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Adam Smith and the Political Economy of a Modern Financial Crisis

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  • Michael Mussa

Abstract

Financial crises have occurred periodically for hundreds of years, and Adam Smith had important insights into their causes. Although by no means all that we know about such crises has been derived from Smith, it is interesting and important to reflect on what he did know and how ignoring his warnings about the creation of excess liquidity has contributed to the current crisis. In addition to the complexity of contemporary finance and the role of central banks and other regulatory institutions, a major difference between Smith's day and ours is the emergence of “moral hazard” as an important policy issue and its corollary, “immoral results.” It is important to realize that the risks of financial crisis, moral hazard, and immoral results cannot be avoided by financial and accounting gimmicks, and that there is no substitute for adequate capital in the creation of liquidity.Business Economics (2009) 44, 3–16. doi:10.1057/be.2008.9

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  • Michael Mussa, 2009. "Adam Smith and the Political Economy of a Modern Financial Crisis," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 44(1), pages 3-16, January.
    • Handle: RePEc:pal:buseco:v:44:y:2009:i:1:p:3-16
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    Cited by:

    1. Michael J Chow & William C Dunkelberg, 2011. "The Small Business Sector in Recent Recoveries," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 46(4), pages 214-228, October.
    2. Robert W. Dimand, 2012. "The Roots of the Present are in the Past: The Relation of Postwar Developments in Macroeconomics to Interwar Business Cycle and Monetary Theory," Chapters, in: Thomas Cate (ed.), Keynes’s General Theory, chapter 5, Edward Elgar Publishing.

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