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 4: Financial crises leading to stagnation – selected historical case studies

Nina Dodig and Hansjörg Herr

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


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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