Economic theory is always and inevitably too simple; that can not be helped. But it is all the more important to keep pointing out foolishness wherever it appears. Especially when it comes to matters as important as macroeconomics, a mainstream economist like me insists that every proposition must pass the smell test: does this really make sense? 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.
（拙訳）
経済理論は、常に必然的に、あまりにも単純化し過ぎたものとなります。それは避けられません。しかしより重要なことは、馬鹿げた結果が出て来た場合はそれを必ず指摘することです。特にマクロ経済学のような重要なテーマにおいては、私のような主流派経済学者は、すべての命題が嗅覚テストをパスすることにこだわります。それが本当に道理にかなっているかどうかチェックするわけです。現在人気のDGSEモデルが、その嗅覚テストにパスするとは私には思えません。それらのモデルでは、経済全体を単一の首尾一貫した人間もしくは王朝であるかのように扱うことを、当然視しています。その人間もしくは王朝は、合理的に設計された長期の計画を遂行し、その遂行が時折りの予期しないショックで擾乱されても、それに合理的かつ一貫したやり方で適応するのです。こうした描写が嗅覚テストにパスするとは私には思えません。このモデルの主唱者は、ミクロ経済学的な行動について我々が知っていることに基礎付けられていることを以って、このモデルは立派なモデルである、と主張します、しかし私に言わせれば、その主張は大体においてまやかしです。そう主張する人たちが自分の言っていることを信じているのは確かです。しかし彼らは嗅ぐことをやめてしまったか、あるいは嗅覚を完全に失ってしまったのです。
The point I am making is that the DSGE model has nothing useful to say about anti-recession policy because it has built into its essentially implausible assumptions the “conclusion” that there is nothing for macroeconomic policy to do. I think we have just seen how untrue this is for an economy attached to a highly-leveraged, weakly-regulated financial system. But I think it was just as visibly false in earlier recessions (and in episodes of inflationary overheating) that followed quite different patterns. There are other traditions with better ways to do macroeconomics.
One can find other, more narrowly statistical, reasons for believing that the DSGE approach is not a good way to understand macroeconomic behavior, but this is not the time to go into them. An interesting question remains as to why the macroeconomics profession led itself down this particular garden path. Perhaps we can come to that later.
（拙訳）
私の言わんとしていることの要点は、DGSEモデルは不況対策について何ら有益なことが言えない、ということです。というのは、DSGEモデルでは、マクロ経済政策のすべきことは何も無いという「結論」が、本質的に現実離れした前提に予め組み込まれているからです。高いレバレッジが掛けられた規制の緩い金融システムを持つ経済について、そのことがいかに当てはまらないかについては、つい最近皆さんも目にしたことと思います。しかし、今回とはまったく異なる経路を辿った以前の不況（ならびにインフレの過熱）についても、そのことはやはり明確に間違っていた、と私は思います。マクロ経済学には、他のもっとまともな昔ながらの手法があるのです。
また、統計学の専門的な見地から見ても、マクロ経済学的な挙動を理解する上でDSGEの手法はよろしくない、と信ずべき理由があります。しかし今回はそこに深入りするのはやめておきましょう。残る興味深い問題は、マクロ経済学者たちがなぜこの特定の隘路に進んでいったか、という点です。その点についてはいずれまた論じる機会がありましょう。
This is hard to explain, but I will try. Most economists are willing to believe that mostindividual “agents” – consumers investors, borrowers, lenders, workers, employers – make their decisions so as to do the best that they can for themselves, given their possibilities and their information. Clearly they do not always behave in this rational way, and systematic deviations are well worth studying. But this is not a bad first approximation in many cases. 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. This all-purpose decision-maker essentially runs the economy according to its own preferences. Not directly, of course: the economy has to operate through generally well-behaved markets and prices. Under pressure from skeptics and from the need to deal with actual data, DSGE modellers have worked hard to allow for various market frictions and imperfections like rigid prices and wages, asymmetries of information, time lags, and so on. This is all to the good. But the basic story always treats the whole economy as if it were like a person, trying consciously and rationally to do the best it can on behalf of the representative agent, given its circumstances. This can not be an adequate description of a national economy, which is pretty conspicuously not pursuing a consistent goal. A thoughtful person, faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on. An obvious example is that the DSGE story has no real room for unemployment of the kind we see most of the time, and especially now: unemployment that is pure waste. There are competent workers, willing to work at the prevailing wage or even a bit less, but the potential job is stymied by a market failure. The economy is unable to organize a win-win situation that is apparently there for the taking. This sort of outcome is incompatible with the notion that the economy is in rational pursuit of an intelligible goal. The only way that DSGE and related models can cope with unemployment is to make it somehow voluntary, a choice of current leisure or a desire to retain some kind