From Crisis to Crisis: Theory and History of Capitalist Crises

Part I: Can Capitalism Survive?
Part II: Details Proliferate, Structure Abides

The last three decades have been the most tumultuous decades ever. Never before has humanity witnessed such a frequency and intensity of financial crises. In trying to understand the underlying causes of these crises, and in an attempt to expose the common themes behind them, economic historians Kindleberger and Aliber turn to Hyman Minsky for help. Minsky once theorized that closed national economies are prone to crises as a result of the pro-cyclical expansion of credit in times of euphoria — and its contraction in times of panic. Kindleberger and Aliber famously sought to scale this approach up to the international level in an attempt not only to account for the financial system’s innate tendency to generate bank failures, stock market crashes, and wild swings in currency values and commodity prices, but also to show how most of the crises since the late 1970s are actually systemically related.

In doing so, Kindleberger and Aliber depart from what they consider to be the typical historians’ perspective, which regards each historical event as a unique occurrence contingent upon specific circumstances. For Kindleberger, plus ça change, plus c’est la même chose — the more things change, the more they are the same. In other words, “details proliferate, structure abides.” While historical specificities will always differ, capitalism has an innate propensity to generate a highly specific cycle of boom and bust that we would ignore at our own peril. “The expansion of credit,” they write, “is not a series of accidents but instead a systematic development that has continued for several hundred years … The form each event takes may seem accidental [but] monetary expansion is systematic and endogenous rather than random and exogenous.” The propensity to generate periodic deep crises is structurally encoded into the very DNA of the capitalist system. “The process,” in other words, “is Sisyphean.”

The question that arises, then, is why this pattern has intensified in recent decades. Apart from the advent of information and computing technology and innovations in financial derivatives, there has clearly been a concerted effort to expand the role of finance in the global economy. Financial deregulation and capital account liberalization have opened the world to free capital flows to a degree not seen since the days of the Great Depression. This deep financial integration has clearly increased the system’s vulnerability to shocks, with global interconnectivity greatly amplifying speculative bubbles (capital inflow), investor panics (capital outflow), and the subsequent risk of contagion. Throughout all of this, however, Kindleberger and Aliber leave one crucial question unaddressed: where does this credit itself come from? Is it really entirely the product of the bullish psychology of exuberant bankers, as the post-Keynesian behavioral economists argue, or is there also a systemic explanation to the expansion of credit itself?

With so much excess liquidity being flushed around the system, it seems foolhardy to ignore the direct link between the financial structure of free capital flow and the underlying economic conditions of stagnant wages. If there is surplus capital flowing around the globe looking for profitable investments, one has to explain where this surplus capital itself came from in the first place. Kindleberger’s classic text, while brilliant in its analysis of the systemic propensity of capitalism to generate periodic deep crisis, still fails to address the origins of these as lying in very tangible socio-economic conditions.