Mechanisms of Financial Crises in Growth and Collapse: Hammurabi, Schumpeter, Perez, and Minsky

This article provides a historical and theoretical overview of the mechanisms leading up to financial crises and financial bubbles. It suggests that the potentially explosive growth of the financial sector at the expense of the real economy fed by compound interest has – since before Ancient Mesopotamia under the rule of Hammurabi – represented a real threat for such crises. A more modern and additional factor that builds up crises is Joseph Schumpeter’s observation of the clustering of innovations. Carlota Perez has more recently developed Schumpeter’s vision into a theory of techno-economic paradigms which – about midway in their trajectory – produce a build-up to financial crises. The theories of Schumpeterian economist Hyman Minsky, which describe the mechanisms leading to the collapse of financial bubbles, complete the overview. The article ends with recommendations to bring the West out of the present crisis by –once again – putting the real economy, rather than the financial economy, in the driver’s seat of capitalism.