On the Hicks and the HickssHansen Myths About the Creation of the IS-LM Model: How Did it Happen?

Abstract

Keynes brought all three of the universally recognized elements that are needed to comprise the IS-LM model, the liquidity preference function, the investment function, and investment multiplier, together in Section Four of Chapter 21 of the General Theory. However, this took place only after Section Three, where Keynes had heavily criticized what he termed “…pseudo-mathematical methods of formalizing a system of economic analysis.” Economists most likely stopped reading at the end of Section Three at the top of page 298 because they assumed that Keynes did not believe in formally analyzing a system of equations that supplied an economic analysis. Apparently, the word “pseudo” was overlooked by economists. Keynes excluded his work from such criticisms. As of 2018, the present problem is that it is now considered a “fact” that Hicks, or Hicks and Hansen, developed the IS-LM model. This can be seen below when considering the following test question: 8. Who developed the concept of IS-LM model? a. Hicks and Hansen b. J. M. Keynes c. Adam Smith d. None of the above. Ans. 8 (a) Hicks and Hansen (It was developed by John Hicks in 1937 and later extended by Alvin Hansen). Get this answer online with the Chegg Study. This answer is the wrong answer. The correct answer is b. J. M. Keynes. Unfortunately, like the myth exposed by G. Kennedy that Adam Smith’s analysis in the Wealth of Nations was based on an “Invisible Hand of the Market”, the myth that Hicks developed IS-LM is universally accepted by both the orthodox schools and the heterodox schools of thought. They are both wrong.