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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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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25 Responses to Olivier Blanchard, Equilibrium, Complexity, And The Future Of Macroeconomics

  1. twowithinthreethatisone says:

    What if the actual solution was an integration of the
    truths of both equilibrium and disequilibrium theories, a true integration of microfoundations and macro-economics, an integration of Lorenz’s three factors, a new economic philosophy whose policies are based on the concept of grace as in monetary gifting whose anatomy is described as an integrated duality within an integrative trinity-unity and formulated thusly:

    [ ( A x B ) –> G/C ] where ( A x B) is an integrated duality and

    everything within [ ] is an integrative and dynamic trinity-unity process in the temporal universe

    It’s a simplification like Lorenz’s three integrated factors, but if also applied to additional factors like the ones you mention or other currently unperceived realities like the cost inflationary nature of modern economies due to the cost accounting convention that all costs go into prices being enforced despite the fact that the rate of flow of total costs increasingly exceeds the rate of flow of total individual incomes.

  2. twowithinthreethatisone says:

    ….it would fit within the formula and result in the integrative trinity-unity.

  3. twowithinthreethatisone says:

    What I refer to as The Cosmic Code can describe basic forces like electro-magnetism

    [ ( + charge x – charge) –> electricity/electro-magnetism ]

    The Hegelian dialectic

    [ (thesis x antithesis) –> synthesis ]

    the human state of Grace

    [ (Space x Time ) –> Self Awareness ]

    the resolution of any problem

    [ ( effort x counter effort ) –> resolution via integration ]
    [ ( idea x counter idea ) –> resolution via integration ]

    (An actual integration is the combination of only truth(s), workabilities, applicabilities and/or relevant existences)

    the signature of good science

    [ (the dualistic scientific process) –> openness to new integratable factors ]

    the signature of scientific breakthroughs

    [ (the dualistic scientific process) –> an aspect of human consciousness like visualization, the ability to experience the moment as new or simply the existential fact of human consciousness itself ]

  4. jamesg11 says:

    Satire only works when it engages appropriately with the text satirised – ie the satire comprehends its target. These ‘comments’ are just hopeless sarcasms …

  5. twowithinthreethatisone says:

    The satire I am aiming at is the folly of the unwillingness to integrate. Without integration both spirituality and science are equally fragmented and reactionary pursuits no matter how serious their efforts. Consciousness exists and so does the scientific method. Without science spirituality is the movie Monty Python and the Holy Grail. Without spirituality science is John Cleese and the Department of Silly Walks. That’s all I’m saying.

  6. stanislaus2 says:

    Steve, I’m a fan of your Debunking Economics. I’m a retired quantitative psychologist (author of Mulaik, S. A. (2009) Linear causal modeling with structural equations. Boca Raton, FL: CRC Press Taylor and Francis Group). I became interested in MMT
    and found your book as a result. Anyway, have you ever run across the book Odum Howard T. (1971) Environment, Power and Society. New York: Wiley-Interscience? Odum was an ecologist at the university of Georgia in the 1970’s and 1980’s. He studied energy flows in environments (including human environments) and developed a systems approach for representing them. For him money just flowed in the opposite direction from energy flows. But what is significant is that he was way ahead of his time in regarding economics as just a special branch of his energy flows modeling. So, in way he has sought to ground ecology and economics in the theory of physical energy flows in systems. I think you would like that very much.

    Another point. I recently attempted to formulate a general equation of monetary flows (I’m sure it’s not new, but it has a feature I don’t see in some MMT treatments: it contains the banking sector as the originator of dollars in circulation, not the Fed. Anyway it’s a differential equation (I am told) adapted from a fundamental equation of hydrology:

    ?C = [X, G, I, L] – [ M, T, S, P]

    where ?C is the change in quantity C of money in circulation (buying, selling goods and materials) as function of the difference between inflows and outflows of money (dollars) into circulation, with
    X – exports,
    G – government spending (including deficit spending)
    I – investing
    L – bank loans

    M – imports purchases
    T – tax revenues
    S – savings (nonspent money)
    P – payback of bank loans

    There exists a quantity of money in circulation C’ where the economy is at full production and employment at stable prices, below which you have deflation and room for growth in money supply and above which you have inflation.

    To me this basic equation is something every President and every Secretary of the Treasury and every Congressman needs to know and understand,. It shows that there are many ways to reach C’ with different compositions of the basic inflows and outflows. It shows the folly of fiscal balances of budgets because C’ is what we seek, not balances of government spending against taxes. It also shows that a fiat money system (contrary to the Austrian’s views) need not be inherently inflationary because anyone who knows this equation will know not to introduce new money into the economy that causes C to exceed C’.

    I also think that C is equivalent to the GDP, which lacks explicitly the representation of bank activity L – P loans minus paybacks. I put it into my equation above after reading your book and learning that the last recession was due to bank debt not federal spending or non-spending.

    In fact, I have also reached the conclusion that quantitative easing could not possibly be inflationary because it represents buying up the debt of the government to banks in purchases of securities. I’m not sure why the Fed (and the Austrians) think that buying securities will increase the banks’ dollars to lend. In fact, and I think some of the folks at the Fed have come around to this view, the Fed plays very little role in money creation for deficit spending, other than to relieve the banks of carrying this debt of the government on their books. Well, my point is that when someone buys a security he pays off the loan to the previous holder of the security–in this case the government for the loan for deficit spending. Those dollars were created out of thin air by the banks, and had to be exchanged into reserve balance dollars at a correspondent bank in order to be able to purchase the securities of the government. (That puts the purchase on the Fed’s books), The correspondent bank gets the bank-created dollars and swaps them for reserve balance dollars that it assembles together on loan from various banks in the banking system. OK. What happens when the Fed buys the security from the bank to the reserve balance dollars the bank gets in return for giving up to the Fed the security? The bank still has the account it created when it created the dollars out of thin air to buy the security. It now has to close that account and extinguish the dollars it created for the loan. It’s a loan! What happens to loans on the books when the loan is paid off by someone? The loan is extinguished along with the dollars used to pay off the loan. The banks don’t have extra dollars with which to make new loans. But they can create them out of thin air as new loans to bank customers who demand them. Fiat money systems don’t need to do fractional reserve banking because they don’t have to use money in bank deposits that are backed by a commodity (gold) to make a legitimate loan.

    The Fed will likely hold the securities it purchases until inflation arises and then will swap the mature securities for new securities with the Treasury. No cash exchanged, just securities. The Fed will then sell these securities to private and foreign investors to drain their dollars out of circulation for the time being. They may seek to have the investors roll over the securities with further swaps with the Treasury until inflation abates. The Treasury will extinguish the mature securities it gets in the swap with the Fed. The only new money that enters circulation is the original purchase money for the securities sold to fund deficit spending. That could be inflationary, depending
    on the circumstances.

    In the meantime there is no national debt problem. The Treasury will swap securities forever with banks that buy them for deficit spending by the government. That means the debt is not really a debt because no one expects the ‘debt’ to be repaid. The banks get a free source of interest money and will be loath to give up the securities as long as it gets the interest at each swap. The Treasury can also borrow money from banks to cover the interest payments. (That’s why the cap on Congressional borrowing can cause the government to default. I think it is also unconstitutional for congress to have a law that puts an a priori cap on borrowing. The Constitution of the United States gives an absolute, unconditional power to borrow and Congress cannot override this by passing a law; it needs a constitutional amendment.)

    See also my paper, Mulaik, S. A. (2001) The curve fitting problem: An objecrtivist view. Philosophy of Science, 68, 218-241. It shows why estimating more and more parameters loses power to test a hypothesis in models with many estimated parameters.

  7. stanislaus2 says:

    Also the guy commenting above me is on the right track. I’m a neo-Kantian and I see the aim of thought is to be able to synthesize as much as possible, which is why systems are better in science than simple theories.

  8. Steve Keen says:

    Hi Stanley, and thanks for your comment. You’re spot on in every regard, and your equation is very similar to how I’ve redefined Friedman’s old money equation to show that the expenditure side is not merely MV but MV + dD/dt (since change in debt is credit and it creates spending power 1:1).

    Making C equivalent to GDP though is slightly wrong since that leaves out the turnover of existing money.

    Can you send me that paper BTW? My email is debunking AT gmail.com.

  9. twowithinthreethatisone says:


    The Hegelian dialectic

    [ (thesis x antithesis) –> synthesis ]

    also describes the dualistic process of the scientific method which requires the integrative rule of incorporating only truth(s), only existent relevancies, and only workabilities resulting in a third state of more unified knowledge-reality.

