Romer, D. (2000). \"Keynesian Macroeconomics

Romer, D. (2000). "Keynesian Macroeconomics without the LM Curve." The Journal of Economic Perspectives, Vol. 14, No. 2, pp. 149-169.

Economic theory in general is at once more controversial and more resistant to change despite observed evidence than are certain other branches of scientific theory; the complexities and sheer unknowns of macroeconomic operations, especially on a global scale, continue to illuminate imperfections or outright miscalculations in current models and theories. It is not only due to the still-refining nature of economic theory that so many different issues can arise causing disputes amongst academics and policy makers, however. The economic patterns of the world's nations and of the global economy as a whole have changed considerably over the past century, some would assert, causing a need for new and more accurately descriptive economic theories not simply because the old theories and identified patterns were not comprehensive or correct, but because the underlying concepts and patterns have themselves shifted.

Both of these over-arching reasons have led to vigorous scholarship attempting to redefine old models or eradicate them completely in favor of new explanations and concepts. Some of these academic efforts have been more successful than others at accurately describing economic events as they have unfolded over the past several decades, and implications of these theories on the global economic events of the past several years can even be found in certain theories. Those that do not measure up are destined to be forgotten, for the most part, but those with a greater degree of accuracy will likely shape economic theory and policy for decades to come.

David Romer's decade-old article in the Spring 2000 edition of the Journal of Economic Perspectives, "Keynesian Macroeconomics without the LM Curve," seems to have fallen primarily in the camp of the forgotten, though by all merits it should definitely be included in the canon of modern economic scholarship and theoretical practice and education. Many writers and economists, as Romer acknowledges, have disputed the accuracy and the applicability of IS-LM model since its inception over seventy years ago, but though the inaccuracies and incoherencies of the model in real-world applications have been well-documented, concrete alternatives to this model as both a teaching tool and as a useful model for economic theorists and policy makers have been few and far between. Romer presents both solid arguments as to why the use of the IS-LM model should be discontinued as well as a new model to take its place that is at once more accurate and more simplified.

Summary and Critique

Romer begins his analysis and recommendation by providing an explanation of the IS-LM model, and even in this section the intelligence and depth of understanding that are possessed by this economist become quickly evident. The author's explanation of the IS-LM model is at once simpler and more comprehensive than other similar explanations found in text books or in related literature; though the implications of this model can be quite complex and are immensely far-reaching, even by macroeconomic standards, he is able to succinctly describe the relationships the model defines. This succinctness is definitely confidence inspiring.

The feeling of the author's reliability is only increased as he continues to describe the changes that have already been made to the IS-LM model. Romer explicitly and directly ties the changes that have been made to the model to the historical shifts in the world's (and the United State's) economy; by noting that inflation was simply not a major issue for the first decades of the models' use and existence, the model's efficiency and accuracy during that period are easily explained. Just so are the inefficiencies of the model in a world where inflation is a major factor in the global economy (as well as in the economies of many independent nations), which the inclusion of aggregate supply (AS) into most contemporary uses of the model addresses. This also creates complications in the model that are not necessarily warranted by the increased accuracies that they provide, and it is for this reason that Romer advocates another major change to the model before it is put to further use.

It is at his juncture that the tone of the article changes somewhat, and where Romer begins to get to the central point of his argument -- namely, that the IS-LM model is in drastic need of change and that he has developed the correct method for changing it. The author's language here becomes somewhat more dense than it is in his discussion of the model's historical progression and current applicability (or lack thereof), but he still manages to achieve a great deal of clarity and certitude in his explanation. Essentially, Romer argues, the model in its past iterations failed to account fully (or at al) for the influence of the central bank on real interest rates, which are themselves in essential part of the model.