The question now is: economic theory of what kind? Some economic theories are better than others. Unfortunately, modern mainstream neoclassical economic theory, although better than the completely untutored economic theories carried around in the heads of most people who’ve never taken ECON 101, leaves much to be desired.
In his essay on Chetty, Dylan Matthews rightly criticizes mainstream economists’ obsession with “mathiness and high theory”—features of mainstream economics that are symptoms of two unfortunate traits of this approach to economics.
The first trait is an excessive focus on equilibrium arrangements. I was tempted here to write “equilibrium outcomes,” but “outcomes” implies processes that result in outcomes. Although (depending on which particular mainstream economist teaches the intro course) some informal mention might be made in class of the processes that generate economic equilibria, in intro-economics courses the processes of adjusting in real-world markets to the likes of shortages of milk, surpluses of labor, and inconsistencies between the plans of entrepreneurs and those of investors are almost never given center stage. Emphasis instead is put on describing the conditions of equilibrium (for example, “In perfectly competitive equilibrium price equals marginal cost equals minimum average total cost”) and on how to solve simple equations in order to determine equilibrium prices and other values.
The second trait is worse: it’s the careless presumption that reality’s complexity is adequately captured by the words, variables, graphs, and concepts used in economic theories. The scientific offense here is not the use of simplifying terms and assumptions. Every scientifically literate person understands that theories, to be useful, must abstract away from a multitude of reality’s details. The offense is that mainstream economists have forgotten that much that is relevant in economic reality results from details and complexities that are impossible to capture in theories in ways that enable economists to make specific predictions of the sort that chemists make when asked to predict the consequences of combining CO2 with H2O.
This forgetfulness, in turn, fuels all manner of empirical studies that are fundamentally flawed.