of flexibility for the future or something like that. But this is exactly the sort of explanation that does not pass the smell test. Working out a story like this is not just an intellectual game, though no doubt it is a bit of that too. To the extent that the observed economy is actually doing the best it can, given the circumstances, it is already adapting optimally to whatever expected or unexpected disturbances come along. It can not do better. It follows that conscious public policy can only make things worse. If the government has better information than the representative agent has, then all it has to do is to make that information public. If prices are imperfectly flexible, then the government can make them more flexible by attacking monopolies and weakening unions. Actually this proposition is dubious on its own. （拙訳） （DSGEが嗅覚テストに通らない件について）説明するのは難しいですが、やってみます。大抵の経済学者は、個々の「主体」――消費者、投資家、借り手、貸し手、労働者、雇用者――の殆どは、与えられた可能性と情報のもとで、自らのために能う限りの最善を尽くす、ということを信じるのに吝かではありません。明らかに、それらの主体は常にそうした合理的な振る舞いをするとは限りませんし、そうした振る舞いからの体系的な逸脱は大いに研究の価値があります。とは言え、多くの場合、それは一次近似としては悪くはありません。DSGEでは、その単純化された経済――先ほどお話したように、すべての経済学は単純化された経済を対象とします、ちょうど生物学が単純化された細胞を対象とするように――に、ただ一人の労働者兼所有者兼消費者兼その他諸々を住まわせます。その主体は、注意深く将来の計画を立て、永遠に生きます。この「代表的個人」という仮定によってもたらされる一つの重要な帰結は、利害の衝突の不在、相容れない期待の不在、詐欺の不在です。 この全用途型の意思決定者は、基本的に自らの嗜好に基づいて経済を運営します。もちろん、直接的に運営しているわけではありません。経済は、概ねは御しやすい市場と価格を通じて運営しなくてはなりません。懐疑論者からの圧力と実際のデータを扱う必要に迫られて、DSGEのモデルを構築する人は、物価や賃金の硬直性、情報の非対称性、タイムラグなどの様々な市場の摩擦や不完全性を取り込むことに力を傾けました。それ自体は良いことです。しかし、やはり基本的には、経済全体を一人の人間――与えられた状況下で、代表的個人のために意識的かつ合理的に能う限りの最善を尽くす人間――であるかのように扱っています。これが一国の経済の適切な描写になるわけがありません。一国の経済は、一貫した目標を目指すなどとは程遠いものです。こうした基礎に基づいて政策が追求されるなどという考えが提示されたならば、思考力に富んだ人間は、自分は一体どんな惑星にいるのだろう、と当然ながら不思議に思うことでしょう。 典型的な例を挙げますと、DSGEの世界では、我々が良く目にし、特に今現在良く目にするタイプの失業の余地がありません。つまり、純粋に無駄な失業です。今は、趨勢的な賃金、あるいはそれより少し低い賃金ででも喜んで働く有能な労働者がいますが、市場の失敗によって彼らの就職が妨げられています。経済は、明らかに手の届くところにあるにも関わらず、双方が得になる状況を実現できないのです。こうした結果は、経済が分かりやすい目標を合理的に追求するという考えとは相容れません。DSGEや関連モデルが失業を取り入れる唯一の方法は、何とかしてそれを自発的なものにすることです。即ち、現時点では余暇を選択したとか、将来のための選択肢を残しておくことを欲した、とかいう話です。しかし、それはまさに嗅覚テストに不合格になる種類の説明です。 こうしたお話を紡ぎ出すことは、ただの知的ゲームという要素も間違いなくありましょうが、それだけでは済みません。我々が目にする経済は、与えられた状況下で実は最善を尽くしているのだ、ということになると、その経済は、予期されたもの予期されなかったものを問わずあらゆる擾乱に対しても、既に最善な形で適合しているのだ、ということになります。もはや改善の余地は無い、というわけです。ということは、敢えて実施する公的政策は、事態を悪くするだけだ、ということになります。もし政府が代表的個人よりも優れた情報を持っているならば、単にそれを公開しさえすれば良い、ということになります。もし価格伸縮性が不完全ならば、政府は独占企業を攻撃して組合を弱体化させることにより、それをもっと伸縮的にできる、ということになります。実際のところ、そうした命題は、かなり疑わしいものです。
We will now start with Dr. Robert Solow. Dr. Solow, you are recognized for five minutes. I think you may need to turn on your— is your microphone on? STATEMENT OF ROBERT M. SOLOW, PROFESSOR EMERITUS, MASSACHUSETTS INSTITUTE OF TECHNOLOGY Mr. SOLOW. Well, I start by thanking you and Dr. Broun for inviting me to this hearing. It is a little odd to be discussing an abstract question like how the macroeconomy works under circumstances like this, but it is pretty urgent. Here we are near the bottom, as the chairman said, of a deep and prolonged recession and the immediate future is very uncertain. We are in desperate need of jobs, and the approach to macroeconomics that dominates the elite universities of the country and many central banks and other influential policy circles, that approach seems to have essentially nothing to say about the problem. It doesn’t offer any guidance or insight and it really seems to have nothing useful to say. And my goal in the next few minutes is to try to explain why it has failed and is sort of intrinsically bound to fail. But before I go on, there is something preliminary that I want to make clear. I am generally a quite traditional, mainstream economist. I think that the body of economic analysis that we have built up over the years and teach to our students is pretty good. There is no need to overturn it in any wholesale way and there is no acceptable suggestions for doing that. It goes without saying that there are big gaps in our understanding of the economy and there are plenty of things we know that ain’t true. That is almost inevitable. The national economy is a fearfully complex thing and it is changing all the time, so there is no chance that anyone is ever going to get it right once and for all. So it is all the more important to catch foolishness when you see it. When it comes to things as important as macroeconomics, I think that every proposition has to pass a smell test: Does it really make