Housing bubble and economic theory: is mainstream theory able to explain the crisis?

Abstract

The current crisis in the global economy is considered on a par with the Great Depression of the 1930s. We can therefore ask whether the crisis will lead economists to revise the mainstream theory. The first result presented in this paper is to show that the traditional theory does not permit the formulation of a coherent explanation of the causes of the crisis because it uses concepts that are not coherent with the dominant theory of finance. The second result is to show that these concepts are coherent with a theory of finance that can be elaborated on the basis of the lesson of Schumpeter, Keynes and Minsky.