4

FROM FIRST FINANCIAL BUBBLES TO

21ST CENTURY CRISES
Kerem GÖKTEN1, Leyla Gizem EREN2

1. Introduction
Economics seems to move away from its social dimension by introducing new tools such as mathematics and
econometrics. These new tools help economists to be exact about the parameters of economy. Economists have
two options in this situation. They either need to predict the crises with these new tools and gain reputation or
they use historical tools and had a risk for labelling fusty. The modern economists are more advantageous than
Adam Smith, with their new tools and databases. Every data that needed could be reached with an easy search
and this could be accepted as a new kind of division of labour which is not similar to Smithian World. But the
consequences of Smithian division of labour and the division in the new computational approach are not so
much different. Saving time is the both the goodness of the division of labour and the computational approach.
But while this was the real destination of the computer technology it was not the one and the only utility of it.
It also helps to calculate the endless equations and data to predict the exact date of the crisis. This is a theoretical
argument which unfortunately could not be supported by the practice. Economists have developed skills and tools
for predicting crisis but that does not work well enough especially in the periods of crisis which were the only
time to evaluate the effectiveness of the tools.

Asian Tigers praised by the International Monetary Fund (IMF) experts’ just before the crises in Southeast Asia
occurred (Bullard et al., 1998: 505-506). Why are statistical tools not enough in predicting the crises, where
could be the problem? Could this problem be in the tools? In the computers? In the economists? Or in another
part? Economics convergence to mathematics and econometrics make the discipline to diverge from society and
history. Rationality is a useful and an important assumption which helps in analysing the economic issues but on
the other hand it is hindering the historical and social dimensions of economics.

This chapter gives importance to the social and the historical dimension of economics and in this context the history
of crisis and the similarities of crisis will be elaborated and by this way it will try to put a light on the linear path of
crisis. This chapter especially focuses on the history of one of the early global crises namely the South Sea Bubble
and tries to show the similarities of this bubble with the financial crises of 2008. In the second section firstly the
ethimology of crises will be evaluated and next the historical crises and especially the South sea bubble will be
examined. After elaborating the important part of the historical crises lastly the crises of 2008 will be analyzed.

1 Dr. Faculty Member, Nigde Omer Halisdemir University, Faculty of Economics and Administrative Sciences, Department of
International Trade ve Logistics Management.
2 Res. Assist., Hitit University, Faculty of Economics and Administrative Sciences, Deaprtment of Economics

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2. From Equilibrium to Crisis or from Crisis to Equilibrium

Economics deals with conditions of equilibrium and attaining these conditions is the fundamental principle in
economics. Equilibrium is a term which was gathered from physics is described as a stationary position in which
the vectors are in the opposite direction to neutralize each other. Asking a strange question such as the timing
of a man will be when could be accepted as an equilibrium position? How could be such a position? Consider a
Quenn’s guard standing still. Could that guard be in a position of equilibrium? Definitely not. Could it be possible
to be in equilibrium in the sleeping without snoring and moving? It is definetly not possible while your bodily
function continues. A human being can attain equilibrium when he dies. The end of living is the condition for
absolute equilibrium. If you want to end this equilibrium you need to give an external shock and to resurrect with
an electroshock theraphy. To put it shortly it could be argued that in medicine it is better to end the equilibrium
condition by an external intervention. This means that in medicine crisis make you to loose the equilibrium
condition. But this does not mean that equilibrium is not important in medicine. There is a disparity between the
absolute equilibrium and the equilibrium which could be both important in medicine and economics. Medicine’s
main aim is to end the condition of absolute equilibrium. But on the contrary it could be said that equilibrium
conditions are important in medicine. In all diseases doctors first duty is to investigate the blood tests which
gives the equilibrium conditions of human chemicals. The equilibrium in the blood tests could be accepted as
an indicator against the absolute equilibrium. Crisis in the equilibrium of blood tests needs to be improved by
an external shock to gain the equilibrium but not the absolute one. Crisis is a concept which was gathered from
medicine. The crises are related with equilibrium but not with the absolute equilibrium. It is interesting that there
is a reverse relationship between crisis and the equilibrium in economics. In economics, first one is a situation in
which the equilibrium condition could not sustain or to attain absolute equilibrium - the death of the market
system. In this context, there is a huge relationship in between crisis in economics and medicine. In both fields
crisis is an end situation – the end of life and the end of self regulating market system.

