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Our Current Economic Crisis


An interesting feature of the current economic crisis is the blame game that is going around. For the most part the crisis is blamed on certain market practices or participants. In particular, unsupervised financial innovations and laxness in regulation are seen as the causes of the troubles that we face. Given this view, the solution offered is relatively simple: regulate the market and bring financial innovations under control. However, as I argued in an article in CounterPunch, this view is simplistic.[1] It ignores the underlying economic system that produces the practices and participants who are considered to be responsible for creating the current crisis.

In response to my CounterPunch essay I received numerous emails, far too many to respond to individually. One inquiry, however, did catch my eyes. I was asked by a reader what I think about the argument that short selling was partly responsible for the market crash of 1929 and current troubles. I was further asked if such practices should be regulated. I referred the reader to an interesting article that appeared on Reuters on September 23, 2008, entitled “Short sellers have been the villain for 400 years.”[2] The author, Daniel Trotta, argued that when in 1609 the share price of Dutch East India Company plunged, a merchant was blamed for short selling, and for the first time the authorities banned such activities.

As I told my reader, whether this was the first time that betting on the market price was outlawed I am not sure. But as a historian of economic thought, and as one who has been interested in the market mechanism in the early stages of development of capitalism, I know that hedging and gambling in the market place are old practices, at least as old as the “commercial revolution” or the development of “merchant capitalism” in the 13th century. Indeed, as I have argued in my book, Money and Exchange: Folktales and Reality, and in some other essays, in medieval trade merchants regularly tried to cheat one another in the market place. [3] In so doing they used other merchants’ ignorance of arithmetic to swindle them. Arithmetic—which at the time consisted mostly of knowledge of the Arab numerals, four basic mathematical operations and the “golden rule,” or the “rule of three,” where a missing fourth number in two equal ratios is found—had just reached Europe by way of Arab merchants. Between the 13th and 16th centuries a group of merchants in Europe, particularly in Italy, wrote manuscripts to teach merchants’ children, who attended special training schools, the newly received arithmetic. But what is perhaps most interesting about these manuscripts is that almost all of them teach how to use arithmetic, particularly in the act of barter, to cheat their trading opponents and increase what they called the “overprice.” As such, these medieval manuscripts taught that the rule of exchange was to come out ahead in transaction and that barter was “nothing but giving a good for another in order to get more.”

To make a long story short, in the medieval markets arithmetic became a tool, a “financial innovation” to use the language of the modern market, to make more money. The rule of the game was to take advantage of arithmetical ignorance of others to gain as much profit as possible. This was how capitalism was born. It was born not of honesty, equality, justice or fairness in exchange, but of deceit, swindle, inequality, injustice and unfairness.  It was also in this same period that one can find the emergence of many other financial innovations, such as forward contracts and bills of exchange, innovations that tried to increase profit by reducing uncertainty and risk.

How did the economic thinkers of the medieval era, the Catholic clergy or the so called Scholastics, react to these market practices? Instead of trying to reflect on the reality of the new and rising social system and attempting to understand its true nature, they wrote pamphlets and gave sermons preaching how to be a good Christian. They prohibited certain market practices and blamed market participants for these practices. They warned people of avarice and excessive accumulation of wealth. They advocated quid pro quo and called for equality in exchange, an Aristotelian concept that by then had acquired a Biblical flavour. As opposed to merchants’ concept of “overprice,” the monks advocated a “just price,” an ambiguous concept that has been interpreted in a variety of ways, including a price that covers cost of production plus a “reasonable” profit.  The monks warned people of practicing such sinful activities as usury and reminded them of such lines in the Bible: “Lend freely, hoping nothing thereby.” In sum, the medieval economic thinkers tried to regulate the market by prohibiting certain practices. Of course, as anyone familiar with the writings of the Scholastics knows, this prohibition was quite selective and often did not include the high and the mighty, the “beloved sons of the church,” who were the church’s benefactors.

It seems that seven hundred years later not much has changed. The point of departure of modern economics, similar to that of the medieval economic writings, is not a real economy where deceit, swindle, inequality, injustice and unfairness are often the norm. But it is an imaginary world, a peaceful and stable market system where there is mostly quid pro quo, equality in exchange, “equilibrium” and “rational agents.” Occasionally, some bad apples, “irrational agents,” appear on the scene that engage in undesirable practices and disrupt the tranquillity of the market system. At this point the modern economists, similar to the medieval monks, start preaching against these despicable individuals and their practices and call for regulation. But instead of giving sermons to end usury and avarice, they lecture against “NINJA loans” (loans made to “No Income, No Job and No Assets” people), mortgage-backed securities, collateralized debt obligations, equity default swaps, credit default swaps and tens, if not hundreds, of other “financial innovations” that have appeared in the past few decades.

Instead of blaming a few bad Christians and Jews for undesirable market practices, the modern preachers blame the NINJA people, who should not have borrowed money; the greedy financial institutions, who should not have made loans to the NINJAs; the associations and corporations, such as Fannie Mae and Freddie Mac, which should not have securitized bad mortgages; the appraisers and the credit rating agencies, such as Moody’s and Standard & Poor’s, which should not have rated so highly the value of some financial institutions; the central bank and its directors, who should not have pushed excessively for lower short-term interest rates; the government regulators, who should not have closed their eyes when it came to regulating the financial intermediaries; the politicians, governmental agencies and institutions, who should not have pushed for deregulation, etc.

Similar to the medieval economic thinkers, the modern economists also have relatively simple solutions to solve the ills of the market system and cure its “excesses.” They propose, among other things, re-regulating and supervising the financial intermediaries, controlling the development of “exotic” financial instruments, renegotiating “toxic” mortgages and “troubled” assets, and prosecuting the individuals engaged in financial gambling and Ponzi schemes. Of course, some of these proposals are commendable. After all, who would be against putting behind bars those greedy tycoons and Ponzi schemers who caused so much pain? Yet, one should not expect such proposals to have long-lasting effect on the “undesirable” market practices any more than the Scholastics’ sermons ended the habits of the medieval merchants. Many centuries after the monks’ prohibitions, greed, swindle, usury, excessive accumulation of wealth, charging overprice, gambling in the market place are alive and thriving.

We should anticipate more of these practices and not less. Even if the current economic proposals are implemented, we should not expect to see “toxic” mortgages, “troubled” assets, “exotic” financial instruments, and Ponzi schemes to disappear from the market for good. Instead, we should expect every regulation to be followed by deregulation and, then, the cries for reregulation. We should also expect the creation of even more “exotic” financial instruments. That has been, since the age of “commercial revolution,” the pattern of development of the market system and there is no reason to believe that such a pattern will change.

SASAN FAYAZMANESH is Professor of Economics at
California State University, Fresno. He can be reached at:


[1] “A Very Short Obit—R.I.P.: the Experts, 1929-2008,” CounterPunch, November 14 / 16, 2008.

[2] See

[3]See Chapter 3, “The Sons of Adam, Justice in Exchange and the Medieval Economy,’ Money and Exchange: Folktales and Reality (2006, Routledge).

Sasan Fayazmanesh is Professor Emeritus of Economics at California State University, Fresno, and is the author of Containing Iran: Obama’s Policy of “Tough Diplomacy.” He can be reached at:

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