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

Summary:
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 Kocherlakota, Simon Wren-Lewis, Paul Romer, Anton Korinek, Paul Krugman, Noah Smith, Roger Farmer, and Brad Delong).

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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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Steve Keen
Steve Keen (born 28 March 1953) is an Australian-born, British-based economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include John Maynard Keynes, Karl Marx, Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, Thorstein Veblen, and François Quesnay.

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