Fallacy of Theories – Financial Crisis

Recently, my class had a guest lecture in which the faculty was trying to impose “Books and Theories are non-relevanat and fail?” Does the proposition hold true in the present scenario? Do the propounded theories like Decoupling, Elasticity, Demand theory etc fail in the real world scenario? How can theory explain an sudden upsurge in Oil Prices? How does one interpret the sub-prime crisis?

Interestingly, the people behind  the crisis and the regulatory bodies around the world are well acquainted with economy and financial theories infact are the top brains in the field of economy and finance. Can we infer that the theories which underly the financial and economical markets are absurd and do not find relevancy in crisis situations?

My opinion on the questions put forth in the prefatory section is “NO”. The theories in existence today are relevant and can correctly define the fundamentals behind the crisis. However, its humans natural instinct of greed and fear that deviate the consequences of the policies from the intended consequences put forth by theory. Economy theories reject sub-prime loans,  very high risk ventures etc but it is the mans’ avarice that has caused him to follow actions which are not as per economy theory.

I believe that economy like any science evolves over a period of time. As economy evolves we shall discover the newer fudamental facts behind crisis which are not defined by the present theories.


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