The IS curve is upward sloping and the LM curve is vertical.
I balked at first, particularly over this line: "We all know that firms have a strong incentive to invest in a boom and not invest in a recession. And we know this is what they do. So we know that mpc+mpi>1 is a very plausible assumption, and one that fits the facts. So why don't we want to believe it?
...Because mpc+mpi>1 makes equilibrium in the Keynesian Cross model unstable, and we don't like an unstable equilibrium, so we make the Keynesian Cross equilibrium stable by assuming mpc+mpi<1, and then use it to teach where the IS curve comes from. And mpc+mpi<1 gives us a downward-sloping IS curve."
The bolded line bothered me. I hate just-so stories about why economists think what they think. Things like "economists like the math to be pretty and that explains neoclassicism" or "economists like to please their overlords and that explains Keynesianism". It's lazy, sloppy analysis that is really just thinly veiled criticism.
And I wanted to say to Nick "it's not just that we 'don't like' unstable equilibrium - it's that the sort of equilibrium that this implies doesn't happen in the world we observe, so why should we believe that sort of unstable equilibrium?"
But I've warmed to this particular instability. After all, why - in the more stable Kenyesian IS-LM world - aren't we constantly underemployed? It's been refered to as "full employment by accident" but we seem to do OK a lot of the time. Why?
Innovation and progress.
An IS curve - because of the scientific method, population growth, creative destruction, and the division of labor - is constantly moving to the right.
After that I was more comfortable with Nick's post. An unstable equilibrium with curves that have a tendency to shift right is a less bothersome sort of unstable equilibrium. What economists "like" and "don't like" has less to do with it, I think.
Monday, August 8, 2011
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Dan: Thanks!
ReplyDelete"And I wanted to say to Nick "it's not just that we 'don't like' unstable equilibrium - it's that the sort of equilibrium that this implies doesn't happen in the world we observe, so why should we believe that sort of unstable equilibrium?" "
Yep. As Samuelson(?) said, when have you ever seen an egg standing on it's pointy end on a flat table?
Well, we do see bicycles standing upright, which is an unstable equilibrium. But then there is always a rider on top, actively adjusting the steering the whole time to make it stable.
The bike is unstable. Bike+rider is stable.
But it's very hard to model a bike+rider. Much easier to pretend the bike has training wheels.
That's rather like an upward-sloping IS and horizontal LM. Providing the bank is moving the LM up and down very skillfully, like a good bike rider. But even good bike riders fall over sometimes.
How about we just admit there is no such thing as equilibrium, stable or unstable?
ReplyDeleteNick Rowe,
ReplyDeleteBikes actually "prefer" to stay upright as much as anything else; so it is the mistakes of the rider which often lead to the tumble.
Niock Rowe,
ReplyDeleteIn other words, it is the self-stability of the bicycle which has as much to do with it staying upright as what the rider does. If you are interested there is an amazing body of literature on this subject going back over a hundred years; that is why do bikes stay upright for very long distances without a rider or with a rigid rider or with a rider not touching the handlebars, etc.
The point being, Gary, that conditions determine stability.
ReplyDeleteA fast moving bike and a bike with a rider are both more stable than a still bike.
An upward sloping IS curve with tendencies for the IS curve to keep pressing rightward is more stable than an upward sloping IS curve with no such tendency.
No, some moving bikes with some riders are less stable than even a still bike is. And some moving bikes are inherently more stable without a rider - or at least without your average rider (they require highly trained riders in other words). The analogy is not terribly useful once you start to know a little bit about bikes.
ReplyDeleteDaniel,
ReplyDeleteFor the record I've broken my ribs (amongst other things) two times mountain biking; it was never the bike's fault.
Gary -
ReplyDeleteDon't make me start considering deleting for bizarrely persistent non-sequitor thread congestion. As it stands I don't like that I have to delete for rudeness on occasion.
Daniel,
ReplyDeleteI didn't bring up the bike analogy, your friend Nick Rowe did; the analogy isn't terribly useful for the reasons that I indicate.
Gary is probably right. But I just can't get my head around it with my hi-skool physics, and I'm not even going to try! Maybe it wasn't the best analogy. But you still get my drift.
ReplyDeleteNick Rowe,
ReplyDeleteSorry, I do understand where you are trying to go with that, but you're always going to have some bike geek push back on that analogy. Bikes are absolutely fascinating machines; far more interesting than I think a lot of people give them credit for.
On the topic of stable bike with no rider, click the second image here.
ReplyDeleteSubhi,
ReplyDeleteYeah, that has actually happened to me - what makes a bike unstable more than anything is a rider losing their nerve.
Yeah I agree Daniel that Nick Rowe is very interesting. For some reason though I can't incorporate him into my daily reading. Sort of like the really nice girl who doesn't catch my fancy in biology class; instead I have a crush on the cheerleader who cheats off my tests and forgets my name.
ReplyDelete