Sunday, March 25, 2018

Brian Romanchuk — The Curious Household Accounting Of DSGE Models [part 2 of 3]

This article is the second part (of a planned trilogy) of articles on the accounting issues within Dynamic Stochastic General Equilibrium (DSGE) models. I have deliberately chosen one of the simplest DSGE models I could find, a deterministic (non-random) Ramsey model from the text Recursive Macroeconomic Theory by Lars Ljungqvist and Thomas J. Sargent. I have the third edition; the text is referred to as [LS2012] herein. My previous article, "The Curious Profit Accounting of DSGE Models," described the relationships for the business sector. This model has three sectors, and yes, the third article will likely be titled "The Curious Government Accounting of DSGE Models." That is, I see issues with all three sectors; the macroeconomic accounting identities tell us if we have a problem with one sector, this will rebound to the other sectors....
Bond Economics
The Curious Household Accounting Of DSGE Models
Brian Romanchuk


Matt Franko said...

"I have deliberately chosen one of the simplest DSGE models I could find, a deterministic (non-random) Ramsey model "

How can it be stochastic and deterministic at the same time?

Brian Romanchuk said...

Yeah, good point. It’s a “DGE” model...

Matt Franko said...


Maybe DDGE ?

FD I am biased 100% deterministic... this to me is the only way that works otherwise who is in control? Chaos can then result if nobody is in control...

Brian Romanchuk said...

In my academic work, I preferred to avoid stochastic analysis; there instead was uncertainty about the true model. One worked with a "cloud" of models around a baseline model. In economics, one could argue that there is a certain amount of "randomness" in outcomes,but it would be nice to recognise model uncertainty.

AXEC / E.K-H said...

The curious non-existence of profit in economics
Comment on Brian Romanchuk on “The Curious Household Accounting Of DSGE Models”

Paul Krugman once put it in a nutshell: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Paul Krugman, of course, is an idiot. But he is not the only one, just the opposite, he is the mouthpiece of the stupid majority. To this basket of deplorables belong also Lars Ljungqvist, Thomas Sargent, the rest of DSGEers, Brian Romanchuk, Roger Sparks, Nick Rowe, and the rest of tireless nonsense bloggers.

What unites these folks is scientific incompetence, more specifically, the inability to realize that maximization-and-equilibrium has always been and will always be a methodologically inadmissible starting point. To recall, these are the verbalized neo-Walrasian axioms:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub)

These premises contain three plain NONENTITIES (constrained optimization, rational expectations, equilibrium) and therefore are forever unacceptable. Being incompetent scientists, though, most economists swallowed this inane stuff hook, line and sinker from Jevons/Walras/Menger onward to DSGE.

Every theory/model that contains just one NONENTITY is scientifically worthless.

What has to be realized in addition is that false premises require a pigtail of false auxiliary assumptions. So, in order to be applicable, constrained optimization requires the auxiliary assumption of a production function with decreasing returns. Thus, a silly behavioral assumption determines the physical properties of production in the upside-down world of standard economics.

One auxiliary assumption that is clearly at odds with reality is zero-profit.

“The zero profit attributed to perfect competition does not arise from perfect competition at all, but merely from the assumption that aggregate profit is zero.” (Murad)

“… since it is impossible to have an economy where everyone is making profits. Aggregate profit for an entire (closed) economy must be zero, hence if any firm is making profits, some other firm must be making losses.” (Boland)

“Wherever entrepreneurs make profits … they expand production; wherever they incur losses, production is contracted. In equilibrium, therefore, there are neither profits nor losses. Walras thus created the abstraction of the zero-profit entrepreneur under perfect competition.” (Niehans)

“Profit theory has long been regarded as one of the more unsatisfactory branches of economics. . . . One reason for this is that economists have not asked the right questions about profit.” (Murad)

In fact, economists do not understand since 200+ years what profit is.#1 This includes Walrasians, Keynesians, Marxians, Austrians, Pluralists, DSGEers, MMTers and, last but not least, Brian Romanchuk.

Lars Ljungqvist’s and Thomas Sargent’s DSGE is proto-scientific dreck. Nobody with more than two brain cells needs three lengthy posts to arrive at this conclusion.

Egmont Kakarot-Handtke

#1 For details see cross-references Profit