have been refuting the strawman arguments the ‘prosecutors’ drafted – for at least eight years.

    Orthodox economists conducted a show trial to pronounce MMT guilty for being correct. The irony is that the show trial proved MMT scholars’ actual views correct. Every orthodox ‘judge’ that voted on the strawman claims agreed with MMT scholars that the claims were false.

    The “Initiative on Global Markets” (IGM) reported the results of its show trial on March 13, 2019 – the day orthodox economists lost their minds and abandoned even the fig leaf of integrity.

    Question A: Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.

    Question B: Countries that borrow in their own currency can finance as much real government spending as they want by creating money.

    MMT scholars do not make or support either claim (see articles 2 & 3 in this series) – so how did IGM manage to create two strawman claims, falsely ascribe them to “Modern Monetary Theory,” and report this show trial to the world as a universal condemnation om MMT by their panel of orthodox economists?

    MMT scholars, for decades, have been explaining when, how, and why deficits can matter. For at least eight years, MMT scholars have been repeatedly refuting Krugman repeatedly advancing this false strawman argument. Whoever drafted these questions knew that they did not represent the position of MMT scholars and that MMT scholars disagree with both of the strawman questions.

    The show trial represents a natural experiment of the competence and intellectual honesty of orthodox economists. The results of that natural experiment are spectacular – a large group of the world’s prominent economists failed the test of honesty and competence even though the test set such a low bar that they should have passed it without discernible effort. As always, show trials demonstrate conclusively the lack of morality and integrity of the ‘judges.’ Not a single member of the ‘judges’ in the show trial passed the twin tests of competence and integrity. They disgraced themselves and our discipline.

    The form the IGM economist panel uses has a space for comments and a number of the panelists wrote comments. Not a single panelist wrote a comment objecting to the strawman questions falsely attributed to MMT scholars that made a mockery of the purported ‘process.’ Not a single panelist blew the whistle on this shameful show trial. There are two possible reasons: one bad, the other awful. It would be bad; and revealing, that not a single prominent economist on the panel knew enough about MMT to know that the questions were vile strawman claims. It would be awful; and revealing, if any of the panelists knew enough about MMT to know that the questions were strawmen – but still participated in the show trial and failed to blow the whistle on this scandal.

    If no one on the ‘expert’ panel had even the tiniest exposure to the MMT scholarly literature required to spot the use of strawman questions to ensure that the panel discredited MMT, much less expertise in evaluating MMT, then IGM has to fix its system. It also needs to apologize to MMT scholars, elected officials, and the public. IGM must promptly withdraw formally their ‘verdict’ in their show trial.

    Consider how IGM would have operated if it actually wanted to report the informed views of orthodox experts on heterodox theory instead of conduct a show trial. IGM would use questions drafted by the heterodox scholars that would accurately reflect the heterodox scholars’ theories. IGM would ask the heterodox scholars to provide an executive summary of key MMT principles. IGM would require its panelists to read enough of the scholarly MMT literature to make an informed judgment. Far better, however, would be to create an ongoing, collegial dialog among orthodox and heterodox scholars rather than these mock rulings by panels composed exclusively of orthodox scholars.

    We are now running another natural experiment – how many of the orthodox ‘judges’ will admit their failures, apologize, and act to reduce the harm they caused? I write this article as an addendum to that natural experiment.

    I urge the orthodox economists who disgraced themselves by aiding this show trial to seek redemption. Perhaps you were simply conned by the people who created the strawman questions. For that to be true, you must be exceptionally unaware of MMT – and willing to condemn it without doing any work. Apologize, but do not stop there. You should be enraged at those who made you complicit in this disgrace. Find out who created the strawman questions and who suggested the show trial and blow the whistle on their frauds. In your joint, open letter of apology, each of you should identify how many published articles or books by MMT scholars you read prior to condemning MMT. The next week will test your integrity and your zeal to restore it.

    I urge journalists to ask each of the ‘judges’ to identify how many MMT scholars’ works they had read. My prediction is that the cumulatively, the ‘judges’ in this shameful show trial had read fewer than five works by MMT scholars.

    Journalists should also ask every ‘judge’ in the show trial to cite and quote the work of at least one MMT scholar making the statements ascribed to us by twin the strawman questions. I predict that none of them will be able to do so.

    Ignorance, of course, is not remotely a defense. If you have never read any of the scholarly MMT literature and someone asks you to be a ‘judge’ in a show trial obviously created to condemn MMT, you have an ethical duty to refuse and to try your best to prevent the show trial from disgracing our field.

