John Hicks's 1937 paper Mr. Keynes and the "Classics"; a suggested interpretation is the most influential study of the views presented by J. M. Keynes in his General Theory of Employment, Interest, and Money of February 1936. It gives "a potted version of the central argument of the General Theory" as an equilibrium specified by two equations (shown as intersecting curves in the IS-LM diagram) which dominated Keynesian teaching until Axel Leijonhufvud published a critique in 1968. Leijonhufvud's view that Hicks misrepresented Keynes's theory by reducing it to a static system was in turn rejected by many economists who considered much of the General Theory to be as static as Hicks portrayed it.
James Tobin described the IS-LM model as: ... the tool of first resort. If you are faced with a problem of interpretation of the economy – policy or events – probably the first thing you can do is to try to see how to look at it in these [IS-LM] terms.
Background
Publication history
Mr Keynes and the "Classics" was first published in Econometrica (April 1937) and reprinted in 'Critical essays in monetary theory' (1967) and again in 'Money, interest and wages' (1982), this time with a prefatory note.
Several of Hicks's other papers deal with the same subject. His review of the General Theory was published in the Economic journal in June 1936 and reissued in 'Money, interest and wages'. 'The classics again' was published in the same journal in 1957 and reissued in 'Critical essays in monetary theory'. 'IS-LM – an explanation' was published in the winter 1980-1 issue of the Journal of post-Keynesian economics and reprinted in 'Money, interest and wages'.
Origins of Mr Keynes and the "Classics" Hicks's paper as first was based on a version read at a meeting of the Econometric Society at Oxford in September 1936, and taking account of the discussion which took place there and later at Cambridge.
According to Warren Young it should be 'regarded not so much as an original and new piece of analysis but as a synthesis of earlier interpretational attempts by [Roy] Harrod and [James] Meade'. Meade and Harrod 'themselves were intimately associated with the development of the General Theory; Harrod was one of the colleagues to whom Keynes sent proofs of the book for comment. Gonçalo L. Fonseca specifically mentions that "The equations of the IS-LM model were written down by Harrod (1937), but the (later) drawing of the diagram by Hicks robbed him of his claims to precedence".
Hicks's own account of the origins of the paper is rather different. He had been working independently on questions overlapping those addressed by the General Theory and found much in it which corresponded to his own thinking. It is this convergence of thinking, rather than the prior knowledge supplied by others, which accounts for his rapidly arriving at a clear picture of Keynes's views. This account explains the singlemindedness of Hicks's interpretation, which homes in on Book IV of the General Theory and on excessive wages as a cause of unemployment, while other reviewers were struggling to reconcile the different elements of Keynes's thought.
Hicks's relatively classical interpretation of Keynes made him the target of criticisms from more radical Keynesians. He had considered the General Theory a more conservative work than Keynes's earlier Treatise on Money and given it a favourable review. But he came to have doubts about the formalism he'd presented in 'Mr Keynes and the Classics' and oscillated between retractions and reavowals.
Terminology
The two curves in Hicks's original diagram are labelled IS and LL, and his original name for the model was IS-LL (or possibly even SI-LL), but the name which stuck was IS-LM. It is also known as the 'Hicks-Hansen model', reflecting the importance of Alvin Hansen's 1953 'Guide to Keynes' (which interpreted Keynes's system along the lines of Hicks's model) in introducing Keynesian ideas to America.
Mathematical representation of Keynes's theory
The General Theory
See the article on the General Theory for a description of Keynes's economic ideas. Chapters 1–13 and 15 develop the concepts on which Keynes's model is based. The model itself receives an initial statement in Chapter 14 and is 'restated' in Chapter 18: it is these statements which Hicks presented in the mathematical form of an equilibrium specified by simultaneous equations.
The choice of units
In section I, Hicks presents Keynes's theories in opposition to Pigou's 1933 "Theory of Unemployment". He remarks that: