Summary 

The global financial and economic crisis of 2007–2009 is widely recognized as the worst global economic crisis since the Great Depression of the 1930s; in both cases, the economic downturn was accompanied by a severe financial crisis, both crises affected large parts of the world, and in both cases, large parts of the world recovered from it. Most notably, the Soviet Union was largely unaffected by the depression of the 1930s, and the global financial crisis did not have a strong impact on China's economic growth in the late 2000s.

Before the Great Depression, some economists, notably Veblen (1919), had warned of the coming crisis. Orthodox economists, including Irving Fisher, disagreed. Even after the Great Depression, orthodox economists had little useful policy advice. The English economist Arthur Pigou argued that wage cuts would reduce unemployment, while Andrew Mellon, a U.S. banker and Treasury Secretary, welcomed “liquidation” as the path to recovery. Mainstream economists failed to foresee the impending global financial crisis.

In this paper, we examine the reasons why most mainstream economists were surprised when the world was hit by the global financial crisis. In retrospect, it should come as no surprise that few mainstream economists predicted the crisis. Their approach to cycles is based on a fundamental misunderstanding of the dynamics of the capitalist economy. At best, their theory is applicable to a world where money is neutral and where the internal dynamics of the economic system push it towards equilibrium.

Key terms: cycles, crisis, orthodox and heterodox paradigms, central bank, government, treasury, full employment.