Economic thoughts

Public mood towards economic thought prevailing today is that economists, central bankers and regulators failed to see the crisis coming. Majority group started questioning the theories propounded and practiced in diagnosing the problems. Among economists we see people talking down Keynes and his followers who have prescribed government has to save the sick economy by providing adequate antibiotics of stimulus. On contrary they claim that irrationally predictable human behavior is cause of these problems and new set of tools and theories needs to be developed. In my perspective, neither Keynes is wrong nor was his predecessors wrong. There is an old proverb everyone is right from their own point. Each economic thought has two messages. First message belongs to the time when this theory was developed and second message gives a timeless message that is applicable to all time periods.
To understand modern day economic thought it is imperative that we understand how various people have left their long lasting impressions on this field. People like, Adam Smith, David Ricardo, Joseph Schrumpter, Alfred Marshall, Jeremy Bentham, Keynes, Milton friedman, efficient market theorists and behavioural finance economists. Although this list is not exhaustive but it would be apt to say that these folks have contributed towards the development of economic thought that we are witnessing today.
Smith came up with invisible hand theory in 1776 with the publication of Wealth of nations and became to be known as father of Capitalism. But Capitalism existed since the dawn of human civilization. Capitalism is not an object that needs to be discovered. Smith when started observing how people from various trades cooperate seamlessly to produce goods for mutual economic prosperity. This idea serves under all times and eras. But crooked human behavior can mercilessly subject some humans to appalling working conditions of production of goods for making profits. This makes people like Karl Marx to propound radical thoughts and make capitalism as an evil. We should not forget, in the long run only two regimes, democracy and capitalism prevails on the surviving living beings on the planet earth. David Ricardo came up with his theory of comparative advantage trade theory for mutual prosperity. As times have changed, global trade increased, industrialization has matured in western countries we have witnessed prosperity only to be punctuated by great depression of 1929. Economists have observed this crisis and its consequences and Keynes prescribed that government should bend over knees to support the economy by providing stimulus and central bank should become ultimate liquidity provider. Later on Milton friedman came up with his theory of monetarism stating that due to political nature. In late 70’s economic thought already loaded with shades of smith, Keynes, friedman evolved into a new direction in the hands of efficient market theorists. This has lead to development of fascinating derivative structures as chief risk transferring tools. Global trade machine has seen a gush of liquidity and wheels started moving at full speed. This machine came to a grinding halt when subprime crisis took hold. Behavioral economists have sensed now it is their time to rise to the occasion and prescribe solutions. This group says irrational exuberance displayed by people towards the appreciation of housing prices has caused the problems that we are seeing. To support their claim Shiller and akerlof came with their book animal spirits. Are they right? There is no one answer. Current crisis has clearly showed that we have not learnt enough in understanding the functional mechanism of capitalism. We have a long way to go and theories to date have failed and behavioural finance is trying to take a role onto itself to explain the problem. Will they succeed? Next crisis will tell that