The history of economics fosters the analogy between medicine and economics. This analogy could be found in
Physiocracy. Dr. Quesnay may accept as the establisher of this correlation. He attempted to relate the blood in the
vessels and the money circulation. The economic system became body politic with Quesnay (Foley, 1973: 121).3 But
the history of political arithmetic is a little bit earlier than the body politic. William Petty is the originator of this
idea and he could be accepted as the father of mathematical economics and econometrics. Calculation of the land
of Ireland was Petty’s duty (Rothbard, 2006: 299). After the developments in the methods and tools of calculation,
economics and economists has a change or transformation. They left the political side behind and the exactness of
the science became brilliant. The change in the science has reflection on the responsibilities of the economists.

Economists have a two responsibility in the modern world. Firstly, they are responsible for forecasting the time of
crisis and secondly the true diagnosis of and the true prescription for the crisis. Forecasting the time of a crisis is
something like lottery winning. Generating a true prescription begins with a true diagnosis. The true diagnosis’s
initial condition is observing and testing the symptoms. So the tests and observes are the most important duty for
the economist working on crisis. The tests and observations depends on two conditions. The first is the economic
theory and the second is the tools of the economics namely mathematics, statistics and econometrics.

The mainstream economic theory did not have a solution to overcome the crises. Say and Ricardo’s approach to the
“impossibility of crises” has taken place in the unconscious of “economists”. The crises are somehow the crisis of the
3 Eren (2015:18) related the number of 5 billion of net produce to the five litre of blood in the vessels of human.

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economic theory4. The crises are an interesting step in the evolution of the economic theory or economic theory
could be read as a reaction to crises. When the gap between economic theory the real world has been diverged, the
economic theory needs to update itself or needs a revolutionary alteration. But economic theory did not succeed in
transforming itself or it did not have an inner power to succeed this. The lack of inner power has been substituted
by crisis. Crisis generates an option for economic theory to be transformed. This argument needs to be supported
with evidence. The South Sea Bubble of 1720 ends feudalism and generates the classical school of political economy
(Ricardian revolution). The crisis of 1848 could be read as the beginning of Marxian political economy. Financial crises
of 1870’s is the birth date of marginal revolution and the beginning of neoclassical economics. The great depression
of 1929 gives us Keynes’s general theory. The crisis of the Keynesian welfare state, which began in the late 1960s and
became prominent in the 1970s, increased criticism and the monetarist counter-revolution (Johnson, 1971: 1, 7-8).
These could be accepted as the evindences for the transformation in the economic theory.
The conception of wealth had a change by the South Sea Bubble. After the crisis, wealth did not seem as consisting
of finance and trade. On the contrary, production will be accepted as the source of wealth. The above process had
a long history that removes the possibility to be evaluated in this chapter. The main aim of the next section is to
investigate the importance of South Sea Bubble and the 2008 crisis.

3. From the history of crisis to 2008 Crisis: Same Story Different Places
Economists in 2007 were not waiting or predicting a crisis in USA. Before the che crisis of 2008 in USA the data
give no signals of crisis (Eren; Saraçoğlu, 2017: 88). The first and the second figure show the usual conditions of
2007. The GDP were increasing in 2007 and the its growth continues till 2008 and turns downward after 2008.