    The code for progress and greater consciousness of reality is an integrated duality within an integrative process and ethic of trinity-unity.

    Without the willingness to integrate, discussions will almost inevitably degrade into obsessive egoistic contention and thus no progress, no new knowledge and no enlightenment. So it is with our current politics, economic theory etc.

    Now one may say, “everybody knows this”, however, the truth is everybody doesn’t know it CONSCIOUSLY or we’d have a lot more agreement, cooperation in integrating and consequent progress and increase in knowledge in all of its forms. Such is the value of having a formula that consciously enables and encourages the entire process.

  10. twowithinthreethatisone says:

    Every truth is an expression of a natural philosophical aspect of the concept of Grace, and The Cosmic Code can help the individual become more aware of that fact

    Economic and monetary example:

    [ (Keynesian additional money into the system x Direct Gifting to the individual) –> Wisdomics/Gracenomics/Social Credit ]

    In other words integrate the truth that additional money does need to go into the economy to help stabilize it and the more resolving and valid truth of direct to the individual monetary policies of a universal dividend and a retail discount leads to the more effective and complete economic solution of Wisdomics/Gracenomics/Social Credit

  11. twowithinthreethatisone says:

    This also works in the scientific aspect of The Cosmic Code, that is, the rejection/non-inclusion of unworkabilities, inapplicabilities and non-resolving palliatives, for instance:

    [ ( Socialistic re-distributive attempt to solve an inherent systemic scarcity of individual income x direct policies of a dividend and retail discount) –> Wisdomics/Gracenomics/Social Credit ]

    In other words the rejection of unworkable and non-resolving re-distribution which is at best a palliative not a solution and hence is contrary to the laws of science and integration leaves the costless solution of policies of a dividend and retail discount as the more effective monetary and economic solutions and these are aligned/lead to Wisdomics/Gracenomics/Social Credit.

  12. Bhaskara II says:

    RE: Professor Keen’s Tweet

    “Steve Keen ?@ProfSteveKeen 8h8 hours ago

    I’ve just signed to oppose @Number10gov’s plan to force firms to list ‘foreign workers’. Join me:”

    I think a better system is that countries should just award citizenship outright on obtaining work or entry for work. Then every worker is a fellow countrywoman or countryman. This is better than a employer controlled work visa for the new and indigenous residents.

    Why? It makes a situation of more equal footing. In the US the (H1B) work visa means the person is stuck with the employer for years and has minimal mobility compared to permanent residency or citizenship. When immigrants are totally free agents wages might be less depressed. As, employers might have to compete for their services, rather than monopolize their services.

    Also, it leaves people freedom to start businesses, or make other contributions rather than just to be an employee at one company.

  13. Bhaskara II says:

    Important Correction about H1B visa

    My statements about the H1B visa are probably wrong and or dated. I checked what I said above and below are some links that moving jobs is possible. Links are below but better advice or documentation is probably available.

    There is mention of a portability act of year 2000 allowing transfer from one employer to an other, by getting approved paper work. There have also been other legislative revisions.

    Please do not consider any comments as legal advice. I am some what ignorant.

    Links below are secondary sources and should not be relied upon as being absolutely correct.


  14. ken says:

    Two things not really related to the post:
    1. I just can’t believe how much at the moment economists are ignoring how the economy is behaving much like it did during the great moderation. Expanding debt brings stability at a cost of increased risk.
    2. This post from The Onion http://www.theonion.com/article/new-study-finds-most-earths-landmass-will-be-phoen-54107 sums up the problems of assumptions of exponential growth.

  15. twowithinthreethatisone says:

    Would not the policies of a new economic philosophy of grace as in gifting, namely a sufficient free gift of a dividend to everyone 18 and older and a general discount to prices at retail sale that was greater than any computed rate of inflation and that was rebated back to the merchants who gave it, resolve both the requirement of continual borrowing and the contradictory paradigm of debt and loan only that Finance now uses to dominate every other business model and manipulate nations and regions?

  16. twowithinthreethatisone says:

    Are they not more thorough and economically insightful solutions to the systemic scarcity of individual income as well as the answer to the creeping erosion of profits and purchasing power that inflation has had on modern economies, more so than the incomplete and so non-resolving policies of a basic income guarantee, a minimum wage increase or even QE directly to the individual ALONE ?

