The ISSLM Debacle: An Analysis of Nearly Nine Decades of Errors Committed by Economists Attempting to Deal with J M Keynes's (Not Hicks's) IS-LM Analysis in the General Theory

Abstract

Keynes’s IS-LM model was first used by Keynes himself in 1933 and 1934, both as a teaching device for undergraduate students and as a way to try out his new, theoretical ideas that he was developing for use in his future General Theory. Keynes’s IS-LM constructs incorporated uncertainty and confidence into BOTH the IS curve and the LM curve by means of an independent variable called the “State of the News”. It has later replaced by confidence. Keynes denoted this independent variable by the symbol W. The only published IS-LM paper that follows Keynes’s treatment of IS–LM in the General Theory is Champernowne’s 1936 paper. Hicks, Harrod, Meade, and Lange, in 1938, explicitly removed this independent variable from their versions of IS-LM because they were completely ignorant about what W stood for. Only Champernowne incorporated independent Q and Q’ variables into his IS and LM model in a manner that matched Keynes’s version, which, not surprisingly, is based on the “state of the news” and uncertainty as it relates to the confidence exhibited by decision makers in their demand for money and investment decisions. Keynes told J Hicks quite bluntly that he, Keynes, had already developed the IS-LM curves using the variable Y, instead of Hicks’s I, long before Hicks did. However, Keynes went on to talk about the need for incorporating clear cut price and profit expectations into the IS curve. Keynes accomplished this in chapters 20 and 21 with his aggregate supply curve, ASC, a locus of all D, expected aggregate demand functions, and Z, expected aggregate supply functions, intersections. Hicks was completely confused and could not follow what Keynes was telling him about chapter 20 of the GT. Unfortunately, the entire economics profession has, since 1937, followed Hicks, Harrod, Meade, and Lange in their erroneous claims about Keynes, the General Theory, and IS-LM, while completely ignoring Champernowne’s correct assessment of IS and LM in his paper. Champernowne’s paper has been, however, constantly cited in the literature since the late 1930’s. Apparantly, no one ever actually read his complete paper. The same can be said about chapter 15 in Keynes’s General Theory. This means that the entire economics literature on Keynes’s General Theory since 1936 is completely flawed except for one lone article published in 1936 by Champernowne. Moreover, it is impossible to fix the flaws at this stage because it would result in the implosion of the entire economics profession worldwide.