Agent Zero

Mark Buchanan doesn't like the dynamic stochastic general equilibrium (DSGE) model. He doesn't like these macroeconomic models because he believes that a handful of elegant equations can not accurately reflect a "messy reality." And while I share his enthusiasm over the development of agent-based models, and agree that current macroeconomic models have obvious limitations, I disagree with the overall sentiment of his article: that macroeconomic models are inaccurate because they consolidate too many agents into too few equations.

First, representing all households and all firms as one agent each is not as bad as it sounds. If we know that - in aggregate - households spend 70% of their income, there is not too much gained from modeling many different households with varying degrees of consumption, but whose average consumption level is still 70%. It may be interesting to see how different households react to different economic environments, but that's not the overarching goal of macroeconomic models. The overarching goal is to see how the overall economy reacts to different environments.

Second, it's unfair to blame the shortcoming of macroeconomic models in predicting the financial crisis and it's aftermath on the models themselves. Models use historical data. It's very hard to predict a once-in-a-generation economic crisis using a generation's worth of data. For example, look at historical housing prices:

Could your model guess what happened to housing prices after 1/1/2006? I'll give you a hint:

Please, don't hate on DSGE models, hate on DSGE models that use poor assumptions.