Explaining the Financial and Economic Crises
New Directions in Modern Economics series
Edited by Eckhard Hein, Daniel Detzer and Nina Dodig
Chapter 4: Financial crises leading to stagnation – selected historical case studies
Capitalist development is not characterized by smooth economic development measured as a stable GDP growth rate or stable development of other economic indicators like employment, the inflation rate or credit expansion. Rather, historically capitalism is characterized by a cyclical development pattern that produces a positive GDP growth rate in most countries in the long run. The ups and downs do not follow the regular swings of the sinusoidal curve. Periods of high growth can be more or less pronounced. Crises can be more or less deep and long. This chapter focuses on deeper economic downturns. Usually, cyclical downturns fade out within a short period of time and make room for a new expansion period. However, one can observe throughout history that periods of economic crises can spiral out of control and that the market mechanism cannot save the economy from a cumulative shrinking. History has also demonstrated that economic crises can lead to a lasting period of stagnation. Typically, these two negative scenarios, cumulative shrinking and long-term stagnation, follow after a deep financial crisis.
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