DSGE models rule out genuine uncertainty by requiring insurable probabilities for all events

Evidence

The dominant macro model has for some time been the Dynamic Stochastic General Equilibrium model, or DSGE, whose name points to some of its outstanding characteristics. “General” indicates that the model includes all markets in the economy. “Equilibrium” points to the assumptions that supply and demand balance out rapidly and unfailingly, and that competition reigns in markets that are undisturbed by shortages, surpluses, or involuntary unemployment. “Dynamic” means that the model looks at the economy over time rather than at an isolated moment. “Stochastic” corresponds to a specific type of manageable randomness built into the model that allows for unexpected events, such as oil shocks or technological changes, but assumes that the model’s agents can assign a correct mathematical probability to such events, thereby making them insurable. Events to which one cannot assign a probability, and that are thus truly uncertain, are ruled out. — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 782

Categorization

• DEFINE: Decodes the DSGE acronym term-by-term and makes explicit the key exclusion: non-probabilizable events are structurally ruled out of the model.
• QUESTION: This insurability-assumption critique is the load-bearing objection to DSGE — worth chasing how Knightian uncertainty was systematically edited out of post-war macro.
• DEEPTHINKING: The point that a model’s answerability depends on converting all uncertainty into insurable probability — and that ‘true uncertainty’ gets ruled out by construction — is dense and paradigm-shifting for understanding why the profession structurally cannot absorb 2008.
• XREF: connects to: Post-crisis attempts to make DSGE models realistic are self-contradictory — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 801; Risk and uncertainty are fundamentally different decision environments — Aris Komporozos-Athanasiou, Speculative Communities: Living With…, 388

Broader Connections

• Post-crisis attempts to make DSGE models realistic are self-contradictory #expands (0.80) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 801
• Risk and uncertainty are fundamentally different decision environments #corroborates (0.80) — Aris Komporozos-Athanasiou, Speculative Communities, 388