  17. twowithinthreethatisone says:

    Virtually every problem in existence remains unresolved because of

    1) lack of awareness of workable third alternatives to its two orthodox “solutions” and/or

    2) a rigid refusal to even consider them.

  18. twowithinthreethatisone says:

    Financial reforms are well and good, but if the idea of monetary grace as in gifting ever took root it would be the end of the rule of finance.

  19. Bhaskara II says:


    Has any one seen the East German hundert Marks note?


    Maybe, they should have put the British Library on the back, since Marx studied there!

    “The Reading Room was used by a large number of famous figures, including notably Sun Yat-sen, Karl Marx, Oscar Wilde, Friedrich Hayek, Bram Stoker, Mahatma Gandhi, Rudyard Kipling, George Orwell, George Bernard Shaw, Mark Twain, Vladimir Lenin (using the name Jacob Richter), Virginia Woolf, Arthur Rimbaud, Mohammad Ali Jinnah, H. G. Wells[4] and Sir Arthur Conan Doyle.”


  20. Bhaskara II says:


    I came across the hundret marx note on this a historian’s data.


  21. Steve Keen says:

    You sound like Steve Hummel, and you behave the same way: multiple posts on a topic before anyone replies to you.

    I let Hummel 1.0 degrade the discussion on this list for far too long. I don’t check this blog often enough these days, but I’ll happily block you if next time I check in I see more than 1 comment from you which is not in reply to someone else.

  22. Steve Keen says:

    Actually, I don’t care whether you are Hummel or you aren’t: you’re an obsessive that overwhelms discussion here and you are about to be blocked.

  23. Bhaskara II says:

    Professor Keen,

    Yes, the words and phrases are often the same as Hummel 1.0.

    Surprisingly, I was able to link the two together!

    In one of the previous twowithininthreeblabla comments, gave quoted text attributed to Hummel.

    He, she, or it seems to be commenting as a sock puppet. I’m sure there is a better older classic term for it.

    I found a site that appeared to archive comments twointhreeblabla comments archived also.*

    *I left a link to in in a previous site in a comment a while ago.

  24. Bhaskara II says:

    Professor Keen,

    Please block.

    Here is twowithingthree…. quoting Hummel on August 16, 2016


  25. Newtownian says:

    Thanks for this article Steve. You supplied me with another intriguing piece into the puzzle for me. Not being a classical economist (I only dabble in risk and ecological economics) I hadnt appreciated any details of DSGE models particularly the use of Bayesian statistics.

    Bayesian stats in the form of Bayes nets are rapidly becoming popular among ecologists and environmental people, including me, in recent years because they offer a very good way to concurrently conceptualize and quantify complex systems. My specific interest is in Risk Management and they appear to provide a means for capturing all the different types.

    As good Bayesians will do, many papers also warn about the seductive nature of models. Models can look very good but do they represent reality? There are lots of tricks now available and even the good data we have often turns out to have low explanatory power. A good one is MARCOT, B. G. 2012. Metrics for evaluating performance and uncertainty of Bayesian network models. Ecological Modelling, 230 50 – 62. (which makes me wonder how seriously economists evaluate their models….and even then intelligent use is needed…..if in 2007 they resampled data between 1990 and 2005 of course they would have found their models reliable I’m sure).

    One acute limitation I’ve been struggling over is how hard it is to do timeseries modelling because very quickly the number of variables in expanded series exceeds the quantity of data and the problem of Parsimony rears its head. Have you ever heard the story of Gauss and modelling an elephant. “How many parameters does it take to fit and elephant?”. The answer is about 4 and 1 more and it will wiggle its head.

    The partial BN solution is “Dynamic Bayesian Nets”. But these look to be a way of undertaking what I understand you would call Kalman filtering and are central to DSGE models which is really scary. A quick look at the BN version indicates the maths is elegant but the precision is utterly dependent on how accurate and precise your prior data is and as you say little deviations get rapidly magnified. Poor recognition of the uncertainty in Bayesian input data is one of the major problems that frequentist statisticians have with Bayesians i.e. how good is the input data.

    Reflecting this it looks like what the DSGE models may be doing is predefining the systems they are modelling as equilibrium with the situation at any time constrained by their initial presumptions and are not free to go off in new directions when the actual system being modelled changes.

    As I was once told……all models are wrong but some are useful (implying there is also a lot of junk out there especially when models are mistaken for reality.)

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