    While I always hope for redemption, my prediction is that most of the ‘judges’ that disgraced themselves and our discipline are proud of their role in the show trial. I believe they will claim they did a great service to the country by smearing MMT through fraudulent strawman claims. Orthodox economists are already citing the show trial ‘verdict’ as proof that MMT is false. Justin Wolfers, who often writes in the New York Times, tweeted his glee at the results of the disgraceful show trial. He described it as “evidence” (in a show trial designed to ensure that the ‘judges’ had zero evidence, and instead was based entirely on two fraudulent strawman statements). He then claimed that the “only real debate” was between the ‘judges’ that “disagreed” with the faux MMT strawman and the ‘judges’ that “strongly disagreed.”

    Wolfers’ dishonesty spurred Paul Krugman to tweet a level of calculated dishonesty that exceeds the term “disgraceful.”

    Prediction: MMTers will say this doesn’t fairly represent their views. Why? Because they say that about *any* attempt to represent their views clearly. MMT is an attitude, not a model; try to pin it down and they will move the goalposts.

    Krugman has been working in his columns and tweets for the last two weeks trying to perfect the wording of this bit of cynical dishonesty. It is such a brazen lie that I dubbed it Krugman’s chutzpah. It is a Catch-22 – if MMT scholars ‘admit’ that Krugman’s dishonest strawman claims he falsely ascribes to MMT scholars are correct, we are admitting our theories are bunk. If we point out that Krugman, again, is falsely ascribing a dishonest strawman claim to us, then Krugman declares this act proves we are not scholars and have no theories. Whatever we do, in response to his lies Krugman defines us as the loser. He will now claim that the show trial, which used his strawman claims, proves he was correct.

    For years (see articles 3 & 4 in this series), we were willing to ascribe Krugman’s strawman arguments to his ignorance of MMT. We repeatedly explained not only the falsity of his strawman claims – which in every case he ascribed to MMT scholars without ever providing a citation or quotation – but also our actual views. It has been clear for at least six years, however, that Krugman is deliberately deceiving his readers. We know this because he keeps ascribing falsely to us the same strawman arguments that we have repeatedly explained to him are false. The show trial used the identical strawman claims that we are on record consistently refuting. Krugman ascribes to us in these twin strawman claims views that are the opposite of MMT precepts. MMT explains that deficits can matter and goes on to explain when, how, and why the can matter. Krugman, and the orthodox show trial, repeatedly, without citation or quotation and ignoring our refutations, simply lie and say that MMT purports that deficits never matter.

    We also know that Krugman is lying rather than ignorant because he slipped up in a March 26, 2011 column – nearly eight years ago – and admitted that he knew that MMT explained that deficits can matter a great deal if they cause a shortage of real resources.

    As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. The perceived future solvency of the government is not an issue.

    We enjoy that Krugman column because it documents another predictive success of MMT compared to Krugman’s analysis.

    Krugman knew that his “prediction” that we would respond to the show trial by stating that the positions ascribed to MMT scholars in that ‘trial’ were strawman falsehoods that we have repeatedly exposed as lies for over a decade had a 100 percent chance of proving accurate. He has seen us rebut the same lie many times when he advanced the identical strawman falsehood repeatedly for nearly a decade. Any reputable scholar would respond to a strawman argument by pointing out that it was a strawman. A strawman argument is a classic logic failure.

    Krugman has redefined chutzpah by claiming that if he lies repeatedly about his opponents’ argument by repeatedly advancing a strawman claim, and his opponents repeatedly refute his lie, his opponents have wronged him and he has won the debate. Every aspect of Krugman’s chutzpah is logically false, dishonest, immoral, and wackiness of epic proportions. As a criminologist, I emphasize an important research finding. The fraudsters’ key to success is typically audacity, not genius. Krugman’s audacity is breath taking. As a criminologist, I particularly love the audacity of making a “predict[ion]” he knows is certain to come true – MMT scholars will refute the lies and strawman questions that the orthodox economists who staged the show trial used to declare MMT scholars ‘guilty’ of claiming things are true that MMT scholars actual teach are untrue. Krugman will then claim his predictive success demonstrates his skills and the perfidy of MMT scholars” pr http://neweconomicperspectives.org/2019/03/the-day-orthodox-economists-lost-their-minds-and-integrity.html?fbclid=IwAR2PF1oqaFcoCX0DRTEj68VjveUaQVfYdbGRu5UzKIJ3-UhhvW75S4SCHwc

