Manias, Panics, and Crashes: A History of Financial Crises

I found Charles Kindleberger’s book detailing the history of financial crises utterly fascinating. Writing in a haphazard, Malcolm Gladwell manner, he sprinkles his arguments with scattered stories. This book is relevant to anthropologists, especially economic anthropologists, seeking to understand models imposed by economists premised on the rational individual. He begins by stating, “for historians each event is unique. Economics, however, maintains that forces in society and nature behave in repetitive ways.” Thus, he points to Marx’s argument that capitalism is inherently crisis-ridden, and emphasizes its cyclical nature. Kindleberger highlights the ways in which individuals and markets can behave in irrational ways. Relying on monetary theorist Hyman Minsky’s model of the role of exogenous events, referred to as “displacement,” such as war that lead to a sequence of events, at which every turn, gives rise to opportunities of speculation for profit. In Minsky’s theory, events can increase confidence. Europhoria might set in or types of groupthink (or bandwagon) behavior. Decisions are made (such as financial institutions accepting liability structures that limit liquidity) based on general affect (or emotions of the time) and this may give rise to manias or bubbles. Speculation for profit departs from normal rational behavior and eventually causes crises.

Economic theory rests on the a priori assumption that people are rational (Chapter 3). Similarly, markets are assumed to behave rationally. Yet even if the action of each individual is rational, the market, as a separate existence, can behave irrationally. Manics and panics are associated with general irrationality. Mob psychology also deviates from rational behavior. What comes to mind for me is Thorstein Veblen’s book (which I was completely enamored of during my first year of graduate school) noting the power wanting to emulate the elites through conspicuous consumption or keeping up with the Joneses.

Kindleberger observes, “the herd instinct, if it is not too derisory a description, may lead in other directions: to the recruit of monks, nuns, social wrkers, teachers.” Even if people behave in rational manners (with the aim of maximization income and wealth), their ultimate decisions may differ and the outcome may also diverge. He further asserts, “people may experience cognitive dissonance, defined as the capacity to filter, massage, manipulate or otherwise process information to make it accord with strongly held internalized beliefs” (Appendix A).

How they filter and manipulate information may be strongly influenced by marketing messages; however, their interpretations of the messages may drastically differ. His point is that there is much variation in individual human behavior and thought that characterizing them as “rational” and using that as an a priori assumption to formulate economic, mathematical models does not make sense. Also, people are prone to fits of mob mentality, which is exemplified by the recent housing bubble crisis. People were persuaded to purchase homes even when it went against their best interests.

Furthermore, it makes it difficult to make economic predictions. he writes, “Chaos theory, I believe, has been applied to evolution. Thousands, perhaps millions, of mutations are possible, but science cannot predict which will make their way.” He points to the comical example of Isaac Newton, surely a rational scientist, who sold his shares with South Sea Company in 1720 for 100 percent profit, but after a further “impulse, an infection from the mania gripping the world that spring and summer,” was influenced to reenter the market and ended up losing 20,000 pounds. Even the archetypal rational model-man such as Newton fell sway to the herd mentality in fits of euphoria, manics and panics.

Then there are borderline rational cases — the first, dealing with target workers, suggesting that higher wages produce not more work but less and in order to increase effort, wages must be reduced; the second, involving clinging to something due to optimism or hope, and the third, when one becomes so fixated on one rational model, but the wrong one that they are unprepared for effects that counter their interests. Then there are the effects of swindles, frauds and merciless Ponzi schemes, which the author argues, tend to increase with crash and panic when people are more inclined to cheat to save themselves. The techniques used also play on people’s feelings of fear, euphoria and panic.

Kindleberger concludes with a warning against reducing economics to merely mathematical models and adopting one kind of discourse. One must consider the kind of instability that the market encounters. Economic pathology occurs; like any organism, it becomes infected with disease — a fact that the IMF and World Bank neglect to address. Governments must learn from the past and correct these mistakes, rather than letting the market run itself. For anthropologists siding with Keith Hart’s notion of the “human economy” dedicated to the principles of democracy and egalitarianism, like Yours Truly, incorporating historical evidence of the imperfect, irrational market qua Kindleberger is a necessary endeavor.


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