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The Special Case

Gotta Come Down

For those students of A Levels Economics who still have no idea how asset bubbles form and why the classical theory of economics suggests that bubbles are unlikely might like to read the recent Buttonwood. A Special Case highlights why the properties of goods that are classified as assets are fundamentally different from the rest of the goods in the economy. This is not only about financial assets but those other goods that are treated as assets. During the tulip mania, the tulips were treated as assets briefly before the entire frenzy collapsed.

When price information feeds back into the demand of a good, the Law of Demand no longer applies and the demand curve of the goods starts sloping upwards. We never seen this sort of analysis done mathematically because it is an imprecise analysis and the equilibrium found is not meaningful (think about 2 positive gradient curves intersecting). George A. Akerlof and Robert J. Shiller brings in various other explanations for the emergence of depressions from disciplines like psychology in their Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism I just manage to borrow it from the library and hopefully I'll be able to finish and review it soon.