Entrepreneurial failure and economic crisis: an historical perspective

"This paper analyses the major UK economic crises that have occurred since the speculative bubbles of the seventeenth century. It integrates insights from economic history and business history to analyse both the general economic conditions and the specific business and financial practices that led to these crises. The analysis suggests a significant reinterpretation of the evidence – one that questions economists’ conventional views. Crises are usually considered to be financial, but historical evidence suggests that their origins are often real. Real effects involve too much investment in some sectors, too little investment in others, and often too much investment overall. These mistaken investment decisions originate in flawed judgements made by entrepreneurs acting under the influence of simple and misleading ideas. The financial aspects of a crisis are often the consequences of a real crisis, aggregated by defaults on fixed-interest debt and the consequent dislocation of the banking system. The evidence suggests that major crises often involve excessive investment in specific sectors that were considered at the time to be of great strategic importance. Whilst some crises are caused mainly by failures of government policies, failures of privately-funded schemes created the most serious problems. Furthermore, whilst some crises were caused by wars and their aftermath, many were entirely peace-time phenomena. Theories of entrepreneurship are well-equipped to explain such patterns of behaviour. They emphasise that business decision-making is based on costly and untrustworthy information. Under normal conditions a diversity of opinion exists and, as a result, entrepreneurs are encouraged to collect detailed information on investment projects. But when a single opinion becomes dominant detailed information may be ignored and opinion alone may be used as a guide to decisions. When a reputable elite endorses an over-simplified view about the strategic importance of some particular sector many entrepreneurs may be misled, and so mistakes can be made on a large scale. Developing and testing a theory of this type requires source material relating to the state of the economy, the behaviour of elites, and the attitudes of entrepreneurs, and therefore benefits from the integration of economic and business history as exemplified in this paper."