One of the dirty secrets of economics is that there is no such thing as “economic theory.” There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear.

Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA. Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations. Physicists start with the four fundamental forces of nature.

Economists have none of that. The “economic principles” underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the “right” conclusions come out of the analysis.

I am of two minds about this. I certainly feel that the beautiful economic theories that have been created with the help of some serious mathematics in the last few decades have yielded valuable insights. Yet on the other hand, these insights are far from telling us unambiguously important things about economic reality and from giving us good recipes for economic policy. I don’t even feel we understand, as economists, how such a basic thing such as economic trade can emerge, based on trust among people. So we have ended up with “theory” as a plaything of political interests. For such reasons, I share DeLong’s frustration. Yes, Paul Seabright has written the wonderful book The Company of Strangers, but still we don’t have a good grasp of the fundamentals of economic trade at the level of really basic theory! Naturally, I am trying to do something about this in ongoing research with my long-time collaborator, Rob Gilles, or I would not be justified in airing my complaints on this theoretical lacuna.

But is it really beauty and some insights of doubtful empirical relevance versus abandoning all hope of having an economic theory? I sincerely hope not. We have, in game theory, the mathematical theory of networks, and in the technology of simulation, some tools that should allow us to build a better theory. One that, although it will always be subject to criticism and will always create the longing for something better, will not be so easily dismissed as nonexistent by a leading economist.

I understand that DeLong is concerned about macroeconomics and one can read his nonexistence claim in terms of macroeconomic theory. But that is a cop-out. If we had a good theory of economic fundamentals, we would be able to build an, at least existent, theory of macroeconomics, by DeLong’s standards. So I addressed my remark here to basic economic theory, not its macroeconomic special case.