Crises in Prosperous Societies: Are they Inevitable?

Abstract

Crises are integral part of economic history. Analysis of economic crises, from the tulip mania in the 17th century to the 2008 crisis, reveals that in prosperous societies most of the crises are associated not with a shortage of resources but rather with abundance. These crises are instigated by processes inherent to the free market, which allows phenomena such as hazardous investments, reckless bank lending policies and the formation of speculative bubbles. The 2008 crisis, for example, involved irresponsible behavior of major financial institutions as well as failure of the regulators to prevent this behavior by confronting the institutions they were entrusted to oversee. The debate between fiscalists and monetarists is less relevant today, while the cooperation between the government, the central bank, and the financial sector becomes a key factor. In countries where this cooperation was successful, the 2008 crisis was less harmful. E.g., in Australia, where the banks had accumulated fewer bad debts than in other countries and the government and the Reserve Bank were quick to act, the crisis was hardly noticed. Another class of economic crises are those triggered by an external cause, such as a natural disaster or an epidemic. In the COVID-19 event, where handling the crisis demanded a combination of health and economic measures, the importance of the private sectors was proven as well. For example, in South Korea, where the government acted quickly and private companies were summoned to participate in developing tests for the virus, the epidemic was blocked earlier and with fewer deaths than in other countries.

Keywords: Prosperous society, Economic crisis, Financial crisis, Free market, Keynesian economics, COVID-19 economic effects

JEL Classification: E12, E32, F60, G01, H12, I30