The Socio-Political Theory of Crises (SPTC)

Abstract

Crises are difficult to predict with the most recent and notable examples being the failure of the profession to see the 2007-2008 Credit Crunch. The failure of quantitative approaches to crises is due to the relative non-comparability of crises when using large-N methods that leave out context – social, political, and institutional. This led to a search for an alternative approach. The theory development research strategies of abduction/retroduction were used to develop a process-oriented theory of financial crises. The process of how a crisis unfolds happens through a 4-step macro-level process: Social, Trigger, Disruption and Psychological. Embedded within the Socio-Political Theory of Crises (SPTC) are three mechanisms: macro-level, disruption, and micro-level. This theory, which now has at its core the social, political, and institutional context, can be used to understand and to explain a variety of financial crises and to compare crises based on the process of how they unfold.

Keywords: Financial Crisis, Financial Crisis History, Theory, Macroeconomic Policy, Decision Making & Herd Behavior, Abduction/Retroduction Methodology

JEL Classification: G01, N2, E60, D81, B410