sense? And I don’t think that the currently popular DSGE models—I can say Dynamic Stochastic General Equilibrium without a lapse—I don’t think that those models pass the smell test. They take it for granted that the whole economy can be thought of 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 don’t think that that picture passes the smell test. And 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 really think that this claim is generally phony. The advocates believe what they say, there is no doubt, but they seem to have stopped sniffing or to have lost their sense of smell altogether. So most economists are willing to believe that individual agents, consumers, investors, borrowers, lenders, workers, employers all make their decisions so as to do roughly the best that they can for themselves, given their possibilities and their information. They don’t always behave in that fairly rational way, and systematic deviations are well worth studying. But it is not a bad first approximation in many cases.
The DSGE model populates its simplified economy with exactly one single combined worker, owner, consumer, everything else who plans ahead carefully, lives forever; and one important consequence of this representative-agent assumption is that there are no conflicts of interest, no incompatible expectations, no deceptions. This all-purpose decision maker essentially runs the economy according to its own preferences—not directly, of course, the economy has to operate through generally well-behaved markets and prices. Under pressure from skeptics and from the need to deal with actual data, DSGE modelers have worked hard to allow for various market frictions and imperfections like rigid prices and wages, asymmetries of information, time lags and so on. This is all to the good, and they have done very good work. But the basic story always treats the whole economy as if it were like a person trying consciously and rationally to do the best it can on behalf of the representative agent, given its circumstances. This cannot be an adequate description of a national economy, which is pretty conspicuously not pursuing a consistent goal. A thoughtful person faced with that economic policy based on that kind of idea might reasonably wonder what planet he or she is on. The most obvious example is that the DSGE story has no real room for unemployment of the kind we see most of the time and especially now: unemployment that is pure waste. There are competent workers willing to work at the prevailing wage or even a bit less, but the potential job is stymied by a market failure. The economy is simply unable to organize a win-win situation that is apparently there for the taking. This sort of outcome is incompatible with the notion that the economy is in rational pursuit of an intelligible goal. The only way the DSGE and related models can cope with unemployment is to make it somehow voluntary, a choice of current leisure or a desire to retain flexibility for the future or something like that. But that is exactly the sort of explanation that does not pass the smell test. To the extent that the observed economy is actually doing the best it can given the circumstances, it is already adapting optimally to whatever expected or unexpected disturbances come along. It cannot do better. It follows that conscious public policy can only make things worse. If the government has better information than the representative agent has, then all the government has to do is to make the information public. If prices are imperfectly flexible, then the government can make them more flexible by attacking monopolies and weakening unions, and actually even that proposition is dubious on its own. The point that I am making is that the DSGE model has nothing useful to say about anti-recession policy because it has built into its essentially implausible assumption the conclusion that there is nothing for macroeconomic policy to do. I think we have just seen how untrue that is for an economy attached to a highly leveraged, weakly regulated financial system, as the chairman pointed out, but I think it was just as visibly false in earlier recessions and in episodes of inflationary overheating that followed quite different patterns. There are other traditions in macroeconomics that provide better ways to do macroeconomics, and I hope we will get a chance to talk about that soon. Thank you.
