Anti-Blanchard

Olivier Blanchard’s intellectual path, exploring different avenues – sometimes non-linear, sometimes even contradictory – can be considered as the personification of the controversial​ evolution of mainstream macroeconomic research during the last three decades …

Assessing this complex intellectual path, nevertheless, also helps to understand why Blanchard’s analyses are ultimately limited by the mainstream framework, and by the role he decided to play in its defense. The primary limitation of the mainstream analysis, in our view, concerns the neoclassical reliance on price movements as leading the economy towards an optimal use of the available amount of labor and other productive resources. This reliance is also apparent in the old IS–LM diagram, advocated by Krugman and other members of the mainstream and that Blanchard readmits at least in the educational field …

This is a typical feature of almost all of the latest evolutions in Blanchard’s thought and more generally in current mainstream analysis: they fall within the branch of neoclassical doctrine that several years ago was sharply defined, and cricitized, as imperfectionist (Eatwell and Milgate 1982). According to this line of research, while in the best of all possible​ worlds the spontaneous movement of market prices would bring the economy towards a neoclassical competitive general equilibrium, actual markets are inhibited from fulfilling this task by the presence of ‘frictions’, ‘rigidities’, ‘asymmetric information’ or ‘incorrect expectations’ concerning future movements of prices. In fact, the critique of the neoclassical theory of capital has shown that even if all ‘market imperfections’ were removed, there would be no guarantee of achieving a full employment equilibrium simply through spontaneous price movements. In the case of the IS–LM model, for example, the problem concerns not only adjustments in price expectations but also the impossibility of proving the existence of an inverse relationship between the interest rate and investment. The non-existence of this relation, among other things, also causes a sense of perplexity concerning the confidence that Blanchard and other mainstream scholars continue to place in the ability of monetary policy to ensure convergence towards full employment.