Work-Standard Alternative to IS-LM Model? (Pt. I of II)

Is there a Work-Standard alternative to the “IS-LM Model?” The current information about the Work-Standard indicates that an alternative can in fact be devised with the TPP (Total Productive Potential) Equation in mind. To understand the justification for such an alternative, it is necessary to discuss about the IS-LM Model and why the Death of Bretton Woods has undermined its legitimacy in the economics field. Doing so will provide the basic criteria on what the alternative should entail and later set the stage for further development of any newer models compatible with the Work-Standard.

To begin, the IS-LM Model is short for “Investment-Saving and Liquidity Preference-Money Supply Model.” It is sometimes called the “Hicks-Hansen Model” in reference to the two men who created it during the 1930s, John Hicks and Alvin Hansen. The purpose was to provide a mathematical model that describes an overview of ideas posited in John Maynard Keynes’s General Theory of Employment, Interest, and Money. On a two-dimensional economic graph, the IS-LM Model demonstrates how Interest Rates affect the causal relationship between the Investment-Saving (IS) curve and the Liquidity Preference-Money Supply (LM) curve in the Quantity of Kapital for a Civil Society’s Outputs and Incomes, its GDP (Gross Domestic Product) and GNI (Gross National Income) respectively.

In any given period of Zeit (Time), the economic activities of a Liberal Capitalist Civil Society will bring it toward an equilibrium existing somewhere between the IS and LM curves. The Kapital Accumulation of the Market/Mixed Economy brings the Civil Society to the IS curve, tempered by the Kapital Accumulation of the Fractional-Reserve Banking System on the LM curve. The equilibrium itself is where we find the Civil Society’s GDP and GNI.

Economic Graph of the IS-LM Model

On the IS curve, the Kapital Accumulation occurs from investments and savings of Kapital through production, consumption, taxation and spending by the Parliament, the Civil Society, and the Private Citizen. Meanwhile, on the LM curve, Kapital Accumulation stems from the Interest Rates, the issuances of LCFIs (Liberal Capitalist Financial Instruments) from Parliament and the financial markets, and changes to the Money Supply by the Fractional-Reserve Banking System. The IS-LM Model corresponds to the four primary methods of Liberal Capitalist economic policies.

  1. Taxation Rates
  2. Government and Consumer Spending
  3. Interest Rates
  4. Money Supply Expansion/Contraction

Under ideal conditions, the Market/Mixed Economy receives lower Taxation Rates and higher Government and Consumer Spending from Parliament and Civil Society, in addition to reduced Interest Rates and expansions to the Money Supply. Lowered Taxation and Interest Rates facilitate the accruement of Schuld from Kapital, while the expanded Money Supply and Government and Consumer Spending pursues a likewise accruement of Kapital from Schuld. The goal is to ensure that the Quantity of Kapital surpasses the Quantity of Schuld, which is easier said than done.

Of course, as Hicks and the Keynesians would later realize, the IS-LM Model is an unsuitable mathematical model to describe the economic life of a Liberal Capitalist Market/Mixed Economy. It does not show how Free Trade Agreements (FTAs) and especially how the dynamics of Production for Profit and Production for Utility affect the relationship that Kapital has with Technology (which is a topic covered in The Third Place).   

Moreover, the IS-LM Model does not provide a reliable basis on which to gauge the Inflation/Deflation Rate and the Employment/Unemployment Rate. Those two factors were decisive in the onset of Stagflation following the Death of Bretton Woods. Prior to the 1970s, the Keynesians had insisted that the Inflation/Deflation Rate is influenced by the Employment/Unemployment Rate. As more of Civil Society becomes employed, the Inflation Rate increases commensurate and vice versa. When Stagflation occurred during the 1970s, the Inflation Rate rose in spite of an increasing Unemployment Rate.

Attempts have been made in the decades since the Death of Bretton Woods and the more recent Great Recession to expand on the shortcomings of the IS-LM Model. The crux of those proposed replacements to the IS-LM Model placed great emphasis on the LM curve, which corresponds to the Fractional-Reserve Banking System. Key examples include the “IS-LM-BoP Model” or “Mundell-Fleming Model” and its attempt to integrate international trade, “IS/MP (Investment–Savings/Monetary–Policy) Model,” the “AD–IA (Aggregate Demand-Inflation Adjustment) Model,” and the “IS-LM-NAC Model” that included a ‘No Arbitrage Condition’ to show how Wages and Prices affect the IS and LM curves. Each attempt sought to integrate either FTAs, another Interest Rate, the Inflation/Deflation Rate, and a discernible relationship between Wages and Prices and the Employment Rate.

Economic Graph of LS-IM-NAC Model

If I had to address where the Work-Standard alternative to the IS-LM Model comes into play, I am willing to argue that those Liberal Capitalist substitutes for the IS-LM Model sought to address issues related to the y-axis. Does the Interest Rate really affect FTAs, Inflation/Deflation Rates, Wages and Prices, and the Employment/Unemployment Rate? Is it tenable to argue that one’s economic life could become free from Interest, which has oftentimes been the source of Usury?

Even though the Work-Standard does not rely on an Interest Rate, its alternative to the IS-LM would not be having the Mechanization Rate (MR) on its y-axis. In fact, its x-axis and y-axis should be devoted to the TPP (Total Productive Potential) value, which affects the RPF (Requisitionary Productive Forces) value. The idea here is to demonstrate how the economic activities of the State, Totality and Self contribute Arbeit and Geld to the Life-Energy Reserve, increasing the TPP value and allowing more units of currency to be brought into circulation by the Central Bank as the RPF value. All that remains is for me to create an economic graph to show how it looks on paper and how it relates to everything discussed in The Work-Standard and The Third Place.

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