DSGE models — worse than useless

18 Mar, 2019 at 17:41 | Posted in Economics | 2 Comments

 dirkAmong other conceptual absurdities, such as the assumption that economic actors consist of identical omniscient ‘rational agents’ all of whom have perfect information about prices and quantities everywhere in the global economy, DSGE models generally incorporate the erroneous ‘veil of barter’ notion and ignore the functioning of real monetary systems …

DSGE models represent the distilled essence of the past three decades of dominant macroeconomic theory. Yet they are, to put it bluntly, nonsense, There is only one representative agent — no meaningful discussion of debt can take place in such a theoretical frame. These models are worse than useless — they are misleading.

Dirk Ehnts is, of course, absolutely right. 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 and its rational expectations and microfoundations!

It is difficult to see why.

‘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.


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.


  1. Exactly. It is not a science and many economist actually don¨t want it to be a science. Taleb calls economics scientism.

    I think economics´ end is just fine. Sounds like a faster advance. No one would consider trying to convert economists, educate them, convince them, etc. We could just drop them out of the dynamic of advance. Just push it by the wayside. It has been exposed.

    • I really agree with your comment. It is not possible to change the economics profession. It needs to be opened up to others and probably closed down all together. The problem is particularly pronounced at graduate schools where most people enter these schools with an insufficiently broad education and with no intention of really trying to understand capitalism or what that would entail.

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