  10. This post is yet another obsolete rant against IS-LM stemming from multiple misunderstandings.
    Prof. Syll thinks that IS-LM “belongs in the neoclassical camp”.
    He appears to misunderstand the purpose and power of IS-LM, which covers both Classical full employment and Keynesian involuntary employment.
    IS-LM is not thus not “classical” because, as Keynes emphasised in GT chapter 1:IV, “classical theory is only applicable to the case of full employment”.
    Prof. Syll complains that Hicks’ IS-LM “is basically a loanable funds model”.
    No it isn’t.
    Classical LP theory is that interest rates are determined by the supply and demand for investible funds with income fixed at full employment:
    i.e. I*(i) = S*(i), where * indicates at full employment.
    In contrast IS-LM allows for Investment and Savings which depend on Y (income) as well as interest rates,
    i.e. I(Y,i) = S(Y,i)
    Prof. Syll notes that only difference between the GT and Hicks’ generalised IS-LM model is that the former has the simplification S(Y) instead of S(Y,i). This difference does not make IS-LM “a loanable funds model”.
    Note that the both simple Keynes GT and the generalised IS-LM have aggregate demand influenced by interest rates, so, contrary to Prof.Syll, there is not a fundamental difference on this account.
    Prof. Syll claims that Hicks’ generalised IS-LM model is “Keynes? No way!” and that “not even Hicks considered it a Keynes-model!”
    This is incorrect.
    The only difference between the GT and Hicks’ generalised GT is the latter allows for consumption (and therefore saving) to depend on interest rates as well as on income. As Hicks notes (on page 152 of his Econometrica 1937 article), in the GT Keynes neglected any possible influence of the rate of interest on the amount saved in order to focus on the more important multiplier process. Hicks explains that this was “a mere simplification, and ultimately insignificant.” From this it is plain, contrary to Prof. Syll, that Hicks’ regarded IS-LM model as fully within the spirit of Keynes.
    Moreover, Hicks’ generalisation of the GT is empirically important because expenditures on durable consumption goods can be sensitive to interest rates.
    I suggest that it time to move on from these archeological debates.
    As MMT argues, and as Hicks’ anticipated long before MMT, interest rates are set by governments.
    “Instead of assuming that the supply of money is given, we can assume that up to a point, but only up to a point, monetary authorities will prefer to create new money rather than allow interest rates to rise. Such a generalised LM curve will then slope upwards only gradually – the elasticity of the curve depending on the elasticity of the monetary system” – Hicks 1937.
    In effect the LM curve is horizontal, and interest rates are exogenous.
    Thus economic policy can be discussed simply in terms of an income expenditure model without reference to misunderstood archaic constructs like the “loanable funds” and LM curve.

  11. I follow the MMT vs neoclassical/neoKeynesian debate and I see the MMT’ers assert that you can simply have government adjust fiscal policy to control inflation. In my youth I was a controls theory guy. Control system using negative feedback where there is a dead time or pure delay in the loop are highly susceptible to instability and poor performance. The dead time between fiscal changes and inflation is around two years. I suggest this will make MMT very hard to implement even given its attractive simplicity and logical correctness.
    Is what I’m talking about. If the dead time varies unpredictably it’s much worse from a design standpoint.

  12. ISLM always struck me as an inherent mangling of stock flow consistent accounting.

    Definitely in Krugman’s wheelhouse.

    • “In a recent op-ed dated March 14, “John and Maynard’s Excellent Adventure”, Paul Krugman defends John Hicks’ original 1937 interpretation of Keynes’s General Theory that cast macroeconomics within a general equilibrium framework, but without the current insistence on the micro foundations that so concerns today’s general equilibrium macro theorists. Krugman is absolutely right. One should not be concerned with the so-called micro foundations of macroeconomics, because what is truly macroeconomics cannot be derived from micro analysis, as for example the famous paradox of thrift, whereby micro behavior gives rise to macro paradoxes that cannot be understood from choice-theoretic microeconomic reasoning.
      But while we agree with Krugman’s criticism of the hordes of “micro-foundation” revisionists that now dominate economics, we are curious why he did not mention Sir John Hicks recantation of IS-LM analysis (see “ IS-LM: An Explanation”, Journal of Post Keynesian Economics, 3 (2) (Winter 1980-81);).
      Many of us remain deeply sceptical about the usefulness of the IS-LM framework for interpreting a real world characterized by uncertainty, crises, and institutional transformations that hardly bring the economy towards any equilibrium, never mind “general” equilibrium. But even if we abstract from these complications with the usual excuse of rendering the analysis simple for pedagogic purposes, the original Hicksian IS-LM model and its various textbook extensions (usually constructed with some sort of Phillips curve add-on) are extremely problematic. The difficulties have really little to do with the view that it’s too aggregative by representing only three markets: product, money, and bond markets – which is the criticism to which Krugman seems to be pre-emptively alluding in his article.

