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ss cycle theory austrian school economists ludwig von mises and friedrich hayek discussed the business cycle starting with mises theory of money and credit published in 1912 marxist theories edit main article crisis marxian recurrent major depressions in the world economy at the pace of 20 and 50 years have been the subject of studies since jean charles léonard de sismondi 1773 1842 provided the first theory of crisis in a critique of classical political economy s assumption of equilibrium between supply and demand developing an economic crisis theory became the central recurring concept throughout karl marx s mature work marx s law of the tendency for the rate of profit to fall borrowed many features of the presentation of john stuart mill s discussion of the tendency of profits to a minimum principles of political economy book iv chapter iv the theory is a corollary of the tendency towards the centralization of profits in a capitalist system successfully operating businesses return less money to their workers in the form of wages than the value of the goods produced by those workers i e the amount of money the products are sold for this profit first goes towards covering the initial investment in the business in the long run however when one considers the combined economic activity of all successfully operating business it is clear that less money in the form of wages is being returned to the mass of the population the workers than is available to them to buy all of these goods being produced furthermore the expansion of businesses in the process of competing for markets leads to an abundance of goods and a general fall in their prices further exacerbating the tendency for the rate of profit to fall the viability of this theory depends upon two main factors firstly the degree to which profit is taxed by government and returned to the mass of people in the form of welfare family benefits and health and education spending and secondly the proportion of the population who are workers rather than investors business owners given the extraordinary capital expenditure required to enter modern economic sectors like airline transport the military industry or chemical production these sectors are extremely difficult for new businesses to enter and are being concentrated in fewer and fewer hands empirical and econometric research continues especially in the world systems theory and in the debate about nikolai kondratiev and the so called 50 years kondratiev waves major figures of world systems theory like andre gunder frank and immanuel wallerstein consistently warned about the crash that the world economy is now facing citation needed world systems scholars and kondratiev cycle researchers always implied that washington consensus oriented economists never understood the dangers and perils which leading industrial nations will be facing and are now facing at the end of the long economic cycle which began after the oil crisis of 1973 minsky s theory edit hyman minsky has proposed a post keynesian explanation that is most applicable to a closed economy he theorized that financial fragility is a typical feature of any capitalist economy high fragility leads to a higher risk of a financial crisis to facilitate his analysis minsky defines three approaches that financing firms may choose according to their tolerance of risk they are hedge finance speculative finance and ponzi finance ponzi finance leads to the most fragility for hedge finance income flows are expected to meet financial obligations in every period including both the principal and the interest on loans for speculative finance a firm must roll over debt because income flows are expected to only cover interest costs none of the principal is paid off for ponzi finance expected income flows will not even cover interest cost so the firm must borrow more or sell off assets simply to service its debt the hope is that either the market value of assets or income will rise enough to pay off interest and principal financial fragility levels move together with the business cycle after a recession firms have lost much financing and choose only hedge the safest as the economy grows and expected profits rise firms tend to believe that they can allow themselves to take on speculative financing in this case they know that profits will not cover all the interest all the time firms however believe that profits will rise and the loans will eventually be repaid without much trouble more loans lead to more investment and the economy grows further then lenders also start believing that they will get back all the money they lend therefore they are ready to lend to firms without full guarantees of success lenders know that such firms will have problems repaying still they believe these firms will refinance from elsewhere as their expected profits rise this is ponzi financing in this way the economy has taken on much risky credit now it is only a question of time before some big firm actually defaults lenders understand the actual risks in the economy and stop giving credit so easily refinancing becomes impossible for many and more firms default if no new money comes into the economy to allow the refinancing process a real economic crisis begins during the recession firms start to hedge again and the cycle is closed banking school theory of crises edit the banking school theory of crises describes a continuous cycle driven by varying interest rates it is based on the work of thomas tooke thomas attwood henry thornton william jevons and a number of bankers opposed to the bank charter act 1844 starting at a time when short term interest rates are low frustration builds up among investors who search for a better yield in countries and locations with higher rates leading to increased capital flows to countries with higher rates internally short term rates rise above long term rates causing failures where borrowing at short term rates has been used to invest long term where the funds cannot be liquidated quickly a similar mechanism was implicated in the march 2023 failure of svb bank internationally arbitrage and the need to stop capital flows which caused bullion drains in the gold standard of the nineteenth century and drains of foreign capital later bring interest rates in the low rate country up to equal those in the country which is the subject of investment the capital flows reverse or cease suddenly causing the subject of investment to be starved of funds and the remaining investors often those who are least knowledgeable to be left with devalued assets bankruptcies defaults and bank failures follow as rates are pushed high after the crisis governments push short term interest rates low again to diminish the cost of servicing government borrowing which has been used to overcome the crisis funds build up again looking for investment opportunities and the cycle restarts from the beginning 39 coordination games edit main article coordination game mathematical approaches to modeling financial crises have emphasized that there is often positive feedback 40 between market participants decisions see strategic complementarity 41 positive feedback implies that there may be dramatic changes in asset values in response to small changes in economic fundamentals for example some models of currency crises including that of paul krugman imply that a fixed exchange rate may be stable for a long