Figure 1: Annual GDP of US (in billions of chained 2009 dollars)

Source: Bureau of Economic Analysis, 2016

4 Apaydin (2015) has a relevant research on how the schools of thought deal with the issue of crisis.

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Figure 2: Growth of US GDP (calculated from billions of chained 2009 dollars)

Source: Bureau of Economic Analysis, 2016

At the beginning of September, the control of the housing finance institutions Fannie Mae and Freddie Mac was
transferred to the federal government. September of 2008 also witnessed the bankruptcy of Lehman Brothers, who
invested in housing related assets and this leveraging failed by the downturn of the housing markets. Lehman’s
vulnerability were high and after the downturn of the market, it sink downwards the economy with it (Ataman
Erdönmez, 2009: 91). The US economy shrank 0.3 percent in 2008 and 2.8 percent in 2009. The unemployment
rate in 2009 was 60 percent higher than in 2008. Gini coefficient of US goes upwards after the crises for two
more years (ILO, 2018; The World Bank, 2018).

The crisis seems accidental for the ones who does not interested the history of capitalism and either the history
of crisis (Eren; Saraçoğlu, 2017: 88). But the costs of these accidents are so much that the faith to global markets
and the invisible hand disappeared. Schlefer (2012) is thinking like us about the invisible hand: “of course, the
dynamic but turbulent history of capitalism belies any invisible hand. The financial crisis that erupted in 2008 and the
debt crises threatening Europe are just the latest evidence”.

Individual mistakes or the wrong policies could not be the reason for the crisis. According to Marxist theory,
the capitalist system has a tendency towards crises, and the fall in profitability ratios is the main source of them
(Clarke, 1994:1; Savran, 2009: 37-39). In the last quarter of 2006, profits from current production have begun
to decline (US Bureau of Economic Analysis, 2016). This is the beginning date of the blowing of the balloon or
the bubble, and it has exploded in September 2008.

Profitability is both for reason and the cause for crises. The decline in profitibility generates the crisis, and the crisis
is interestingly lessening the decline in profitability. The decline in profits ends immediately after the crisis and it
began to rise. The Figure 3 below shows the decline in profits in the US economy. In the final period of 2008, the

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huge decline in profits generates the crisis and interestingly in the first period after the crisis, the profits began to
rise. The reason of this could be explained by the reserve army of labour. The size of the reserve army was higher
in the period of crises and it has a direct effect on the level of wages. It prevents the increases in the level of wages.
The capitalists have the opportunity to decrease the wages and also unpaid overtime workings became widespread.

Figure 3: Profits from current production

Source: Bureau of Economic Analysis

As mentioned above the history of crisis to teach us that the crises are the natural consequences of the capitalist
system. The etymology of the concept of crises gives us an important clue.

The Greek word krino is the origin of the word crisis. The “decisive moment” is the meaning word crisis. It is the
moment of decision in removing the blockage. This indicates those crises are already an end and a beginning or a
turning point in the economy. The crises are the transition point between economic recession and recovery. In this
context it is an end or an opportunity to a new beginning (Merriam-Webster, 2018; Vanhoutte, 2018: 142-143).

The crises have the same patterns. The signs of disease are seen firstly in the financial part of the economy but the
real effect of the crisis was seen in the production sector.

The interest rates are low and this generates a demand to stocks which increases the price of stocks. The increase
in the new investors in the stock market increases the stock prices and the high stock prices could continue. The
prices of the stocks exceed the real value of the business firms. When the increase in new investors stops, there is
a stock market turbulence began. We could accept this as a historical fact. Kipper and Wipper crisis (1621) which
occur during the thirty years’ war. To finance the thirty years’ war, the Holy Roman Empire made a debasement
in the currency (Bundesbank, 2017). The Netherlands experienced a similar financial crack called tulip mania in
1636. This similarity could be explained as the deviation of asset prices up from its intrinsic values then fall to its

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intrinsic values even below. There are some recent examples such as Missippi Bubble, South Sea Bubble, Black
Friday, Great Depression, 1982 Latin American debt crisis, 1997 Asian Financial Crisis and the dot.com crash.
In all these crises, asset prices exceeds its intrinsic values and then fall again. In dot.com crisis of March 2000, the
NASDAQ rate nearly fivefold in four years time (Figure 4). In less than a month, a trillion dollars worth of stock
value had disappeared (Atakısı et al., 2010: 50; Eren; Saraçoğlu, 2017: 90; Geier, 2015).

