Edited and with an introduction by Philip Pilkington, a journalist and writer living in Dublin, Ireland The previous parts of the series can be found here, here, and here while a bibliography can be found here
The debates surrounding the Dynamic Stochastic General Equilibrium [DSGE] models are perhaps some of the most interesting and important to have surfaced in the wake of the crisis. Of course, they, too many debates within the economics profession after the crisis, are deployed in order to insulate the research program from any fundamental criticism. But it is in the nature of the material that the critical observer can see something more interesting going on. And that is the contradiction at the heart of economics: the dichotomy, the abyss that opens up by necessity between macroeconomics and microeconomics.
Mirowski puts it as such:
A methodologist would point out, as I have done, that the canonical DSGE assumes its canonical outlandish format in order to ‘save’ it’s microfoundations, viz., the non-negotiable prescription that macro and neoclassical microeconomics are one big unified theory. All these current fragmentary amendments to render the DSGE model more ‘realistic’, or perhaps more politically acceptable to the ‘New Keynesians’, are self-contradictory, since they attempt to mitigate or ‘undo’ the microfoundations which had been imposed by decree from the outset. It ends up being one more instance of economists asserting both A and not-A simultaneously.
To truly understand the significance of this debate is to see that, were neoclassical economics ever to be amended in a manner that allowed it to be both logically consistent and empirically realistic, the whole thing would simply fall apart.
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