The limits of the mainstream theory

This chapter shows that there is a sharp contrast between the explanations described in the previous and the dominant theory of money and finance. The mainstream theory describes an economic system in which no crisis can ever occur, that is, a system in which: 1) monetary authorities control the amount of money but not the supply of credit which depends on saving decisions; 2) banks are mere intermediaries that do not create risks; 3) the process of wealth accumulation and the phenomenon of speculation are not relevant. However, when explaining the origins of the crisis, mainstream economists refer to a profoundly different system. In fact, they recognize that the crisis developed in a context in which: 1) the supply of credit depends on the choices made by the banking system and not on the agents’ savings decisions; 2) the financial system can create risk; and 3) the phenomenon of speculation is relevant. The conclusion drawn in the first part of the book is that the current crisis should lead the economics profession to develop an alternative theoretical approach capable of explaining the functioning of an economic system that features these three characteristics.