The work of Shiller and other suggests that capitalism is not some self-regulating system that hums along with nary a disruption; rather, it is a system prone to 'irrational exuberance' and unfounded pessimism.
Bubbles, as John Stuart Mill believed, begin when some external shock or "some accident" --a new market, for example--"sets speculations at work".
Credits and debt play an essential role.
Invariably, the boom ends when the unexpected failure of a handful of firms causes a "general distrust" in the marketplace, spreading uncertainty and making credit next to impossible to secure, except on onerous terms.
Mill's model:\
(1) an external shock for a boom
(2) a speculative mania driven by psychology
(3) a feedback mechanism that sends prices skyward
(4) easy credit available to everyone
(5) inevitable crash of the financial system, followed by plenty of collateral damage on the 'real economy' of factories and workers.
Karl Marx was the first thinker to see capitalism as inherently unstable and prone to crisis.
Keynes believed that what really determines employment levels is aggregate demand; if wages are cut and workers are fired, people will consume less and demand will falter. As demand drops, entrepreneurs will become more reluctant to invest, which incurs more wage cut. People save more and spend less, decreasing more demand. (Deflation) The way to cope with is government intervention.
Friedman believes that instability within any given economy can be explained by fluctuations in the money supply.
According to Minsky, instability of capitalism originates in the very financial institutions that make capitalism
Three types of borrowers
(1) hedge borrowers
(2) speculative borrowers
(3) Ponzi borrowers
Austrian economists:
skepticism toward government intervention
a focus on individual entrepreneurs as the unit of economics analysis
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