Knowledge, Truth and the History of Economic Thought
Edited by Stephan Boehm, Christian Gehrke, Heinz D. Kurz and Richard Sturn
Chapter 19: Walras' law and the IS–LM model: a tale of progress and regress
19. WalrasÕ law and the ISÐLM model: a tale of progress and regress Hansjšrg Klausinger* INTRODUCTION The integration of macroeconomics into the framework of general equilibrium analysis marked a vital step from the Ôeconomics of KeynesÕs to the neoclassical synthesis version of ÔKeynesian economicsÕ. Two crucial elements in this process were the translation of the General Theory into the terms of the ISÐLM model and the application of WalrasÕ law. It is not merely by accident that Hicks Ð whose approach towards the General Theory was shaped by Value and Capital Ð was the most influential protagonist in the early development of both these ideas. Thereby the neoclassical synthesis provided the unifying framework for analysing and discussing Keynesian topics, as for example the controversy between the liquidity preference and the loanable funds approach to the determination of the rate of interest. However, in the course of this development a host of subtle analytical problems emerged Ð for example with respect to the time structure of period analysis and the proper handling of stocks and flows. Starting with the early attempts by Hicks and Patinkin and culminating in the final accomplishment of a consistent stockÐflow version of ISÐLM by Foley and Buiter, most of these problems could be resolved within the general equilibrium framework. In this sense one may consider the steady refinement of the analytical tools used in ISÐLM analysis as an example of Ôtheoretical progressÕ.1 Yet curiously enough, side by side with this increasing...
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