The Demise of Finance-dominated Capitalism

The Demise of Finance-dominated Capitalism

Explaining the Financial and Economic Crises

New Directions in Modern Economics series

Edited by Eckhard Hein, Daniel Detzer and Nina Dodig

This book provides an overview of different theoretical perspectives on the long-run transition towards finance-dominated capitalism, on the implications for macroeconomic and financial stability, and ultimately on the recent global financial and economic crisis. In the first part, the macroeconomics of finance-dominated capitalism, the theories of financial crisis and important past crises are reviewed. The second part deals with the 2007-09 financial and economic crisis in particular. The special focus is on the long-run problems and inconsistencies of finance-dominated capitalism which played a key role in the crisis and its level of severity.

Chapter 3: Theories of financial crises as cumulative processes – an overview

Daniel Detzer and Hansjörg Herr

Subjects: economics and finance, financial economics and regulation, post-keynesian economics


Financial crises are no new phenomena. Even before market mechanisms dominated the whole economy, financial crises were possible. One of the most widely cited examples, the ‘Tulip Mania’, was a speculative bubble in 1637 in the Netherlands marked by extreme price increases of newly introduced tulip bulbs. When the bulb prices suddenly collapsed in a panic, many speculators became over-indebted and fell into bankruptcy. From the late eighteenth century on, when modern capitalism in England unfolded, financial crises were regular companions of capitalist development, however with different intensity in different historical periods. By the nineteenth century, economists had already started to develop modelsto try to understand financial crises. Karl Marx and John Stuart Mill, among others, famously analysed financial crises. The aim of this chapter is not to present a history of economic thought, and will thus not discuss early theories in great detail. However, as will be shown, many of the theories developed by economists of that time have been incorporated into later approaches to understanding financial crises. The present analysis is restricted to dynamic unsustainable processes which lead to financial crises in a medium-term horizon.

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