This chapter is dedicated to the reception of the General Theory by macroeconomists. The Oxford meeting of the Econometric Society was a decisive moment in the evolution of macroeconomics. Three versions of the IS-LM model were introduced by three economists called upon to play a great role in later developments of macroeconomics: Roy Harrod, John Hicks and James Meade who all strove to extract a model capturing Keynes’s message. However, only Meade tackled the problem of the stability of equilibrium. Unlike his colleagues from the Econometric Society, he thought that this problem could be addressed on the basis of a static model, from which stability conditions could be derived.
Frisch, Tinbergen and Kalecki, who were all present at the conference, criticized his approach and pointed out the need to specify a dynamic adjustment process based on economic assumptions to assess the stability properties of an economic model. Nevertheless, they recognized that the IS-LM model was a powerful vehicle to move forward with the analysis of macroeconomic relationships. Samuelson was one of the first to take the challenge of studying on the basis of an explicit dynamic mechanism the stability properties of the IS-LM model. In doing so, he argued for connecting the analysis of stability with comparative statics, while at the same time an author like Arthur Cecil Pigou (1941) still argued for their separation. For Samuelson, it was only with this connection that “meaningful theorems” could be derived and the effects of various shocks on the equilibrium could be discussed. Paradoxically, Samuelson underpinned the belief that stability could be taken for granted to derive comparative statics results, while he himself warned of the possible risks that some policies, like those generating deflationary effects, could pose on the stability of the economy.
Posts in this section:
[chapter 8 posts]
Bridging comparative statics and dynamics in Samuelson’s 1941 IS-LM model
Questioning Samuelson’s dogma: Schelling on growth and cycles
Back to the future: Meade meets M.E.A.D.E. in the person of Tinbergen