Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

Kakarot-Handtke, Egmont (2014): Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. Published in:

Abstract

Krugman has recently revitalized IS-LM with a number of succinct analytical pieces on his blog. The reverberations were remarkable. Economists, however, are known often not grasp the full content of their own and, a fortiori, of others’ models. This happened to Keynes in the days of high theory and to Krugman in these days. Keynes applied a defect formalism, which is here replaced by objective-structural axioms. This yields the correct relationship between retained profit, saving, and investment which in turn makes it clear after the event that the IS-part of the IS-LM construct never could bear any substantive theoretical load.

• Item Type: MPRA Paper
• Language: English
• Keywords: new framework of concepts; structure-centric; axiom set; Hicks; Allais
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B5 - Current Heterodox Approaches > B59 - Other; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical

References

Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.

Barens, I. (1997). What Went Wrong with IS-LM/AS-AD Analysis – and Why? Eastern Economic Journal, 23(1): 89–99. URL http://www.jstor.org/stable/40325756.

Blanchard, O. (2000). What Do We Know about Macroeconomics that Fisher and Wicksell Did Not? Quarterly Journal of Economics, 115(4): 1375–1409. URL http://www.jstor.org/stable/2586928.

Boland, L. A. (1992). The Principles of Economics. Some Lies my Teacher Told Me. London, New York, NY: Routledge.

Cencini, A. (2003). IS-LM: A Final Rejection. In L.-P. Rochon, and S. Rossi (Eds.), Modern Theories of Money, pages 295–321. Cheltenham, Northampton, MA: Edward Elgar.

Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, NY, etc.: Cambridge University Press.

Godley, W., and Lavoie, M. (2007). Monetary Economics. An Integrated Approach to Credit, Money, Income and Wealth. Houndmills, Basingstoke, New York, NY: Palgrave Macmillan.

Hicks, J. R. (1937). Mr. Keynes and the "Classics": A Suggested Interpretation. Econometrica, 5(2): 147–159. URL http://www.jstor.org/stable/1907242.

Hicks, J. R. (1939). Value and Capital. Oxford: Clarendon Press, 2nd edition.

Kakarot-Handtke, E. (2011a). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–26. URL http://ssrn.com/abstract=1895268.

Kakarot-Handtke, E. (2011b). Reconstructing the Quantity Theory (II). SSRN Working Paper Series, 1903663: 1–19. URL http://ssrn.com/abstract=1903663.

Kakarot-Handtke, E. (2011c). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL http://ssrn.com/abstract=1911796.

Kakarot-Handtke, E. (2012). Primary and Secondary Markets. Levy Economics Institute Working Papers, 741: 1–27. URL http://www.levyinstitute.org/publications/?docid=1654.

Kakarot-Handtke, E. (2013a). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL http://ssrn.com/abstract=2207598.

Kakarot-Handtke, E. (2013b). Understanding Profit and the Markets: The Canonical Model. SSRN Working Paper Series, 2298974: 1–55. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2298974.

Kakarot-Handtke, E. (2014). Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right. SSRN Working Paper Series, 2389341: 1–17. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2389341.

Kalecki, M. (1987). Bestimmungsgrößen der Profite. In Krise und Prosperität im Kapitalismus, pages 133–147. Marburg: Metropolis.

Keen, S. (2010). Solving the Paradox of Monetary Profits. Economics E-Journal, 4(2010-31). URL http://dx.doi.org/10.5018/economics-ejournal.ja.2010-31.

Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.

Keynes, J. M. (1933). Mr. Robertson on "Saving and Hoarding". Economic Journal, 43(172): 699–712. URL http://www.jstor.org/stable/2224530.

Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan. (1936).

King, R. G. (1993). Will the New Keynesian Macroeconomics Resurrect the IS-LM Model? Journal of Economic Perspectives, 7(1): 67–82. URL http://www.jstor.org/stable/2138320.

Krugman, P. (2011a). Ah Yes, LM (Wonkish). New York Times, The Opinion Pages, Online, October 8. URL http://krugman.blogs.nytimes.com/2011/10/08/ ah-yes-lm-wonkish/?_php=true&_type=blogs&_r=0.

Krugman, P. (2011b). IS-LMentary. New York Times, The Opinion Pages, Online, October 9. URL http://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/?_php=true&_type=blogs&_r=0.

Krugman, P. (2013a). Misunderstanding IS-LM (Wonkish and Unimportant). New York Times, The Opinion Pages, Online, March 19. URL http://krugman.blogs. nytimes.com/2013/03/19/misunderstanding-is-lm-wonkish-and-unimportant/.

Krugman, P. (2013b). The Monetary Base, IS-LM, And All That (Very Nerdy). New York Times, The Opinion Pages, Online, August 23. URL http://krugman.blogs. nytimes.com/2013/08/23/the-monetary-base-is-lm-and-all-that-very-nerdy/.

Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.

Lavoie, M. (1992). Foundations of Post-Keynesian Economics. Cheltenham: Edward Elgar.

Lerner, A. P. (1938). Saving Equals Investment. Quarterly Journal of Economics, 52: 297–309. URL http://www.jstor.org/stable/1881736.

Lutz, F. A. (1938). The Outcome of the Saving-Investment-Discussion. Quarterly Journal of Economics, 52: 588–614. URL http://www.jstor.org/stable/1885035.

Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, NY, Chicago, IL, San Francisco, CA: McGraw Hill, 2nd edition.

Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.

Murad, A. (1953). Questions for Profit Theory. American Journal of Economics and Sociology, 13(1): 1–14. URL http://www.jstor.org/stable/3484955.

Newton, I. (1999). The Principia; Mathematical Principles of Natural Philosophy. Berkley, CA, Los Angeles, CA, London: University of California Press. (1687).

O’Donnell, R. (1997). Keynes and Formalism. In G. C. Harcourt, and P. A. Riach (Eds.), A ’Second Edition’ of The General Theory, volume 2, pages 131–165. Oxon: Routledge.

Ohlin, B. (1937). Some Notes on the Stockholm Theory of Savings and Investment I. Economic Journal, 47(185): 53–69. URL http://www.jstor.org/stable/2225278.

Robinson, J. (1956). The Accumulation of Capital. London: Macmillan.

Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition.

Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

Smith, A. (2008). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press. (1776).

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 http://mpra.ub.uni-muenchen.de/20557/.

Wray, L. R. (1991). Saving, Profits, and Speculation in Capitalist Economies. Journal of Economic Issues, 25(4): 951–975. URL http://www.jstor.org/stable/4226478.