period of time but will collapse suddenly in an avalanche of currency sales in response to a sufficient deterioration of government finances or underlying economic conditions 42 43 according to some theories positive feedback implies that the economy can have more than one equilibrium there may be an equilibrium in which market participants invest heavily in asset markets because they expect assets to be valuable this is the type of argument underlying diamond and dybvig s model of bank runs in which savers withdraw their assets from the bank because they expect others to withdraw too 20 likewise in obstfeld s model of currency crises when economic conditions are neither too bad nor too good there are two possible outcomes speculators may or may not decide to attack the currency depending on what they expect other speculators to do 21 herding models and learning models edit main articles herd behavior economics and adaptive expectations a variety of models have been developed in which asset values may spiral excessively up or down as investors learn from each other in these models asset purchases by a few agents encourage others to buy too not because the true value of the asset increases when many buy which is called strategic complementarity but because investors come to believe the true asset value is high when they observe others buying in herding models it is assumed that investors are fully rational but only have partial information about the economy in these models when a few investors buy some type of asset this reveals that they have some positive information about that asset which increases the rational incentive of others to buy the asset too even though this is a fully rational decision it may sometimes lead to mistakenly high asset values implying eventually a crash since the first investors may by chance have been mistaken 44 45 46 47 herding models based on complex systems science indicate that it is the internal structure of the market not external influences which is primarily responsible for crashes 48 in adaptive learning or adaptive expectations models investors are assumed to be imperfectly rational basing their reasoning only on recent experience in such models if the price of a given asset rises for some period of time investors may begin to believe that its price always rises which increases their tendency to buy and thus drives the price up further likewise observing a few price decreases may give rise to a downward price spiral so in models of this type large fluctuations in asset prices may occur agent based models of financial markets often assume investors act on the basis of adaptive learning or adaptive expectations citation needed 2008 financial crisis edit main article 2008 financial crisis history edit see also list of banking crises and list of economic crises the bursting of the south sea bubble and mississippi bubble in 1720 is regarded as the first modern financial crisis a noted survey of financial crises is this time is different eight centuries of financial folly reinhart rogoff 2009 by economists carmen reinhart and kenneth rogoff who are regarded as among the foremost historians of financial crises 49 in this survey they trace the history of financial crisis back to sovereign defaults default on public debt which were the form of crisis prior to the 18th century and continue then and now causing private bank failures crises since the 18th century feature both public debt default and private debt default reinhart and rogoff also class debasement of currency and hyperinflation as being forms of financial crisis broadly speaking because they lead to unilateral reduction repudiation of debt prior to 19th century edit the roman denarius was debased over time philip ii of spain defaulted four times on spain s debt reinhart and rogoff trace inflation to reduce debt to dionysius i s rule in syracuse and begin their eight centuries in 1258 debasement of currency also occurred under the roman empire and byzantine empire the financial crisis of 33 caused by a contraction of money supply had been recorded by several roman historians 50 among the earliest crises reinhart and rogoff studied is the 1340 default of england due to setbacks in its war with france the hundred years war see details further early sovereign defaults include seven defaults by the spanish empire four under philip ii three under his successors other global and national financial mania since the 17th century include 1637 bursting of tulip mania in the netherlands while tulip mania is popularly reported as an example of a financial crisis and was a speculative bubble modern scholarship holds that its broader economic impact was limited to negligible and that it did not precipitate a financial crisis 1720 bursting of south sea bubble great britain and mississippi bubble france earliest of modern financial crises in both cases the company assumed the national debt of the country 80 85 in great britain 100 in france and thereupon the bubble burst the resulting crisis of confidence probably had a deep impact on the financial and political development of france 51 crisis of 1763 started in amsterdam begun by the collapse of johann ernst gotzkowsky and leendert pieter de neufville s bank spread to germany and scandinavia crisis of 1772 in london and amsterdam 20 important banks in london went bankrupt after one banking house defaulted bankers neal james fordyce and down france s financial and debt crisis 1783 1788 france severe financial crisis due to the immense debt accrued through the french involvement in the seven years war 1756 1763 and the american revolution 1775 1783 panic of 1792 run on banks in us precipitated by the expansion of credit by the newly formed bank of the united states panic of 1796 1797 british and us credit crisis caused by land speculation bubble 19th century edit danish state bankruptcy of 1813 financial crisis of 1818 in england caused banks to call in loans and curtail new lending draining specie out of the u s panic of 1819 pervasive usa economic recession with bank failures culmination of u s s 1st boom to bust economic cycle panic of 1825 pervasive british economic recession in which many british banks failed and the bank of england nearly failed panic of 1837 pervasive usa economic recession with bank failures a 5 year depression ensued panic of 1847 a collapse of british financial markets associated with the end of the 1840s railway boom also see bank charter act 1844 panic of 1857 pervasive usa economic recession with bank failures the world economy was also more interconnected by the 1850s which also made the panic of 1857 the first worldwide economic crisis 52 panic of 1866 the overend gurney crisis primarily british black friday 1869 aka gold panic of 1869 panic of 1873 pervasive usa economic recession with bank failures known then as the 5 year great depression and now as the long depression panic of 1884 a panic in the united states centred on new york banks panic of 1890 aka baring crisis near failure of a major london bank led to corresponding south american financial crises panic of 1893 a panic in the united states marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures australian banking crisis of 1893 panic of 1896 an acute economic depression in the united states precipitated by a drop in silver reserves and market concerns on the effects it would have on the gold standard 20th century edit panic of 1901 limit...