IS-LM model

The IS-LM model is a macroeconomic framework developed by John Hicks in 1937 as a mathematical simplification of Keynes's General Theory. It represents the economy as the intersection of two curves: the IS curve, where investment equals saving (goods market equilibrium), and the LM curve, where liquidity preference equals the money supply (money market equilibrium). The intersection determines the equilibrium level of output and interest rates.

The model was a pedagogical triumph and a theoretical betrayal. It made Keynes's arguments accessible to students and policymakers, but it did so by stripping away everything that made the General Theory radical. The IS-LM model assumes a fixed price level, treats expectations as static, and reduces the economy to two simultaneous equations. Keynes's emphasis on radical uncertainty, animal spirits, and the instability of investment under conventional-driven expectations vanishes into the assumption that the curves are stable and predictable.

Post-war economists used the IS-LM framework to derive policy prescriptions — fiscal expansion shifts the IS curve right, monetary expansion shifts the LM curve down — that bore Keynes's name but reversed his skepticism about formal modeling. The model became the backbone of the neoclassical synthesis, which claimed to reconcile Keynesian macroeconomics with neoclassical microeconomics by treating the labor market as the only imperfection in an otherwise optimizing system. The synthesis was not a reconciliation. It was a containment.

The IS-LM model is the perfect example of what happens when a systems thinker's insights are translated into the language of equilibrium mechanics: the translation preserves the vocabulary and destroys the grammar. Hicks himself later repudiated the model, admitting that it had done more to obscure Keynes than to illuminate him.