Flaws in Econ Theories Caused Current Crisis

Flaws of Modern Economic Theory: The Origins of the

Contemporary Financial - Economic Crisis

Ezra Davar

Abstract

The Paper shows how fundamental flaws in the modern economic theory are a central part in the formation

of financial bubbles: 1) The Keynesian multiplayer is based on the substitution of the cause (the national income)

for the effect (investment); which yields inadequate results. 2) Modern general equilibrium theory is

based on the following assumptions: a) modern version of free goods conception; b) “Walras’ Law”; This is

realistically absurd, as according to these assumptions, the equilibrium price of some goods and services

might be equal zero. 3) Modern money theory assumes that fiat money is the only type of money, which is

erroneous.

Keywords: Flaws of Modern Economic Theory, Keynes’s Multiplier, Modern General Equilibrium Theory,

Modern Money Theory, Smith, Walras, Keynes