Home > New vs. Old Paradigm Economics, The Economics Profession > DSGE macroeconomics — a costly waste of time

DSGE macroeconomics — a costly waste of time

from Lars Syll

Commenting on the state of standard modern macroeconomics, Willem Buiter argues that neither New Classical nor New Keynesian microfounded DSGE macro models has helped us foresee, understand or craft solutions to the problems of today’s economies:

The Monetary Policy Committee of the Bank of England I was privileged to be a ‘founder’ external member of during the years 1997-2000 contained, like its successor vintages of external and executive members, quite a strong representation of academic economists and other professional economists with serious technical training and backgrounds. This turned out to be a severe handicap when the central bank had to switch gears and change from being an inflation-targeting central bank under conditions of orderly financial markets to a financial stability-oriented central bank under conditions of widespread market illiquidity and funding illiquidity. Indeed, the typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding. It was a privately and socially costly waste of time and other resources. 

buiter

Most mainstream macroeconomic theoretical innovations since the 1970s … have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and aesthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works …

Both the New Classical and New Keynesian complete markets macroeconomic theories not only did not allow questions about insolvency and illiquidity to be answered. They did not allow such questions to be asked …

Charles Goodhart, who was fortunate enough not to encounter complete markets macroeconomics and monetary economics during his impressionable, formative years, but only after he had acquired some intellectual immunity, once said of the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling: “It excludes everything I am interested in”. He was right. It excludes everything relevant to the pursuit of financial stability.

The Bank of England in 2007 faced the onset of the credit crunch with too much Robert Lucas, Michael Woodford and Robert Merton in its intellectual cupboard. A drastic but chaotic re-education took place and is continuing.

I believe that the Bank has by now shed the conventional wisdom of the typical macroeconomics training of the past few decades. In its place is an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions and half-developed insights. It is not much, but knowing that you know nothing is the beginning of wisdom.

And today Simon Wren-Lewis tells us that “Nearly all the young academic macroeconomists I know want to work with DSGE models, because that is what gets published.”

After reading Buiter’s article, that certainly should be a very worrying confirmation of economics becoming more and more a total waste of time. Why do these young bright guys waste their time and efforts? Besides aspirations of being published, I think maybe Frank Hahn gave the truest answer back in 2005, when interviewed on the occasion of his 80th birthday, he confessed that some economic assumptions didn’t really say anything about “what happens in the world,” but still had to be considered very good “because it allows us to get on this job.”

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  1. BFWR
    December 21, 2013 at 6:47 pm | #1

    Economics requires transcendent solutions, not just reform.

  2. BFWR
    December 21, 2013 at 8:13 pm | #2

    To wit, a new economic/zen koan: What is the sound of DSGE and Instability theorists talking past each other?

    Economic/experiential answer: Monetary Grace, the free gift/Social Credit/Satori

  3. Paul Davidson
    December 21, 2013 at 9:58 pm | #3

    I have been arguing, at least since 1983, that true Keynes analysis — WHAT I CALL POST KEYNESIANISM – focuses on the problem of liquidity and what can cause a well organized market to be illiquid and when can the some well organized market become illiquid.

    Before I emphasized this aspect of Keynes I found it easy to be published in major economic journals. For example I had two major articles in the AER published within tree issues of the AER.– I also had a number of articles published in the EJ, the RE&S, and even, believe it or not, in the JPE — when I had a debate with Milton Friedman..

    I also was appointed to the Brookings Economics Panel and published an important article published in the Brookings Paoers — and the paper was picked up by Walter Cronkite and I even got to be interviewed for about 45 seconds on the CBS news.

    but when I started emphasizing uncertainty and rejecting the classical ergodic axiom, I was less welcome in orthodox circles.

    paul davidson

  4. Newtownian
    December 24, 2013 at 11:41 am | #4

    Lars, your critique of DGSE is very persuasive so I was wondering if you could check out a ‘hot of the press’ (maybe) attempted intrusion into the real world and give us an evaluation. The Royal Society is just publishing a detailed analysis of peak oil which is very worrying in of itself.

    Worrying for me is that the only mainstream economics analysis seems to be a DGSE perspective. Maybe you could analyse and comment.

    The collection of reviews/analyses is in the Philosophical Transactions Part A which is mainly focused on hard sciences – see http://rsta.royalsocietypublishing.org/content/372/2006.toc

    The article in question is Michael Kumhof and Dirk Muir Research article: Oil and the world economy: some possible futures Phil. Trans. R. Soc. A. 2014 372 20120327; doi:10.1098/rsta.2012.0327 (published 2 December 2013)

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