Thorstein Veblen's crisis theory and 2008 financial crisis

Thorstein Veblen the founder of Institutional Economics described economic science as a social science and tried to establish the connections between anthropology, sociology and psychology. In contrast to the simplification presupposition of classical economics, he dealt with the science of economics with an evolutionary approach, rejected the idea of rational individual and thought that economic agents made their decisions with the effect of institutions, instincts and their environment. He had the opportunity to observe the great development of technology in his lifetime, and he thought that the production concept became a profit-oriented in the period when the financial sector volume passed the real sector volume and that the owners of the company were engaged in legal but unethical sabotage activities in order to increase their profits. He thought that the increasing volume of the loans provided by the investment banks caused the oligopolistic market structure and created a credit-based crisis theory. The 2008 Financial Crisis had negative effects on the world, particularly the US, and the factors causing the crisis were sought. The Financial Instability Hypothesis developed by Minsky and Veblen's ideas on credit-based economic crises are conceptualized under the name of Veblen-Minsky Cycles. The theory is based on an increase in income inequality, an increase in the demand for credit, and the idea that debt-financed consumption expenditures lead to economic fragilities. Veblen-Minsky Cycles can be analyzed with Stock Flow Consistent Models in which the stocks and flows are integrated in the macroeconomic economy and their changes are periodically monitored In this study, the Financial Instability Hypothesis and Veblenian consumption dynamics were combined to analyze the Veblen-Minsky Cycles on the basis of the 2008 Financial Crisis. In the model, household income declines and consumer loans are increasing in order to avoid changing current consumption patterns. The effect of this situation on individual wealth and its impact on the overall economy are examined. The model results showed that income inequality among households caused disruptive effects on economic stability, as well as increasing the total expenditure on consumption driven by emulation, as well as reducing gross domestic product. When the results of the Stock Flow Consistent Model and the situation before the 2008 Financial Crisis were taken into consideration, it was concluded that the deregulation policies, the loans supplied without considering the payment power of households and the consumption made with the emulation motives are the factors leading to the crises.