Explaining the Financial and Economic Crises
New Directions in Modern Economics series
Edited by Eckhard Hein, Daniel Detzer and Nina Dodig
Chapter 3: Theories of financial crises as cumulative processes – an overview
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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