Simple-Minded Pseudo-Macroeconomists

Tyler Cowen does not like the IS/LM model. Excellent. Indeed, when Hicks wrote his 1937 paper "Mr. Keynes and the Classics," which interpreted Keynes's General Theory as the now-familiar IS-LM construct, he finished with this:

The General Theory of Employment is a useful book. But it is neither the beginning nor the end of Dynamic Economics.

Thus, Hicks himself is telling you: "This is my effort to figure out what the heck Keynes was trying to get across. Don't take it too seriously though. I'm sure there is plenty of good research to come that will put all of this into perspective, and indeed may replace it." Hicks would probably have been surprised at what happened to IS-LM. Generations of textbook writers found IS-LM a very convenient model to use in getting basic Keynesian ideas across to undergraduate students. However, frontier macroeconomic researchers did not take IS-LM seriously after the early 1970s. By about 1980, IS-LM had essentially disappeared from the top economics journals and from the top PhD programs in economics. But one could still find some version of IS-LM in undergraduate textbooks.

How is IS-LM used today? You do not see it in published macroeconomic research, as a framework for discussion among policymakers, or in PhD programs in economics. It is certainly not necessary to use it in teaching Keynesian economics to undergraduates. In the third edition of my intermediate macro textbook, you will not find an IS-LM model. I have found what I think are more straightforward and instructive ways to get Keynesian economics across, and to get it across in line with what modern Keynesian researchers actually do. For example, I do a version of a Keynesian coordination failure model that looks like what Roger Farmer did in the early 1990s, and an undergraduate version of a Woodford sticky-price model.

So, given that IS-LM is not used by any serious macroeconomic researchers or practitioners, and that we want to represent in an accessible way for undergraduates what macroeconomic researchers and practitioners are actually up to, why would anyone care about IS-LM? Why indeed? But Brad DeLong and Paul Krugman do. In fact, they are quite passionate about it. Well, the Amish are passionate about what they do as well. While DeLong and Krugman might like to freeze the profession at its state in 1937, the rest of us have moved on. In the words of the great bard:

Your old road is rapidly aging. Please get out of the new one if you can't lend your hand, for the times they are a-changing.