DSGE macroeconomics — overconfident story-telling

25 September, 2016 at 12:53 | Posted in Economics | 6 Comments

We economists trudge relentlessly toward Asymptopia, where data are unlimited and estimates are consistent, where the laws of large numbers apply perfectly and where the full intricacies of the economy are completely revealed … Worst of all, when we feel pumped up with our progress, a tectonic shift can occur, like the Panic of 2008, making it seem as though our long journey has left us disappointingly close to the State of Complete Ignorance whence we began …

overconfidenceWe may listen, but we don’t hear, when the Priests warn that the new direction is only for those with Faith, those with complete belief in the Assumptions of the Path. It often takes years down the Path, but sooner or later, someone articulates the concerns that gnaw away in each of us and asks if the Assumptions are valid …

It would be much healthier for all of us if we could accept our fate, recognize that perfect knowledge will be forever beyond our reach and find happiness with what we have …

Can we economists agree that it is extremely hard work to squeeze truths from our data sets and what we genuinely understand will remain uncomfortably limited? We need words in our methodological vocabulary to express the limits … Those who think otherwise should be required to wear a scarlet-letter O around their necks, for “overconfidence.”

Econometric theory promises more than it can deliver, because it requires a complete commitment to assumptions that are actually only half-heartedly maintained …

Our understanding of causal effects in macroeconomics is virtually nil, and will remain so. Don’t we know that? … The economists who coined the DSGE acronym combined in three terms the things economists least understand: “dynamic,” standing for forward-looking decision making; “stochastic,” standing for decisions under uncertainty and ambiguity; and “general equilibrium,” standing for the social process that coordinates and in uences the actions of all the players. I have tried to make this point in the title of my recent book Macroeconomic Patterns and Stories. That’s what we do. We seek patterns and tell stories.

Ed Leamer



  1. In British English an assumption is an instance of assuming, i.e. ‘taking too much for granted; arrogant, presumptuous’ [COD]. When asked what my assumptions are, I generally say that I hope there are none. I would, though, own up to conjectures and hypotheses. One of the confusing things about economics is its own private language, where everyone recognizes that there are critical assumptions,. but somehow thinks that it is okay. Of course, economists aren’t the only ones that confuse me thus.

  2. Excuse me Dave, but the assumptions used in mathematics and in macroeconomics are of the same nature, whilst the assumptions about which you write are of a kind used for purposes of rhetoric and innuendo. Axioms, assumptions, definitions and models are all vital parts of the way economics is expressed and taught and to omit them and even to think that one can manage without them is taboo. An hypothesis is the same thing as an assumption here but a conjecture embraces a theory too. The private language of economics can often be traced to the logical thinking process, although I do find that certain economists don’t follow sufficient logic and omit stating the assumptions, whatever language and far away expressions with strange sounding names they care to dredge up.

    • David, I quite agree that the assumptions of macro and math are often presented rhetorically as if they ‘are of the same nature’. But are they actually? I’m not sure what aspects you intend to capture by the term ‘nature’, but it seems to that there are differences and they seem significant to me.

      For example, statistics has various axioms concerning stochastic systems, while DSGE has an assumption that economies are stochastic. One is apart of a mathematical theory, the other an unsubstantiated (and – to some – counter-intuitive) claim. Again, in mathematical model theory one is obliged to demonstrate that one’s axioms are consistent. In DSGE, however, it seems to me that one has a set of assumptions that contradict Turing’s work on morphogenesis. So macroeconomic assumptions don’t seem to come with the same concern for logic as mathematical ones. To me, a vital difference in their nature.

  3. When Leamer uses the word “Asymptopia”, I presume he is referring to a limit that is unobtainable. So, I wonder if he actually means the word “Asymptotia”, more likely derived from the word “asymptote”? I would presume the word “Asymptopia” is more likely derived from the word “asymptope”. If this is the case, Leamer may have been better advised to use the word “Asymptotia”. A quick review of the definition of the words “asymptope” and “asymptote” might suggest he has chosen a word which has an unintended meaning.

    • Asymptote + Utopia = Asymptopia

  4. Spot on JKH – but mines a little more interesting. 🙂

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