Figure 4: NASDAQ Composite Index (1997-2002)

Source: Fed St. Louis, (2018)

This same story has occured in the 2008 financial crisis. With the Dwyer’s (2009) words: “Stock prices fell roughly
50 percent from peak to trough from October 2007 to March 2009”.

It is difficult to explain such an important crisis by a domino effect triggered by individualistic mistakes or weakness.
The problem lies within the system. According to to the invisible hand paradigm, there is a harmonious order and
economy tends toward equilibrium or with the words of Shaikh (1978: 219) “capitalism is capable of automatic
self-reproduction”. If not capable in so doing there must be room for external influences.5 In the aftermath of
the crisis, mainstream economists contradictoryly hoped for state intervention. So there is a tension between the
economists anti-crisis faith and after-crisis policies. The intervention to the system ruins the spontaneous working
of the system and generates the crisis. Here we see the traces of the methodological dilemma of the bourgeois
economy against the crisis: Explaining the source of the problem with external factors, not the nature of the
system. The bourgeois economy, which based on equilibrium and therefore rejects the crisis, refers to individuals,
accidents and monsoon rains in explaining the crises (Savran, 2009: 31-39).

Üşür had speculated and make a distinction namely “historical reconstruction crisis” and “transition crisis”. In
the restructuring crises, there is no fundamental change in the rule and general functioning of the system. The
transition crisis made an alteration in the mode of production. It is the reason of transforming from one mode of
production to another mode (1999: 42-44).
5 According to Holcombe (1999) “there is an inherent tension between the concepts of an equilibrium outcome versus the invisible
hand process”.

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The transition crises in the history of capitalism are not often seen. The crisis of feudalism in the 16th century
was the end of feudalism.6 1917 Russian crisis could be accepted as a transition/structural crisis. That crisis gave a
birth to a new social formation namely socialism. Or the “crisis of socialism” in 1989 in China could be accepted
as structural crisis (Üşür, 1999: 43; Gökten, 2016: 32). In this context South Sea Bubble is a reconstruction crisis.

4. The First Bubbles: Mississippi and South Sea Bubbles

4.1. Mississippi Bubble
The South Sea and Mississippi Balloons are connected to each other, although they have their own conditions7.
The monetary expansion efforts of the Kingdoms of France and England, which face the problem of paying their
debts, have sparked speculation (Kindleberger; Aliber, 2005: 59). John Law is responsible for the collapse called
Mississippi Bubble. Law, known as a gambling and financial genius, was influential on French government circles
starting from 1715. Law’s previously rejected national bank proposal was adopted by the success of the General
Bank experience that began in 1716. Thus, General Bank was transformed into Royal Bank (Dale, 2004: 69-70).

