"In a sense, what we have is a a "just so" story, and not a theory"

Arnold Kling has a point about theories:

"Josh Hendrickson writes,

there are many so-called Keynesians who have been out there promoting policies that are quite the opposite. They have been promoting the re-capitalization of banks, forcing banks to lend, automotive bailouts, and a push toward developing "green" jobs. These attempts to micromanage the supply side of the economy are not consistent with Keynesian stimulus or that of modern macroeconomic theory( THAT DOESN'T MATTER. THEORIES ARE SIMPLY MORE OR LESS USEFUL ).

In my mind, there are three dots that need to be connected:

1. theory( KANTIAN: ECONOMICS: MORE OR LESS USEFUL )
2. the explanation for the recent crisis ( HUMAN AGENCY AND NARRATIVE THINKING )
3. policy to get us out of the crisis.( POLITICAL ECONOMY: PRAGMATIC:EXISTENTIAL:TRIAL AND ERROR )

Hendrickson is worried about the disconnect between (1) and (3). I agree. But I also worry that there is a disconnect between (1) and (2) and between (2) and (3).

Neither textbook macro nor modern theory is focused on sudden shifts in the risk premium( FEAR AND AVERSION TO RISK AND THE ACCOMPANYING FLIGHT TO SAFETY ), although I think it is impossible to describe the recent crisis without referring to such a shift. In a sense, what we have is a a "just so" story ( I'VE CALLED IT A NARRATIVE ), and not a theory. That in turn makes the connection between theory and policy rather tenuous( FOR ME, IT ALWAYS IS. IF THE QUANTS HAD UNDERSTOOD THIS, THEY WOULDN'T HAVE HAD SUCH FAITH IN THEIR THEORIES ).