Ramblings on Micro-foundations, Part III...

David Colander dropping gold nuggets in his recent Congressional Testimony...

"DSGE supporter’s primary argument for using the DSGE model over all other models is based on their model having what they call micro foundations. As we discuss in Colander, et al. (2008) what they call micro foundations are totally ad hoc micro foundations. As almost all scientists, expect macroeconomic scientists, fully recognize, when dealing with complex systems such as the economy, macro behavior cannot be derived from a consideration of the behavior of the components taken in isolation. Interaction matters, and unless one has a model that captures the full range of agent interaction, with full inter-agent feedbacks, one does not have an acceptable micro foundation to a macro model."