Your summary of what Lucas said or meant about Keynesianism and what Keynesians commented on rational expectations reminds one of the definition of scholarship: “Yet a good deal of what is published is, at best, trivial stuff, putting me in mind of that observation: ‘Rubbish is rubbish, but the history of rubbish is scholarship.’” (Haack, 1996, p. 301)
The history of rubbish clearly shows that the representative economist does not understand the basics of scientific methodology. “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
So, one always needs both: formal and material consistency. Economics as ‘inexact and separate science’ (Hausman, 1992) is content with one.
“The unique property that DSGE models have is internal consistency. Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.” (See intro)
Note well: an inconsistent model underlies policy guidance. And this is exactly why a genuine scientist like Feynman characterized the whole proto-scientific exercise as farce.
The actual problem of economics is not that this or that model is insufficient. The problem is that both the New Classical and the New Keynesian approaches are a failure. Reform is not an option.
The scientific revolution still stands where Keynes left it. “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight — as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)
This was the agenda in 1936 and this is the agenda today. New Classicals and New Keynesians have only prolonged the detour.
Haack, S. (1996). Preposterism and Its Consequences. In E. F. Paul, F. D. Miller, and J. Paul (Eds.), Scientific Innovation, Philosophy, and Public Policy, 296–315. Cambridge, New York: University of Cambridge.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
DSGE is beyond repair. The problem goes much deeper. As a matter of fact, the representative economist cannot tell the difference between profit and income, which, clearly, is the precondition for understanding how the market economy works.
There is neither hope for New Classicals, New Keynesians, Post Keynesianism, or MMT in general, nor Godley/Lavoie and Wren-Lewis in particular.
For details of the big picture see cross-references Profit.