Robert Solow on Dark Age Macro
I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether.
…The DSGE school populates its simplified economy – remember that all economics is about simplified economies just as biology is about simplified cells – with exactly one single combination worker-owner-consumer-everything-else who plans ahead carefully and lives forever. One important consequence of this “representative agent” assumption is that there are no conflicts of interest, no incompatible expectations, no deceptions.
And no Recalculation problem, in that the single representative agent never has to re-arrange patterns of specialization and trade.
Pointer from Simon Johnson. On this issue, I am still a Solow student. I share his dismay at the path that macroeconomic theory took over the past thirty years.
Paul Krugman shares this dismay also. He is ready to go back to the old-time Keynesian religion. I am trying to be completely agnostic, taking into account the history of macroeconomic controversies but ready to proceed from a blank sheet of paper. Solow, in his written remarks, does not reveal where he stands. My guess is that it is somewhere in between Krugman and me, with policy leanings closer to Krugman’s.