Structural Analysis of Financial Madness Mechanisms, the Instability Hypothesis, and the Rise of Fictitious Capitalism

The Paradox of Rationality and Human Tendency Towards Financial Folly

Classical economic theory assumes that markets are highly efficient, and that economic actors behave according to "rational logic" that balances supply and demand, leading prices always towards a fundamental equilibrium point.
However, financial history repeatedly proves the exact opposite; periodic crises and financial bubbles reveal a latent collective tendency towards greed, driven by illusion and an overwhelming desire for quick wealth without real production.

An economic bubble is essentially a sharp and structural disconnection between the intrinsic or actual value of an asset and its market price.
To illustrate this concept, we can borrow a simplified explanatory model from the world of sports:
When it is rumored that the brilliance of a team and its artistic success is entirely due to the skills of a remarkable player like "Messi", while the coach "Guardiola" is seen merely as an inflated shell blown up by this brilliance, we face an unjustified inflation of one party's value at the expense of reality.
The disappearance of the real element (Messi) in this Keynesian model is enough to burst the inflated valuation of the other party, revealing that the value was nothing but a balloon.
This structural disconnection between price and actual size is the driving force behind financial bubbles; a steady rise in asset prices (whether real estate, stocks, or even agricultural commodities) without logical economic justification, where people buy the asset for one reason only:
That others are buying it, expecting the rise to continue.

Roots of Institutional Capitalism and Dutch "Tulip" Madness

The idea of investing in stocks and the birth of stock exchanges did not originate in modern times, but has its roots in the 17th century in the Netherlands.
In 1634, the Netherlands welcomed a new flower from the Ottoman Empire, the "tulip".
This flower caused an extraordinary social and cultural fascination due to the rarity of some of its types and its stunning beauty, and this aesthetic admiration quickly turned into a mad investment obsession that shook the foundations of the economy and society completely.

This obsession coincided with the establishment of one of the first stock market experiments in history through the "Dutch East India Company".
This company needed massive financing to operate its trading ships to the East to bring spices, silk, and gold.
Instead of relying on traditional borrowing, the company innovated a mechanism that allowed the public to buy "shares" or "stocks" that financed the sea voyages in exchange for a portion of the future profits upon the return of the ships loaded with goods. Thus, the first stock exchange and ownership certificates in the world were born.

With the stock exchange and tulip mania, investors no longer traded in actual flowers, but moved to trading in "the promise of a bulb"; that is, certificates and securities representing future contracts for a tulip bulb still buried underground.
In his famous book Extraordinary Popular Delusions and The Madness of Crowds, Scottish journalist Charles Mackay documents the insane levels of those prices; where the value of a single bulb of the rare "Viceroy" type reached the equivalent of: 2000 kilograms of wheat, 4 bulls, 8 pigs, 12 sheep, two barrels of wine, two tons of butter, and half a ton of cheese combined.
The madness reached such a level that people sold their homes, farms, and their families' futures to obtain a single bulb.
However, this market built on excessive hope and illusion suddenly collapsed when buyers refrained from purchasing at record price levels, leading everyone to sell, and the strategic value of the asset plummeted to zero, waking the community to an economic and historical disaster known as the "Tulip Bubble", the oldest recorded economic bubble.

"Super intelligence and brilliant science do not provide immunity against the traps of financial bubbles. Isaac Newton, the discoverer of the laws of gravity and the inventor of calculus, fell victim to the famous 'South Sea Bubble' in the early 18th century, losing his fortune there, leading him to utter his historic quote: 'I can calculate the motions of heavenly bodies, but I cannot calculate the madness of men.'"

Structural Anatomy of the Bubble: Minsky's Hypothesis and Kindleberger's Stages

American economist Hyman Minsky presented his revolutionary thesis known as the "Financial Instability Hypothesis" in 1977.
Minsky argued that "stability breeds instability"; as long periods of economic growth and financial stability lead economic actors to feel overly secure, encouraging them to engage in high-risk investment behaviors and excessive borrowing at low-interest rates to finance speculative assets, which inevitably drives the economy towards sharp and violent fluctuations.

Economic historian Charles Kindleberger picked up this hypothesis in his seminal book Manias, Panics, and Crashes to establish a temporal and structural framework consisting of four stages that any economic bubble goes through in history:

The Four Stages of Economic Bubble Development:

  1. Structural Shift Moment (Displacement):
    The bubble begins with the emergence of a new factor in the market; a revolutionary technology, an innovative idea, an expansionary monetary policy, or a new financial asset that captures investors' attention and shakes the stagnant waters.
  2. Prosperity and Expansion Stage (Booming):
    Prices begin to rise gradually and then jump rapidly.
    Investors (both small and large) enter the market, the media amplifies reality, and a psychological contagion known as FOMO (Fear of Missing Out) spreads, raising demand and prices to unprecedented levels.
  3. Euphoria Stage:
    This stage represents the peak of financial madness, where everyone achieves quick paper gains, and thinking about risks completely disappears.
    Investors here rely on the "Greater Fool Theory", which assumes that buying an asset at an inflated price is not a mistake, as long as there is another fool willing to buy it at a higher price in the future.
    This is reinforced by a psychological bias known as "Confirmation Bias", where the mind filters information to focus only on positive news that justifies their investment decision and ignores warnings.
  4. