When I started my Ph.D. in Princeton, pure economic theory was king. Economists with stellar math skills were high in status and high in demand, even if their knowledge of the real world was... slight.As one who takes the strange, it would seem, view that theory still has a lot going for it I would argue that what has happened is that the type of theory has changed over those 18 years. Gone are the days of just doing general equilibrium theory of the Arrow and Debreu type. As Till Duppe writes,
In the following eighteen years, however, something big seems to have changed.
[f]rom the point of view of today Debreu's influence on the body of economics could be called zero, in that general equilibrium theory (GET) is the economics of yesterday. (Duppe 2010: 2-3).Today theory is more likely to be partial equilibrium theory in the form of things like, for example, auction theory, game theory, market design theory or contract theory. All of these are making a contribution to our "knowledge of the real world", despite what Caplan seems to think.
And I'm not the only one who sees positive signs for theory. Jeff Ely at the Cheap Talk blog sees at least four positive signs:
1. Theorists have been recruiting targets for high-profile private sector jobs. Michael Schwarz and Preston McAfee at Yahoo!, Susan Athey at Microsoft for example. In addition the research departments in these places are full of theorists-on-leave.That said, I do see very few economists, in this country at least, who take theory seriously as they should. Most economists look to me to be of the 'I run a million regressions and picked the one that confirmed my prejudices' type.
2. Despite some overall weakness, theory is and always has been well represented at the top of the junior market. This year Alex Wolitzky, as pure a theorist as there is, is the clear superstar of the market. Here is the list of invitees to the Review of Economics Studies Tour from previous years. This is generally considered to be an all-star team of new PhDs in each year. Two theorists out of seven per year on average. (No theorist last year though.)
3. In recent years, two new theory journals, Theoretical Economics and American Economic Journal: Microeconomics, have been adopted by the leading Academic Societies in economics. These journals are already going strong.
4. Market design is an essentially brand new field and one of the most important contributions of economics in recent years. It is dominated by theorists.
Oh well, it's back to the THEORY of the firm for me I guess.
- Duppe, Till (2010). ‘Debreu's apologies for mathematical economics after 1983’, Erasmus Journal for Philosophy and Economics, 3(1) Spring: 1-32.