IS-LM a la Hicks versus IS-LM a la Modigliani

The aim of this essay is to revisit J. R. Hicks's famous "Mr. Keynes and the 'Classics'" ([1937] 1967), beyond doubt one of the most influential articles in the Keynesian tradition. It was presented jointly with two other papers, written by Harrod and Meade and pursuing the same aim of clarifying the content of Keynes's General Theory, to the 1936 Oxford meeting of the Econometric Society. Despite the fact that these three contributions were quite similar, Hicks's piece has by far been the most influential. ¹

Rereading Hicks's article leads to a somewhat surprising result. It turns out that his SI-LL model, as he coined it, does not square with the subsequent IS-LM models found in macroeconomics textbooks at the heyday of Keynesian economics. ² It may well be true that Hicks provided the conceptual apparatus that proved so successful, to the point of being identified with the very field of macroeconomics. Yet there is a breach of continuity between his own use of the model and that of standard textbooks. First, in Hicks's account, involuntary unemployment or non-market clearance exists in both the classical and the Keynesian models. This is no longer true in the textbook account of IS-LM. Therein, the classical model features market clearing, whereas the Keynesian model is supposed to exhibit involuntary unemployment. Second, in Hicks's article, monetary expansion has real effects in the classical model, whereas this is not necessarily so in the Keynesian model. In contrast, in the textbook account the inefficiency of monetary expansion (i.e., its lack of impact on employment) is the hallmark of the classical model, the opposite being true for the Keynesian model. ³ As a result, R. Clower's ([1975] 1984, 192-93) judgment that "Keynesian economics" owes as much to Hicks as to Keynes should be tempered. The transition from Keynes's economics to Keynesian economics is, rather, a two-step process: its first stage concerns the passage from the General Theory to Hicks's model; its second stage, the shift from Hicks's use of the IS-LM framework to its modern understanding. I claim that F. Modigliani's article "Liquidity Preference and the Theory of Interest and Money" (1944) played a decisive role in this second transition. It is his, not Hicks's, version that underlies the standard models. Hence the need to draw a distinction between IS-LM à la Hicks and IS-LM à la Modigliani.

My aim in this article is threefold. First, I want to provide a reinterpretation of Hicks's seminal paper. Only a minimal assessment of what Hicks regarded as the specifics of the "Keynesian revolution" will be made, so as to have the proper background for discussing his model. Second, I want to make a close comparison between Hicks's and Modigliani's essays and vindicate the claim of a two-step process evoked above. Third, I want to bring to the fore some ambiguities in Modigliani's position.

To close this introduction, it may be useful to contrast my essay's contribution with that of two recent articles on the same subject (Darity and Young 1995; Barens and Caspari 1999). As far as Darity and Young's survey article is concerned, three differences should be pointed out. First, whereas theirs has a broader scope than mine in that it investigates the whole literature from Hicks, Harrod, and Meade to papers written in the 1950s, my article's only concern is the relationship between Hicks and Modigliani. As a result, my investigation is more in-depth. Second, the originality of my essay lies in its claim that there is a breach from Hicks's SI-LL to the standard IS-LM model and that Modigliani's 1944 article played a crucial role in recasting the former into the latter--a claim that is not in Darity and Young...