The prepared statement of Dr. Solow follows:] PREPARED STATEMENT OF ROBERT SOLOW It must be unusual for this Committee, or any Congressional Committee, to hold a hearing that is directed primarily at an analytical question. In this case, the question is about macroeconomics, the study of the growth and fluctuations of the broad national aggregates—national income, employment, the price level, and others—that are basic to our country’s standard of living. How are these fundamental aggregates determined, and how should we think about them? While these are tough analytical questions, it is clear that the answers have a direct bearing on the most important issues of public policy. It may be unusual for the Committee to focus on so abstract a question, but it is certainly natural and urgent. Here we are, still near the bottom of a deep and prolonged recession, with the immediate future uncertain, desperately short of jobs, and the approach to macroeconomics that dominates serious thinking, certainly in our elite universities and in many central banks and other influential policy circles, seems to have absolutely nothing to say about the problem. Not only does it offer no guidance or insight, it really seems to have nothing useful to say. My goal in the next few minutes is to try to explain why it has failed and is bound to fail. Before I go on, there is something preliminary that I want to make clear. I am generally a quite traditional mainstream economist. I think that the body of economic analysis that we have piled up and teach to our students is pretty good; there is no need to overturn it in any wholesale way, and no acceptable suggestion for doing so. It goes without saying that there are important gaps in our understanding of the economy, and there are plenty of things we think we know that aren’t true. That is almost inevitable. The national—not to mention the world—economy is unbelievably complicated, and its nature is usually changing underneath us. So there is no chance that anyone will ever get it quite right, once and for all. Economic theory is always and inevitably too simple; that can not be helped. But it is all the more important to keep pointing out foolishness wherever it appears. Especially when it comes to matters as important as macroeconomics, a mainstream economist like me insists that every proposition must pass the smell test: does this really make sense? 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. This is hard to explain, but I will try. Most economists are willing to believe that most individual ‘‘agents’’—consumers investors, borrowers, lenders, workers, employers—make their decisions so as to do the best that they can for themselves, given their possibilities and their information. Clearly they do not always behave in this rational way, and systematic deviations are well worth studying. But this is not a bad first approximation in many cases. 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-ownerconsumer-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. This all-purpose decision-maker essentially runs the economy according to its own preferences. Not directly, of course: the economy has to operate through generally well-behaved markets and prices. Under pressure from skeptics and from the need to deal with actual data, DSGE modellers have worked hard to allow for various market frictions and imperfections like rigid prices and wages, asymmetries of information, time lags, and so on. This is all to the good. But the basic story always treats the whole economy as if it were like a person, trying consciously and rationally to do the best it can on behalf of the representative agent, given its circumstances. This can not be an adequate description of a national economy, which is pretty conspicuously not pursuing a consistent goal. A thoughtful person, faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on. An obvious example is that the DSGE story has no real room for unemployment of the kind we see most of the time, and especially now: unemployment that is pure waste. There are competent workers, willing to work at the prevailing wage or even
a bit less, but the potential job is stymied by a market failure. The economy is unable to organize a win-win situation that is apparently there for the taking. This sort of outcome is incompatible with the notion that the economy is in rational pursuit of an intelligible goal. The only way that DSGE and related models can cope with unemployment is to make it somehow voluntary, a choice of current leisure or a desire to retain some kind of flexibility for the future or something like that. But this is exactly the sort of explanation that does not pass the smell test. Working out a story like this is not just an intellectual game, though no doubt it is a bit of that too. To the extent that the observed economy is actually doing the best it can, given the circumstances, it is already adapting optimally to whatever expected or unexpected disturbances come along. It can not do better. It follows that conscious public policy can only make things worse. If the government has better information than the representative agent has, then all it has to do is to make that information public. If prices are imperfectly flexible, then the government can make them more flexible by attacking monopolies and weakening unions. Actually this proposition is dubious on its own. The point I am making is that the DSGE model has nothing useful to say about anti-recession policy because it has built into its essentially implausible assumptions the ‘‘conclusion’’ that there is nothing for macroeconomic policy to do. I think we have just seen how untrue this is for an economy attached to a highly-leveraged, weakly-regulated financial system. But I think it was just as visibly false in earlier recessions (and in episodes of inflationary overheating) that followed quite different patterns. There are other traditions with better ways to do macroeconomics. One can find other, more narrowly statistical, reasons for believing that the DSGE approach is not a good way to understand macroeconomic behavior, but this is not the time to go into them. An interesting question remains as to why the macroeconomics profession led itself down this particular garden path. Perhaps we can come to that later. Chairman MILLER. Thank you, Dr. Solow. Dr. Winter, you are recognized for five minutes.
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