Addressing the root cause of crises is most important

I had pointed about papers presented at ABCDE conference.

I was just reading one of the papers presented by Giovanni Zanalda, an economic history professor at Duke University. In this paper he narrates evidence from three previous recessions and says if we do not address the root cause of the crisis, the crisis will continue.

In this paper I focus on three historical cases which show how at time of major financial and economic crises it is important to focus on solving problems in the underlying structure of the economy. Failure to address the root causes of a crisis leaves the financial system exposed to catch another cold which eventually could become pneumonia – using a medical analogy which would have been much in vogue among eighteenth-century political economists. Often crises emerge because of countries’ failure to adapt their economies to new international competition or institutions become obsolete, they are out of sync with contemporary economic and political developments. To address these problems it requires large amount of political and economic capital than in the case of traditional monetary and fiscal policies.

I first examine the work of an Italian author, Antonio Serra, against the backdrop of a series of financial and economic crises that plagued the Kingdom of Naples during the first decades of the seventeenth century. In contrast to the mainstream interpretation of the time, that emphasized the monetary origins of these crises, Serra identified “real” factors –from an absence of manufacturing and “entrepreneurial spirit” to a lack of credit and good governance–, as the primary reasons for the kingdom’s economic problems. I then review the work of Geminiano Montanari, an Italian mathematician from the seventeenth century, who challenged the common practice of blaming financiers and financial innovations as the source of all evils at times of financial crises. While recognizing the negative impact of excessive financial speculation, Montanari identified other more important causes of crises such as lack of investments in manufacturing and commerce. The third example is from the Great Depression and shows how countries began to recover after abandoning the gold standard, a measure taken against the dominant view and orthodoxy of the time.

The Research continues to debate what are the root causes for this crisis. I found the paper interesting as it discusses crisis way back in times. What is even remarkable is speculation etc were even blamed then for the crisis. However, the real causes were structural issues. This is what we see even now. Now much of the research points to issues with Government, regulation, Corporate Governance etc. Again nothing changes much as we look into history.

 

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