MODELS AND MATHEMATICS: HOW PIGOU CAME TO ADOPT THE IS-LM-MODEL REASONING

Norikazu Takami

Journal of the History of Economic Thought, 2014, vol. 36, issue 2, 169-186

Abstract: The paper investigates how Arthur Pigou came to adopt the reasoning essentially based on the working of the IS-LM model and to admit that money wage cuts are neutral to employment under the liquidity trap. This occurred through his involvement in the controversy with John Maynard Keynes in 1937–38. In the first instance, Pigou used a simple model to oppose Keynes’s assertion on such neutrality. Pigou (and Keynes too) applied verbal logical analysis to the model to derive his conclusions. Submitting a paper to the Economic Journal, Nicholas Kaldor analyzed Pigou’s model in mathematical terms and asserted that Pigou derived inconsistent conclusions from his model. Kaldor’s method eventually convinced Pigou, Keynes, and Dennis Robertson (who participated in the debate in correspondence). The paper thus argues that the controversy was concluded when one form of model analysis replaced another; specifically, when mathematical analysis replaced verbal logical analysis. This study provides a case study to the first category of Mary Morgan’s two functions of economic modeling: models as an object to inquire into and models as an object with which to inquire.

Date: 2014
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