Do We Really Need to Start From Scratch? Economic Theory on Economic Crises

Has the crisis indeed demonstrated that as profession we are misled by the beauty of the mathematical models and the only useful, workable solutions at hand were provided in early 1930s? The objective of this paper is to provide a review of the current state-of-the-art literature from the perspective of its usefulness in the context of economic crises. We argue that although economists might be unable to answer many questions or to “predict” crises, the path the profession is following is approaching the operational ability to provide useful policy guidance in the context of business cycles. Analysing the state of economics after the crisis it is argued that ability to answer these questions relies critically on the development of better models with micro-foundations. Already existing and promising directions for future research are discussed.