      The first and obvious problem is that, even in the three-market aggregative model, there can never be such a thing, even at the conceptual level, called general equilibrium. To get that we must presume that there are independent functions of investment and saving and, at the same time, independent demand and supply functions for money. But one of the most basic criticisms that Keynes himself had come to recognize immediately after writing the General Theory is that the supply of money is not some exogenous variable that can be independently pitted against a distinct demand for money function. In a sophisticated monetary economy, the supply of money must be treated as a purely endogenous variable as many modern post-Keynesians and also neo-Wicksellians have come to recognize. Hence, the idea of money market equilibrium is meaningless, since one cannot conceptually ever be out of equilibrium when the two cannot be defined independently of one another.

      However, the problem also arises on the product market side. Keynes had long debated the issue of I=S equilibrium, as for instance, also in 1937, with Swedish economists who made use of notions such as ex ante (or planned) investment and ex ante saving . While Keynes said that one can perhaps give some meaning to ex ante investment (in terms of business enterprises planning capital expenditures), at the macroeconomic level one cannot meaningfully describe saving as being anything that can actually differ from investment. Admittedly, this leads to a debate about the meaning and nature of the multiplier as a “disequilibrium” concept. But our point is that if the “supply” of money can never be independent of the “demand” for money and if saving can never be independent of investment, then what use is the IS-LM analysis that presumes exactly that independence?

      Moreover, if one were to postulate an infinitely elastic LM curve (as one can infer from David Romer, “ Keynesian Macroeconomics without the LM Curve”, Journal of Economic Perspectives, 2000;) to deal with this lack of independence between the money demand and supply, then the question is what insight does the latter construction provide? It seems that everyone except Paul Krugman believes that short-term interest rates are policy determined, and that they are not set in the way the traditional IS-LM analysis suggests. This means that an increase in investment (entailing a rightward shift of the IS curve) will not lead to an increase in short-term interest rates unless the central bank chooses to raise its central bank rate. Moreover, if the LM curve is flat at any level of interest rates, then what characterizes a liquidity trap and what is it? It certainly cannot be the traditional “flat” lower portion of an otherwise upward-sloping LM curve. Krugman’s liquidity trap is an LM curve that is flat at the zero rate of interest. But what does the IS-LM model have to say about long-term rates of interest? Krugman leaves us in the dark here. And what can the IS-LM model tell us about how the central bank is able to control and set short-term interest rates and what can it tell us about the consequences of quantitative easing on real output or price inflation? We believe that this model cannot really teach us anything about these issues; one needs an institutional analysis, not a rudimentary and misleading instrument.

      Keynes himself was ambivalent about the role of interest rates in determining fixed capital formation (with his contrasting views in chapters 11 and 12 of the General Theory) and few would argue that business investment is strongly sensitive to changes in the rate of interest, as depicted in the traditional textbook loanable funds model. Ironically, nowadays, it is household spending on consumer durables and housing that is much more highly interest elastic and this feature is often muddied in the way this latter spending is represented in the “I” portion of the IS relation.

      Heterodox economists have traditionally rejected the IS-LM approach for many such reasons; but, even if one were to hold one’s nose, in an uncertain world in which investment is governed by animal spirits (and therefore I being interest inelastic unless inclusive of household spending) and in a world of endogenous money, at best, the IS curve can be represented by a vertical line (or a more elastic relation when including household spending, an IS’ curve). In much the same way, the LM curve can be represented by a horizontal line at any level of interest rates set by the central bank (as shown in the figure below). What insights can such a tool of analysis really offer economists? It suggests that an increase in autonomous spending will generate increases in output without any “crowding out” effect arising through higher interest rates. But one hardly needs an IS-LM framework whose truly central feature is the role played by interest rates to infer that! In our humble opinion, Hicksian IS-LM analysis cannot offer us very much and this is why even Sir John Hicks himself eventually abandoned it almost 35 years ago. And so should Paul Krugman!”

