Hick’s Contribution to the Development of the IS-LM Model Was Limited to Drawing the IS-LM Figure or Diagram: Keynes Was the Originator and Theoretical Developer Who Presented the Complete IS-LM(LP) Model, Supported by the D-Z Model, in the General Theory on pages 298-303 in Section Four of Chapter 21
31 Pages Posted: 2 Jan 2019
Date Written: December 16, 2018
Hicks, in the last paragraph of the last page of his April,1937 Econometrica paper dealing with a “suggested interpretation” of the General Theory, correctly concluded that his “skeleton” model represented a small improvement over Keynes’s similar “skeleton” model of the General Theory. This “small” improvement was, presumably, Hicks’s actual drawing of the IS and LM curves in Aggregate Income and rate of interest space.
The major defect in Hicks’s IS-LM model, when compared to Keynes’s IS-LM(LP) model of chapter 21 of the General Theory, is an error of omission, not commission. The problem, mentioned to Hicks in Keynes’s reply to Hicks, was that Hicks had no D-Z model serving as a foundation for the IS-LM model that would have incorporated the missing expectations concerning the price level, theory of the firm, production function, labor market, and marginalist conditions, like Keynes’s chapter 20 result that the real (expected) wage equals the marginal product of labor, that Keynes had incorporated in his D-Z model of expected aggregate demand and expected aggregate supply.
In Hicks’s 1980-81 paper in the JPKE, which offered an explanation for the IS-LM model, Hicks, correctly, states clearly that his contribution to the IS-LM model was the IS-LM graph or diagram. He later correctly stated that it was Keynes, who had a model with three elements that was analyzed with two parameters in Aggregate (effective demand) Income-rate of interest space in chapter 21, whose model he was interpreting. This is just another way of stating what he had stated in the last paragraph of his 1937 Econometrica paper, which was that his “skeleton” was a small improvement over the original Keynesian “skeleton”.
The first IS-LM model was presented by Keynes in December ,1933,in his student lectures attended by D. Champernowne and W. Brian Reddaway, whose June, 1936 papers in the Economic Record and Review of Economic Studies, respectively, incorporated versions of the IS-LM model contained both in Keynes’s December, 1933 lectures and in his mid 1934 draft copy of the General Theory, where the confidence in one’s expectations variable had replaced the “change in the news” variable, W, as pointed out by Dimand and Rubin. The Reddaway and Champernowne papers appeared 11 months before Hicks’s April, 1937 paper on IS-LM and the General Theory. Hicks’s June, 1936 review of the General Theory in the Economic Journal not only has absolutely no discussion of any type of IS-LM model, but claims, partly correctly, that Keynes’s discussion of expectations was what was truly important and original in Keynes’s General Theory.
Keywords: IS-LM, IS-LP(LM), Reddaway, Champernowne, Keynes, Chapter 21, Chapter 15, Keynes’s Views of Math
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation