Olivier Blanchard, Equilibrium, Complexity, And The Future Of Macroeconomics

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I have observed and appreciated Olivier Blanchard’s intellectual journey over the last decade. It began in August 2008, with what must be regarded as one of the worst-timed papers in the history of economics. In a survey of macroeconomics entitled “The State of Macro”, he concluded, one year after the financial crisis began, that “The state of Macro is good” (Blanchard, 2008). However, Blanchard did not remain locked into that position, and he had the rare intellectual courage to say so in public and in academic papers. His most recent post, before the one I am responding to today (“Further Thoughts on DSGE Models: What we agree on and what we do not”), stated that, far from the state of macro being good:

There are many reasons to dislike current DSGE models. First: They are based on unappealing assumptions. Not just simplifying assumptions, as any model must, but assumptions profoundly at odds with what we know about consumers and firms. (Blanchard, “Do DSGE Models Have a Future?”, August 2016)

I have commented on several of Olivier’s papers on the progress between “The State of Macro” and “Do DSGE Models Have a Future?”, and he references one of my comments (“The need for pluralism in economics”) in this most recent piece (as well as others by  Narayana KocherlakotaSimon Wren-LewisPaul RomerAnton KorinekPaul KrugmanNoah SmithRoger Farmer, and Brad Delong). So he includes me in his summary of the discussion, and this necessitates a reply because—while again I appreciate his engagement—I disagree with his summary from its very first point.

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  • Nexusfast123

    I like Keen and his empirical approach that he has developed and used to clear up some issues. For instance how banks create ‘debt’. None of this, though, explains how an economy becomes ‘competitive’ and is capable to continuously ‘out-competing’ other nations. This is driven by ‘technology’. We actually need to articulate how an economy works through the acquisition, manipulation and management of technology as this is a prerequisite to the building industries, create jobs and balance trade. Finance based economics is a dead end.

  • The future of macroeconomics may come down to the basic realisation that the assumption of scarcety and thereby positive interest rates may not longer hold in the future. This is such a basic issue that the implications are hard to envision. The first sign of this changing environment is negative interest rates. If people have enough now then having enough in the future is more important than having more in the present so that the assumption of time preference comes into question.

    And low interest rates allow for more capital to exist, so if interest rates go even lower, we could be wealthier. It may not be a coincidence that the Industrial Revolution started in England just after it was the first country to institute a central bank in 1694. This made is possible to make more credit available at lower interest rates via the mechanism of fractional reserve banking.

    Another issue is the fraud in the financial system. It all comes down to moral hazard. Investors can keep trusting central banks and governments to step in when the financial system is in danger of collapsing. It is not possible to withdraw this support and let the economy collapse. Regulation is becoming quite cumbersome so that the alternative of setting a maximum interest rate may be more promising.

    Interest is also a reward for risk. If there is a maximum interest rate then there is a cap on the risk lenders are willing to take. This can stabilise the financial system. When most interest rates are negative, the maximum interest rate on loans could be zero. In order to achieve negative interest rates, currency (cash and central bank deposits) should be taxed like Silvio Gesell proposed in the Natural Economic Order, so that it is attractive to lend out money at negative interest rates as they better the tax rate.

    To have an idea how that might work out, you could read the following:


  • Zap

    Macro Shmackro, economics is now just another obvious in your face fraud…….central banks are now imposing negative interest rates, something that has never existed in economic history for the obvious reason that nobody in history ever thought to loan money to a third party and pay to do so, yet economist’s now will debate this as if it is some actual theory and then the policy will be implemented. The emperor has no clothes. Just the debate proves the fraud because nobody should be debating whether 2 + 2 = 5 never mind implementing it as a rule.

    And this allegedly to cure the economy from the “paradox of thrift” and “money hoarding” that supposedly is what ails it, here in a world with 250 trillion in current DEBT.