The Economist On Modern Economic Theory Melting Down

The most recent issue of The Economist has three articles about The Crisis of Modern Economics, with a book on the cover whose title is "Modern Economic Theory" appearing to melt down, with the most interesting one being the one on macroeconomics. All three articles are linked to in a post by Menzie Chinn on Econbrowser, where he also links to Austrian, Mario Rizzo, criticizing mathematical modeling. While recognizing some of the arguments in The Economist to be valid, Chinn definitely defends mathematical modeling, and seems to be not too critical of the dominant DSGE models. Mark Thoma at Economist's View also linked to all three articles, along with a link to Mark Gertler's mini-course that attempts to try to show how the DSGE models might be fixed to do better (an effort that I think fails).

The main arguments in the article on macroeconomics (the main other one is on financial economics) involve failures to include behavioral economics, failures to do heterogeneous agent modeling, and a general failure to model bubbles well, with Minsky being mentioned, although also dismissed as not mathematical (despite work by Steve Keen and me and others). While these arguments are correct, there is all too much defense of the DSGE models for "benchmark" purposes, although my observation is that the people working on these models, which totally dominate central bank modeling, take them all too seriously and think that models assuming rational expectations by homogeneous agents in general equilibrium can be solved with minor tweaking (and think their inclusion of sticky prices and wages is some great breakthrough to ingenuity, a point Thoma pokes at, and that many Post Keynesians have argued is neither Keynesian nor even useful, with flexprice models often less stable than fixprice ones). There is also the general ignoring of deeper problems in microeconomics in these articles, such as those pointed out in Steve Keen's _Debunking Economics_, even if I disagree with some of what he has to say in that book.