Half Time

In the first week of this blog I began by examining the origins of capitalism, and how it may give rise to financial crises, concentrating on the ideas of Hyman Minsky.  I also demonstrated how a capitalist system may emerge by focusing on the attractive growth mechanism it seemed to provide, as well as being an alternative during socio-economic distress.  

This week I have focused on why capitalism may be vulnerable to financial crises.  Firstly, I examined the propositions of Karl Marx, a vehement opponent of capitalism, who argued that such a system led to an elitist power vacuum.  This system, he suggested, would inevitably meet a violent end through a worker uprising facilitated by its monopolistic tendencies.  Whilst many of Marx’s ideas have little academic support, his recognition of the inherent instability of capitalism is important.  Attention was then directed to Schumpeter’s creative destruction characterization of capitalism.  In short, Schumpeter was an advocate for the dynamism of capitalism, and suggested that destruction led to a revitalized system which was necessary for economic growth.  I also illustrated how animal spirits and irrational exuberance could lead to the emergence of speculative bubbles, and identified how the safety net of limited liability may act as a catalyst for this seemingly irrational risky behavior. 

Next week, I will focus on whether capitalism has been associated with specific financial crises throughout history.