From a game-theoretic perspective, a national economy is a set of rules that is acceptable within a well-defined socio-cultural context combined with a system for enforcing those rules. If the rules were unacceptable the situation would degenerate into violence.
But, what then are economic crises? These are situations where economic catastrophes are unavoidable within the parameters of the game. The socio-cultural context has changed and the rules of the economic game must change in order to reflect this.
A few concrete examples:
\(1.\) The 1907 crisis in the USA was due in large part to the fact that in America there was no institution to control the supply of money in a rapidly growing economy. A central bank had to be created and with this a number of key institutions and professions to support the central bank.
\(2.\) The 1929 crisis, the Great Depression, was a classical example of free market failure similar to the Dutch Tulip crisis. What makes it unique in American history is that it was largely due to the lack of a sufficiently strong social safety net.
Without a strong safety net for citizens(such as farmers at the poverty-line), citizens aren’t sufficiently measured in their consumer behaviour. This changed with the New Deal of FDR which included the Social Security Act(1935) and the National Labour Relations Act(1935). Another key innovation was the Glass-Steagall act(1933) which was designed to separate commercial and investment banking in order to avoid similar speculative scenarios in the future.
\(3.\) The French revolution was due in large part to a harvest crisis in Europe’s most populous country compounded with a financial crisis which resulted from French involvement in the Seven Years’ war as well as the American War of Independence. Given their encouragement of the American Revolution, this made French citizens believe that a similar revolution was possible back home.
In general, an important economic crisis leads to a fundamental change in the rules of the economic game as the crisis is symptomatic of important socio-cultural transformations. From this perspective, we may view economic crises as anthropological phase transitions.
John Steinbeck. The Grapes of Wrath. The Viking Press-James Lloyd. 1939.
Baten, Jörg. A History of the Global Economy. From 1500 to the Present. Cambridge University Press. 2016.