by Lars P. Syll
Servaas Storm’s has a recent article that is a marvellous final take down of the ridiculous aspirations of New-Classical-New-Keynesian macroeconomic modelling. DSGE models are worse than useless – and still, mainstream economists seem to be überimpressed by the ‘rigour’ brought to macroeconomics by New-Classical-New-Keynesian DSGE models, its rational expectations, and microfoundations!
It is difficult to see why.
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From Servaas’ “The Standard Economic Paradigm is Based on Bad Modeling“:
Mainstream macroeconomics can only progress if it gets rid of the DSGE albatross around its neck. It is better to do it now than to wait for another 20 years because the question is not whether but when DSGE modeling will be discarded. DSGE modeling is a story of a death foretold …
Getting rid of DSGE models is critical because the hegemonic DSGE program is crowding out alternative macro methodologies that do work … DSGE practitioners, who with a mixture of bluff and bluster act as gatekeeper, judge, jury, and executioner in all macroeconomic matters, are a block on the road to progress. The roadblock has to be removed. The failed and failing DSGE models have to go if mainstream macroeconomics wants to become a force for the common good again.
‘Rigorous’ and ‘precise’ DSGE models cannot be considered anything else than unsubstantiated conjectures as long as they aren’t supported by evidence from outside the theory or model. To my knowledge, no decisive empirical evidence has been presented. DSGE models are nothing but a joke.
Proving things ‘rigorously’ in DSGE models is at most a starting-point for doing an interesting and relevant economic analysis. Forgetting to supply export warrants to the real world makes the analysis an empty exercise in formalism without real scientific value.
Mainstream economists think there is a gain from the DSGE style of modelling in its capacity to offer the one and only structure around which to organise discussions. To me, that sounds more like a religious theoretical-methodological dogma, where one paradigm rules in divine hegemony. That’s not progress. That’s the death of economics as a science.
As David Hand tells us – building models based on questionable ontological or epistemological assumptions may be fine in mathematics and religion, but it certainly is not science:
If you want absolute truth then you must look to pure mathematics or religion, but certainly not to science … Science is all about possibilities. We propose theories, conjectures, hypotheses and explanations. We collect evidence and data, and we test the theories against this new evidence … It’s the very essence of science that its conclusions can change, that is, that its truths are not absolute. The intrinsic good sense of this is contained within the remark reportedly made by the eminent economist John Maynard Keynes, responding to the criticism that he had changed his position on monetary policy during the 1930s Depression:
When the facts change, I change my mind. What do you do, sir?”
DSGE models belong – as Servaas suggests – in the Museum of Implausible Economic Models. Making adjustments to Ptolemaic epicycles or trying to amend and elaborate on flat earth theories and models is both stupid and tragic. It’s a waste of time and effort. As we all know there are better alternatives.
This article appeared on Lars P. Syll blog 24 June 2021.
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