Tyler Cowen writes,

Enter DSGE models. There are plenty of good arguments against them. Still, they provide a useful discipline and they pinpoint rather ruthlessly what it is they we still do not understand. We can and should devalue them in a variety of ways, and for a variety of reasons, but still we should not dismiss them.

Models are simplifications. Sometimes they seem useful. For example, the AS-AD model often seems useful for explaining economic fluctuations. The production function often seems useful for explaining the distribution of income.

The DSGE model was never adopted for its usefulness in that sense. It was adopted in order to satisfy a methodological principle. That may be why I am tempted to dismiss it.

Any model can be described as valuable if you say that it shows us what we do not understand. To me, that is a low bar.

I think that a model is a trap if factors outside of the model constantly have to be invoked, to the point where they overwhelm the factors that are in the model.

Take the neoclassical production function. Recently, it has occurred to me that this may be a trap. Economists seem to need to add all sorts of types of capital to the model: human capital, social capital, network capital, brand-name capital, etc. It is hard enough dealing with heterogeneity in physical capital–how many forklifts equal one blast furnace? But when physical capital does such a poor job of explaining differences in performance across firms, across economies, and over time, at what point do you say that the neoclassical production function is a trap?