September 4, 2015

DSGE is just another perpetual motion machine

Comment on Wim Nusselder on ‘The day macroeconomics changed’


Your fundamental error consists in the commonsensical intuition that economics is first and foremost about human behavior. The representative economist simply cannot get his head around the fact that economics is about the behavior of the economic system.

No way leads from the understanding of human behavior to the understanding of how the actual economy works. Standard economics is a manifest failure and the ultimate methodological reason is that it is built upon false premises.

All theories/models that take one or more of the following concepts into the premises are scientifically worthless: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/prices, and ergodicity. All these items are economic nonentities.

From an economist who accepts one of these nonentities nothing of scientific value is to be expected. DSGE is caught in the proto-scientific cul-de-sac. To discuss its technical details is not any better than to discuss the mechanics of just another perpetual motion machine. Real scientists refuse to do this because they know for sure that this thing cannot work in principle.

Egmont Kakarot-Handtke

Preceding post 'Much change, no progress'