      Mario Seccareccia-Professor of Economics, University of Ottawa
      Marc Lavoie-Professor of Economics, University of Ottawa

    • JKH,
      Do you have any solid reasons for making this claim?
      Others have said this – I am interested in your reasoning.

    • JKH,
      “….mangling of stock flow consistent accounting.”

      Do you have a line reasoning to support this?

      • Because, for starters, the notion of an IS curve is nonsense.

        There is no such thing as an “equilibrium” between saving and investment or planned saving and planned investment or whatever the hell it’s supposed to be.

        Investment generates saving. This reflects elementary accounting concept and necessary causality.

        Keynes understood this – he spent time drawing out the neccessary and important distinction between saving and finance in the GT.

        So it’s a mess from the get go. That dissuades one from spending a whole lot of time worrying about the other side – LM. But no doubt that’s a mess as while. It looks way too monetarist in any event to be useful.

        It’s a useless contortion in total – even as a “gadget”.

        It’s an 80 year old version of the accounting ignorance carried forward by modern mainstream.

        And how the economics profession got sucked into this disease of trying to jam everything into a graph is a disaster for the ages.

        I probably should have said accounting inconsistent instead of SF inconsistent.

        It’s more straightforward – although the profession remains obtusively oblivious and immune to an understanding of the fundamental role of elementary accounting logic in economics.

        • In the Keynesian system, savings and investment are always equal, but not necessarily in equilibrium. Equilibrium in the goods market occurs when planned saving equals planned investment.
          Changes in the propensity to consume (or alternatively expressed changes in the propensity to save) and changes in invesment shift the equilibrium point.
          Why is this not consistent with accounting?
          Accounting is just a record of transactions, is it not? How does it direct causality?

          • IS equilibrium is part of Hicks ISLM .

            Is it part of Keynes’ GT ?

            • I don’t think so …

              But open to being corrected with specific quotation evidence from the GT

          • JKH
            The IS is the locus of possible equilibrium points (given expectations) in the goods market. Given a particular MPC, it maps the locus of equilibrium points as investment is changed (and the MEC schedule is a function of the interest rate).
            The GT of course doesn’t speak of the IS curve. However, Keynes, having played with the notion of a set of simultaneous equations (which underlie the ISLM approach) before publication of the GT and drafting a chapter on this subject, chose to not include this means of exposition in the GT. He excluded it because he could not effectively work expectations into the analysis (the equations in this early format all had the “W” variable which stood for the “state of the news” which is seen is a surrogate expectational operator).
            The basis for these equations are the MPC, the MEC and the liquidity preference (and assume exogenous money), all of which are amply dealt with in the GT, as you know.

  13. When writing letters to people, we are often trying to be polite even though we have strong doubts …

    • Yes of course. But Keynes, it seems to me, was always up for robust conversations having read his letters to Roy Harrod, who was staunchly classical. Perhaps his relationship with Hicks was different. Perhaps he didn’t want to open up another battlefront seeing he was not a well man at the time.
      And there is all the evidence, that prior to publishing the GT, he had invested a good deal in the analytical approach evident in the ISLM analysis.

      • Shouldn’t Keynes various reactions to Hicks be seen in the light of Joan Robinson’s remark that that sometimes the Circus had difficulty in explaining to Maynard what his revolution really was; and Keynes` expressed reservations about some of the new fangled stuff going on around him? It should also be placed in the context of her assertion that he was a genius and thus uninterested in the crossing of ts, and dotting of is, which entangle the non-genius.

    • Ah, but autistics like me often fail at the ‘polite’ part and speak truth to plainly 😉

      • Correction, ‘percieved’ as in limited personal view, truth ….

  14. We are all aware of the famous letter of Keynes to Hicks, regarding Hicks 1937 paper, in which Keynes writes “I found it very interesting and really have next to nothing to say by way of criticism”.
    Keynes also wrote in the letter, “At one time I tried the equations, as you have done, with I in all of them. The objection to this is that it overemphasizes current income. In the case of the inducement to invest, expected income for the period of the investment is the relevant variable.”
    He seems to have rejected the approach because he could not feed expectations into the equations. Although, in the GT (p.141 to 146) Keynes talks about how changes in expectations shifts the MEC (and hence the IS curve).
    Dimand has noted that Keynes first presented a simultaneous equations approach in his Middlemas lectures at Cambridge in 1933 and also in a 1934 draft of the GT.
    So it might seem that Lars’ claim “there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense” is a little too strong.
    The plot is thicker than it might at first seem.

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