



But it wasn't a change in the dominant econ theory. Theory has certainly changed, sure, but more by evolution than revolution - things like game theory and behavioral theory have slowly been mixed in with the old hyper-rational "neoclassical" paradigm





No, the big revolution has been in the role of theory itself. Go back and read some old 1970s papers (I'm not going to link to any specific ones, following my policy of not singling out specific authors), and you'll be amazed at the disconnect from reality. A lot of those papers would take great pains to specify that the outcome space was assumed to be a Borel space, while spending precisely zero time discussing how the model could be tested against real-world data. This was econ's famed "deductive method" at its most arrogant. It really was enough to just show up, state your assumptions (i.e. herp your derp ), solve the resultant math problem to get some nice-looking equations, and call it a day.





That doesn't seem to be so true anymore. Theory papers peaked as a percent of the total sometime between 1973 and 1993, and have been declining ever since:





That's a very dramatic drop. And notice that a lot more theory papers nowadays include simulation.





A lot of people can feel the wind changing. "Theory is kind of dead," Tyler Cowen once told me over drinks (beer for me, soft drink for him). "Nothing big is coming out of theory these days." "What about social learning and herd behavior?", I countered. "That was sort of the last gasp of theory," he said with a grin, "and it was twenty years ago."





Macro has been slower to embrace the change, because macro data is so uninformative that often all you can do is spin one theory after another. But macro also seems to feel the pressure. "We don't really need more macro theorists," a prominent macroeconomist once told me. "What we need are macro empiricists."





I call that a revolution. It's not quite a Thomas Kuhn style paradigm shift - more of a shift in the underlying criteria that the economics community is using for deciding how the world works. Deduction is on the way out, and induction is on the way in.





homo economicus was supposed to act. Other behavioral meteors followed. There was Why did this happen? I'm not sure, but my guess is that the meteor that hit the economics dinosaurs, and set the field's evolution off in a new direction, was named Daniel Kahneman. Starting in 1973, Kahneman released a torrent of papers showing that human behavior didn't look anything like the way thatwas supposed to act. Other behavioral meteors followed. There was Richard Thaler , who showed how behavioral effects could mess up many of the decision-making processes in economics. There was Vernon Smith , who showed that even simple markets don't work the way economists long assumed. There was named Colin Camerer , who scanned people's brains and confirmed that non-rational decision-making processes were at work. There were many others. Really, it was a giant comet of Behavioral Economics that broke up somewhere in orbit and fell to Earth in many parts.





theory to replace the hyper-rational paradigm their empirical work had smashed. Even simple, limited theories like As the weight of evidence mounted, the economics community could no longer ignore the contradictions between theory and reality. But though they had found a swarm of factual anomalies, the behaviorists failed to produce a new grandto replace the hyper-rational paradigm their empirical work had smashed. Even simple, limited theories like Prospect Theory have struggled to make sense of the world outside the lab. The ship of economics hasn't so much been pointed in a new direction as set adrift without a compass.





Of course, this was probably inevitable. The old hyper-rational theory was unified only because it dramatically oversimplified the world. But it could only oversimplify the world because it refused to look at the world. As soon as someone came along and forced economists to look out at the world, most of the work that economists had done had to be discarded. (Not all, interestingly; the pure-rational-deductive approach has had a few stunning successes .)





So what do you do when you can't make sense of the world? You just keep trying to get a better picture of the world. My guess is that this is why econ is shifting from theory to empirics.





new theories, or to work in "deductive", theory-first paradigms. But I also see econ's shift as being part of a bigger, deeper change that is happening all across academia. In physics, fundamental theory has hit a wall . The Standard Model, completed in the 70s, has been well confirmed by experiments, and all the leading candidates for new physics seem to be untestable. Even in math, formal deductive proof is slowly being replaced by proof-by-computer ; at some point the question of whether math is an empirical science gets harder to answer definitively. As for the humanities, "theory" has basically become a giant joke, even if a lot of leading scholars haven't gotten the joke yet. Meanwhile, a lot of the big revolutionary advances seem to be coming in biology, while the other "lab sciences" of chemistry, materials science, neuroscience and electrical engineering continue to rack up steady progress. And "data science" is considered the new frontier. Obviously all these fields make use of existing theories, but they rarely tend to cook up dramaticallytheories, or to work in "deductive", theory-first paradigms.





Maybe humanity is reaching the end of a big Theory Wave. The late 19th and early 20th centuries saw such enormous victories for theory - Cities destroyed! Thinking machines invented! Logistics revolutionized! Chemistry reinvented! - that we poured a lot of our brainpower into sitting down with pencil and paper and working out mathematical ideas about how the world might work. Maybe we've temporarily exhausted the surplus gains available from ramping up our investment in theory, and the boom is quietly coming to an end.

As I see it, there has been a huge revolution in economics over the past 35 years or so.