By K. Vela Velupillai
The genesis and the path towards what has come to be called the DSGE model is traced, from its origins in the Arrow-Debreu General Equilibrium model (ADGE), via Scarf’s Computable General Equilibrium model (CGE) and its applied version as Applied Computable General Equilibrium model (ACGE), to its ostensible dynamization as a Recursive Competitive Equilibrium (RCE). An outline of a similar nature, albeit very briefly, of the development and structure of Agent-Based Economics (ABE) is also included. It is shown that these transformations of the ADGE model are computably and constructively untenable. Suggestions for going ‘beyond DSGE and ABE’ are, then, outlined on the basis of a framework that is underpinned -from the outset- by computability and constructivity consideration
Velupillai’s point is that while there are theorems that show that an equilibrium exists for DSGE models, it is impossible to find it, in particular computationally as computers work on a finite number of points. In his words. it follows that formulating optimal decision problems as dynamic programming problems is impossible. This comes about because DSGE rely in their proofs on various theorems, some of which make assumptions leading to non-computability or non-constructivity. The only way out it to assume that the computer is solving a model economy where agents themselves are computers.