Law’s second stage of debt refinancing was the Mississippi Company. For this purpose Law used a defunct company.
This company was the Mississippi Company which holds the monopoly of the trade in French Louisiana. Law received
the Kingdom’s permission in order to finance the development of Louisiana by share issue. In 1718, the company also
took the monopoly of tobacco and spread its activities to a wide geography (Dale, 2004: 71-72). Following the trust
of the investor, Law issued shares in succession. These stocks were the subject of a full speculative frenzy. In January
1719, the shares that were offered to the public on 500 livre per share increased to 10,100 livre in the last month of
the year. After this performance, Law was brought to the finance ministry, the country’s highest administrative position.
The people who invested in the shares of Mississippi became rich in a few months. High demand for Mississippi
shares caused an increased amount of banknotes in circulation. Astronomical increase in money supply created
the inflationary environment. The price of goods doubled from July 1719 to December 1720. In Paris real estate
prices soared twenty-fold and and demand for luxury goods has increased dramatically. In January 1720, Mississippi
Company shares lost about 20 percent. Within this period investors wanted to get their earnings in the form of
gold coins instead of banknotes. Law accused investors and tried to limit the payments in gold. In May 1720,
Law decided that Company’s shares were overvalued and began to devaluate shares. Due to investor panic and
devaluation, the company’s shares declined to 1,000 livres at year’s end. In 1721 September, the value of the shares
will decrease to 500 livre which is the value of the public offering (Garber, 2000: 100-103; Dale, 2004: 78, 134;
Colombo, 2012)8. The collapse of the Mississippi project led to a series of bankruptcy and suicide, as well as the
deepening of the financial problems of the Kingdom of French.
6 Sarıöz Gökten (2013: 78) mentions the “general crisis of 16th century” as the transforming force for feudalism. Also there was a
crisis in Ottoman Empire in this period. According to Köktaş (2016:226) “The equlibrium of Classical Ottoman” could not continue
with the crisis of 1585.
7 According to Garber, “government connivance was at the heart of these schemes. Each involved a company that sought a rapid
expansion of its balance sheet through corporate takeovers or acquisition of government debt, financed by successive issues of
shares, and with spectacular payoffs to governments” (2000: 87). The different sides of the contemporaneous twin crisis are as
many as their similarities. Law gathered the financial powers in France. South Sea Company has not been able to replace the Bank
of England and therefore has no authority to control the money supply (Julia, 2011: 112). South Sea Company had to compete with
other share issuing companies. Mississippi Company shares were bearer shares so they could freely tradable.In return ownership of
South Sea Company shares had to be registered on the company’s books (Dale, 2004: 79-80).
8 John Law soon became a fugitive while he was the strongest man in Europe. He had to leave France, and he settled in Venice where
he lived until his dead (Dale, 2004: 137).

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According to Colombo (2012) the Mississippi Bubble was not technically a bubble. Mississippi is an example
of bad monetary policy based on uncontrolled increase in money supply, rather than a financial crash caused by
panic and speculation.

4.2. South Sea Bubble

South Sea Company which was founded in 1711 was a merchant company trading to South Seas and especially
Spanish America. The South Sea Company has been established as a public-private partnership in order to reduce
the debt of the United Kingdom. It was like a shadow national bank. United Kingdom’s issued bonds for the
public debts were the assets of the South Sea Company. Although the company was founded in 1711, the business
in question, however, began in 1717. The first voyage had limited success. George III of Great Britain became
governor of the company in 1718, in order to gain confidence in the entrepreneurs (Smith, 2007: 577; Atakısı et
al., 2010, 51). “Under the Treaty of Utrecht (1713), the South Sea Company was granted the Asiento to provide
144,000 adult slaves for Spain’s American colonies over a thirty year period” (Brown, 2010: 28). The profitibality
in slave trade is controversial. According to Carswell, (1993:55) it is “not profitable” on the other hand Paul (2011:
3-4) is not agree with Carswell and criticize the mainstream historians and concludes that slavery was profitable.
In fact, as you will see below trade was always of secondary importance for the company.

The Whigs were dominating the Bank of England. South Sea Company was a tool for Tories to restructure the
national debt without becoming dependent upon the Whigs (Paul, 2011: 57). The argument that “the company”
basically emerged as a counter balancing organization to the Bank of England and East India Company could
be accepted. Particularly in the government debt auctions, the Bank of England faced the South Sea, where the
South Sea was always one step ahead. Therefore as has already been mentioned, the South Sea Company was
basically taking over the debts of the state. The conversion of government debt into equity for the South Sea was
the company’s main profit. Although the origin of this company was based to the Tories, the managers of the South
Sea had ability in getting close, into the party in power. There is a relationship in between the South Sea managers
and the leading members of the parliament. South sea managers have given stocks to the leading members of the
parliament which could be seen as bribes (Hoppit, 2002: 142; Atakısı, 2010: 49-51; Eren; Saraçoğlu, 2017: 93-
94). Thomas (2003: 12) also mentions these bribes (amounting 1,3 million £) and manipulations. The sharp rise
in the share prices helped the members to gain money. The number of the people who wanted to invest in the
company could increase by this process. The people were mad about “the company”, the ladies sell their jewelries
to buy the shares (Melville,1921: 54-55).

