Grand Theft Kocherlakotau

by Henry on August 26, 2011

John Kay has a “piece”:http://www.ft.com/intl/cms/s/0/faba8834-cf09-11e0-86c5-00144feabdc0.html#axzz1W9LvZiR2 about the travails of modern economic theory in the Financial Times today. This analogy struck me as a bit unfair.

bq. The only descriptions that fully meet the requirements of consistency and rigour are completely artificial worlds, such as the “plug-and-play” environments of DSGE – or the Grand Theft Auto computer game. … Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.

After all, as best as I am informed, _Grand Theft Auto_ has an entire simulated world, with multiple interactions between quasi-autonomous, if scripted personalities. Dynamic Stochastic General Equilibrium models – not so much. But this spurred me to think – how would _Grand Theft Auto_ work if it looked a little bit more like a DSGE model? All interactions taking place with a single modal gangsta, whose preferences were taken as representative of all gangstas across the entire economy? Frictionless exchanges, in which gunfire never occurs because all actors anticipate what other actors are likely to do, and hence avoid welfare-lowering actions? My imagination is limited, both (a) because I’ve never actually played Grand Theft Auto, and (b) because my exposure to the relevant economic arguments primarily consists of dim memories of snotty comments about Robert Lucas in lectures by neo-Keynesian Peter Neary (who taught advanced macro to my undergraduate class and was keen on the Malinvaud tripod). But I’m sure that other members of the CT community don’t labour under these twin disadvantages, and can do better. Also, I recognize that the title of this post is quite unfair, since Kocherlakota, whatever his other faults, is “not especially keen”:http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4428 on DSGE arguments, but if the belabored wordplay fits, then wear it …