Chapter 47: The IS-LM Diagram
Warren Young Whether the IS-LM diagram has been praised as ‘the core of modern macroeconomics’, vilified as ‘bastard Keynesianism’, or utilized as a common analytical device for debate between ‘fiscalists’ and ‘monetarists’, it has been at the forefront of economic discourse from the late 1930s onwards. In this survey, I focus on the origin of the diagram in its CC-LL (Hicks, 1936) and IS-LL (Hicks, 1937) vintages. I then proceed to deal with the cardinal difference in derivation between Hicks’s IS-LL (1937) and Hansen’s IS-LM diagrams (1949). Finally, the impact of the diagram on interpretations and representations of Keynes’s General Theory is assessed. Extensions to the diagram are also dealt with in the closedeconomy context; the open-economy setting of the diagram will be dealt with in Chapter 48. HICKS’S SEPTEMBER 1936 CONFERENCE DIAGRAM Hicks’s account of the genesis of his 1937 diagram is that it emanates directly from the use of his ‘Value and Capital methods’ of reducing a three equation system into two, and the concomitant diagrammatic representation of these resultant equations (Young, 1987, 98–102). While other ways of generating the diagram have been described elsewhere (Young, 1987, 94–97), for our purpose here, Hicks’s account is taken at face value, as he only claimed ‘responsibility’ for the IS-LL diagram, and not the equations now considered to be ‘IS-LM’ (Young, 1987). But there is a version of his diagram that predates the 1937 IS-LL diagram. This version – the CC-LL diagram – was presented by Hicks himself on the morning...
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