Patterson and Reiffen’s (1990: 167) words “The “aggressive marketing scheme” it pursued triggered a bull market,
which benefited not only its own new issue of shares, but those of other incorporated and unincorporated joint-
stock companies as well”. The impressive increase in a few months will turn into a destruction that spreads to the
same period of time.

As mentioned above The Mississippi Company had a direct effect on the South Sea Company’s financial operations
from the beginning. The success of John Law’s financial experiments influenced the English government. France,
which improved its financial indicators, was a threat and an example for England. As well as debt management
the abnormal profits made by The Mississippi Company and its investors generate motivation for financial circles
(Dale, 2004: 83). The bursting of the Mississippi Bubble at the beginning of the summer of 1720 had caused a

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stock exchange crash not only in France, but in Europe’s most important financial centers. While the share price of
the South Sea Company was initially unaffected by this crash, the perception of the investor began to deteriorate
towards the end of summer. There were concerns that the South Sea Company would share the same fate due
to its proximity to the Mississippi Company. Although investor psychology was deeply affected by the failure of
Law’s experiment a stock market crash does not have to be explained by external conditions. The market valuations
were not sustainable, the gap between the valuation of the stock and subscription prices was widening. The inner
fragilities of the Company’s financial structure highlight the internal factors that help to explain the timing of the
crash (Dale, 2004: 138-140; Dale et al., 2005: 263).

Beyond these the important government legislative regulation correlated with South Sea bubble. The Bubble Act
has led to results beyond the expectations of the company, which is influential on Parliament. The Act aimed at
restricting rivals’ activities and new entrants to the market but ironically has caused general selling on the market
(Thomas, 2003: 13-14). With the words of Dale (2004:142-143):

What the South Sea directors had failed to foresee was that the collapse of fringe enterprises would have devastating
knock-on effects on core Exchange Alley stocks, including in particular shares of the South Sea Company.

Figure 5 shows the formation of the bubble and its burst. The increase in the price for the South Sea Company’s
share is incredible since the beginning of the year. The price of South Sea stock, which was £128 at 1 January,
rose to over £900 by mid-summer (Dale, 2004: 115). As of mid-september the end of the South Sea experience
was clearly visible. Attempts to stabilise the stock price was unsuccessful. Two serious problems were arising:
great inconvenience of latecomers and liquidity problem. The cost of the sudden collapse of the stock price was
considerably higher for the latecomers who had subscribed at prices up to £1000 (Table 1) (Dale, 2004: 148).
Some investors have seen that the shares are overpriced, and despite the warnings, the naive and optimistic
investors have pushed prices up9. The behaviors of the rational individuals seeking new profit opportunities led to
a “speculative euphoria”. Increasing optimism and prosperity pushes people and financial institutions to take on
the risks that they would not normally undertake. Each new investment expanded the credit, the credit stimulated
new investments….10(Kindleberger; Aliber, 2005: 37; Paul, 2011: 113-114).

9 This shows us that we should not explain all of the bubbles on the financial history with a passion for gambling. Different types of
investors enter the market at different times for different reasons (Paul, 2011: 116).
10 Hutcheson’s writings were of critical importance. He provided important evidence that absolute valuations of the South Sea
Company deviated extremely from the valuation criteria of the period (Dale, 2004: 187).

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Figure 5: Share price of South Sea Company, Bank of England and East India Company during the Bubble Episode

Source: Leister (2017:22)

The losses could not be prevented, government intervention needed to solve the crisis. Government and Parliament
to orchestrate a bail-out operation. In this process The Bank of England was used, and the Bank reluctantly involved
in the South Sea Company’s problems. The company had to transfer a significant portion of its government bonds
to the Bank of England (Dale, 2004: 149-150).11 This was a punishment for the South Sea Company.12 Eventually
The South Sea Company had lost the struggle against the Bank of England after the burst of the bubble.

