The economist Paul Krugman says that there are three types of economics: up-and-down economics ("stocks were up and unemployment was down today"), airport-bookstore economics (Ten Easy Steps to Avoid Global Depression), and Greek-letter economics. Greek-letter economics is the mathematical variety, practiced in universities and published in academic journals. And it is in serious trouble.

Historically, Greek-letter economics has rewarded mathematical pyrotechnics over fidelity to the real world. The core theories that Greek-letter economics has produced over the last few decades, such as "rational expectations" and "general equilibrium" theory, are mathematically elegant but lacking in empirical validation.

The dismal state of the dismal science matters to managers, chief operating officers, consultants, and business professors because much of modern management thinking has been built on a foundation of Greek-letter economics. The bad news is that this foundation is now in serious doubt. But take heart—the good news is that a radically new one is being put in place.

The roots of management thinking

Many of the most successful and widely used strategy tools today—the five-forces framework, cost curves, the structure-conduct-performance (SCP) model, and the concept of sustainable competitive advantage, to name a few—owe their origins to ideas developed in the 1950s...