Krugman doesn’t understand IS-LM (Part 3)

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This arti­cle is the third piece in a four-part series. Read part one here and part two here.

But first, a word about my Kick­starter cam­paign to raise funds to devel­op Min­sky, a tool for design­ing strict­ly mon­e­tary macro­eco­nom­ic mod­els:

There are only 3 days left to help Kick­start Min­sky! We’ve raised $63,200 now, which puts us with­in strik­ing dis­tance of our first stretch goals:


About 1400 hours of total pro­gram­ming time will enable Rus­sell to com­plete the “Mun” release, which will focus on improv­ing the graph­ics and pre­sen­ta­tion aspects of the pro­gram.

Nathan will also be able to devel­op a ver­sion of Min­sky for iPad and Android Tablets.

I’m also not about to give up hope that we might make the sec­ond stretch goal:


With twice as much as the orig­i­nal INET Grant, we should be able to com­plete stage 2 of Min­sky—the “Ques­nay” release named in hon­or of the per­son I regard as the world’s first dynam­ic econ­o­mist, Fran­cois Ques­nay—in which the plat­form could sup­port the con­struc­tion of mul­ti-bank mod­el of the finan­cial sec­tor, and a mul­ti-com­mod­i­ty mod­el of pro­duc­tion.

Krug­man does­n’t under­stand IS-LM (Part 3)

Krug­man’s expla­na­tion of our cri­sis today is straight from the pages of John Hick­s’s 1937 expla­na­tion of the Great Depres­sion (though curi­ous­ly, Hicks him­self did­n’t men­tion the actu­al state of the glob­al econ­o­my at all in his 1937 paper), which attempt­ed to explain the rela­tion­ship between inter­est rates, and real out­put in goods and ser­vices and mon­ey mar­kets. First­ly, the LM curve, (rep­re­sent­ing Liq­uid­i­ty Pref­er­ence – Mon­ey Sup­ply) is hor­i­zon­tal at the “zero low­er bound”, since when nom­i­nal rate of inter­est reach­es zero, there’s no point in buy­ing bonds – it’s wis­er to keep your mon­ey in cash.  And sec­ond­ly, dur­ing a Depres­sion, pri­vate demand can fall so much that the inter­sec­tion of IS (rep­re­sent­ing Invest­ment – Sav­ing) and LM occurs at a lev­el of GDP well below the full employ­ment lev­el. The econ­o­my is in an equi­lib­ri­um with invol­un­tary unem­ploy­ment (see fig­ure 7).

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.