11 It is interesting to note that the title of a book written by Armour (1721) on those days were “Proposals for Restoring Credit: for
Making the Bank of England More Useful and Profitable, for Relieving the Sufferers of the South-Sea Company, for the Benefit of
that of the East-India, and for Raising the Value of the Land-interest of Great Britain : Humbly Offered to the Consideration of both
Houses of Parliament”.
12 In the days of the South Sea crisis remitting the company has thought but not realized (Melville, 1921).

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Table 1 Shareholder Losses and Gains (£)

Cost per share Net assets per share Gain/loss per share
Original shareholders at 100 90,9 557,1 466,2
First money subscription at 300 272,7 557,1 284,4
Second money subscription at 400 363,6 557,1 193,5
First conversion offer at 375 340,9 557,1 216,2
Third money subscription at 1000 909,1 557,1 -351,9
Projected subscription at 1000 1000 557,1 -442,9

Source: Dale, 2004: 122.

It is well-known that the South Sea Bubble is a frequently referred event in the world financial history. However,
the emphasis made by economic historians does not originate from the extent of the economic devastation. The
main reason is to analyze the financial crises that have emerged since then and to trace the investor behavior. When
we look at the economic-social effects of the South Sea bubble, there is no evidence of a shock in the economy,
particularly in agriculture. There may be a short term fluctuation in foreign trade. Contrary to the expectations the
social impact of the South Sea Bubble has not reached significant levels due to the lack of a general bankruptcy
wave (Hoppit, 2002: 152-153; Paul, 2011: 103-105). Dale cautiously argues that the increase in the number of
suicides in London can be attributed to the burst of the bubble. There are booms that took place during periods
when there was no real paradigm shift that would affect productivity gains and company profitability, as well as
traditional valuation methods abandoned during this process (Dale, 2004:185- 186).

With the South Sea, a small change in the sentiment of investors, who fascinated by the success of money
subscriptions and trusted the company, has led to the bubble’s bursting. Similarly, the investor’s overconfidence
on bullish investment advisors and optimistic profit forecasts at the height of the 1990s dot.com boom led to a
retreat from stocks. In this process, corporate malpractices and financial scams became visible (Dale, 2004: 188).

Beyond similarities, there is useful information about investor behavior in the 1720 Mississippi and South Sea
events, and we can combine this information with the experiences of the Japanese stock market bubble of the
1980s, dot.com and the global financial crisis of 2008. If the message of the extraordinary developments of 1720
understood by business circles, economic policymakers can take protective actions (Dale et al., 2005: 264).

5. Conclusion
Finally, the expansion dynamics of such speculative investment field limited by the expansion dynamics of the
economy. A growth based on capital accumulation and profit cannot be infinite or unlimited. It is not possible to
increase profit continuously and uninterruptedly and to maintain capital accumulation forever.

The example of the South Sea bubble is crucial in depicting the inherent problems in the capitalist system and to
establish common grounds in the crisis of capitalism.

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When capital accumulates sufficiently in the capitalist mode of production, there will be profitable investment
areas, but this increases the risk and the bubble swells. Financial bubbles appear in different social conditions at
different times, not a repetition of each other. However, due to the nature and functioning of the capitalist system,
it is a fact that common characteristics emerge.

The capitalist system is increasingly relying on financialization to overcome its bottlenecks. Missisippi and South
Sea are early examples of these quests. The only important element in these important experiences of financial
history is not irrational investor behaviors that pursue high returns. We find the early examples of CEOs and
high-level financial experts known for their responsibilities in the Mississippi and South Sea bubbles. Despite
previous experiences and warnings, investors still ignored the information and recognized valuation methods that
were readily available to them. Better explanations to the economic damages caused by irrational investor behavior
will facilitate the work of the financial circles and policymakers to take the measures unless they are part of the
unethical behavior.

References
Apaydın Ş. (2015) Kısa Vadeli Sermaye Hareketlerinin İktisadi Dalgalanmalar Üzerindeki Etkileri: Kuramsal
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