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[Posted on behalf of Robert Leeson. -- RBE] 
 
Anthony Waterman writes: 
 
"It is precisely not the case, in the 'Keynesian' world for which the IS/LM model and
hence the AD curve is constructed, that any causal nexus exists between M and P. The IS
and LM components of the story are each 'fixprice' models (as Hicks called them). Hence a
'mental experiment' in which one analyses the logical consequences of changing M whilst P
remains constant is entirely proper".
 
In my dictionary "proper" is defined as being "in conformity with demands of society,
decent, respectable". Why is it that to be accepted in "society" and to be regarded as
"decent, respectable" our students are obliged to accept (often uncritically) these models
as adequate representations of the macroeconomy?
 
This was Keynes' objection to formalism (in his discussion of the causal nexus between M
and P in The Theory of Prices (1936, chapter 21, 297-8): "Too large a proportion of recent
'mathematical' economics [...symbolic pseudo-mathematical methods of formalising a system
of economic analysis...] are mere concoctions, as imprecise as the initial assumptions
they rest on, which allow the author to lose sight of the complexities and
interdependencies of the real world in a maze of pretentious and unhelpful symbols".
Keynes emphasised that "provisional conclusions" had to be reassessed in the light of "the
probable interaction of the factors among themselves. This is the nature of economic
thinking".  Believing that it is entirely proper to ignore such interactions is the
antithesis of such "economic thinking".
 
In ISLM: An Explanation, Hicks (1983, 61), referring to a "classroom gadget", made a
similar point: "I want to ask [the applied economist] to try and to assure himself that
the divergences betwen reality and the theoretical model that he is using to explain it
are no more than the divergences he is entitled to overlook".
 
Hicks, J.R. 1983. ISLM: An Explanation.  In Fitoussi ed Modern Macroeconomic Theory
(Oxford: Blackwell).
 
Robert Leeson 
Murdoch University 
 
 
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