Paul Krugman, defending the IS-LM (a/k/a “old Keynesian”) model of the macroeconomy as a non-rigorous but useful “scratchpad”, misses the point by a mile:
It’s a simplified model that more or less gets at what you think are the essentials of an issue, and is easy to work with, so you can use it to reach quick first-pass judgments about policy or whatever.
But IS-LM isn’t the prime example of a scratchpad. What is?
The answer is, supply and demand.
It is not easy to derive supply and demand curves for an individual good from general equilibrium with rational consumers blah blah. And it’s definitely not easy to justify consumer and producer surplus as measures of welfare. And there have always been some purists who condemn any use of the S and D curves we all grew up with, the use of triangles to measure welfare loss, and all that.
But for the most part nobody pays attention. The supply-and-demand framework is so convenient, while pretty much getting at what you want to get at, that it’s what almost everyone uses to get a first-pass analysis of economic issues.
Okay, look. Supply and demand (and, especially, triangles of welfare loss, etc) are not entirely rigorous, but they’re good useful simplifications that actually give useful (though approximate) answers to important policy questions. Sort of like Ohm’s Law for electrical circuits.
But IS-LM is not like that at all, because IS-LM does not even address the key policy questions in macroecomics. IS-LM can tell you, perhaps, how to fight a recession, but it can’t tell you whether the recession is worth fighting — not even loosely, because the model contains no individual utility functions and no social welfare function. It therefore does not allow you even to formulate the question of whether a given policy is worth its costs, because it provides no framework for weighing costs against benefits.
Analyzing policy via supply and demand is like analyzing electrical circuits with Ohm’s Law. It answers questions, and over a fairly wide range of situations, it answers them with tolerable accuracy. But analyzing policy via IS-LM is like analyzing electrical circuits with a barometer.
Somewhere in a parallel Universe, there’s an electrician named Paul Krugman who carries a barometer wherever he goes. He uses it to check current flow. Whenever someone says, “Hey, Paul. That barometer is really the wrong tool for the job”, he gets all snarly and says “Hey! Whatcha got against approximations?” Then he goes back to work, muttering something about fools and knaves.