...The authorities did not recognise the stroke... thought it was simply a particularly nasty cold... put extra whisky in the hot toddies.... Just as the patient was beginning to show signs of improvement, it experienced a second stroke. This one was not as catastrophic as the first, but it seriously set back the patient's recovery. Once again, the stroke was misdiagnosed, this time as a hospital-acquired infection.... Now, seven years after the first stroke and three years after the second, the patient is still partly paralysed down the left side and has a speech impediment....
Herein lies my beef with Blanchard. Hot toddies and antibiotics are not the right treatment for strokes. Nor is deep cleaning of hospitals, important though this is. But the economics profession's toolkit seems to be limited to hot toddies, antibiotics and cleaning ladies.... And it justifies its limited diagnostic skills and inadequate toolkit by arguing that if only we keep warm and dry and eat well, we won't catch colds or suffer strokes anyway.... I confess I find it difficult to see how a system that is normally far from equilibrium can be adequately represented by a general equilibrium model, but then I am not a mathematician. I am encouraged therefore to see that Borio seems to share my concerns (my emphasis):
Modelling the financial cycle raises major analytical challenges for prevailing paradigms. It calls for booms that do not just precede but generate subsequent busts, for the explicit treatment of disequilibrium debt and capital stock overhangs during the busts, and for a clear distinction between non-inflationary and sustainable output, ie, a richer notion of potential output--all features outside the mainstream.... So, sorry Brad, but I do not think I am wrong to say that the economics profession's love affair with linear models must be ended. Multiple equilibria, disequilibrium and non-linearities are the new flame. Having said that, Brad's last comment is spot on:
The key questions of macroeconomic political economy then are not the questions of the construction of nonlinear multiple-equilibrium models that Frances Coppola wants us to study. They are, instead, the questions of why ideological and rent-seeking capture were so complete that North Atlantic governments have not deployed their fiscal and credit policy tools properly since 2008.
Indeed, if policymakers want to deny stroke patients essential treatment and force them back to work before they are properly recovered, there is not a great deal economists can do to stop them. Such is democracy....
Despite my criticisms, Olivier Blanchard deserves credit for acknowledging the hubris of the 1980-2008 economic paradigm, and for attempting to change it within his own organisation. Some of the IMF's economic research in recent years under his leadership has been outstanding. He is indeed a vir illustris.
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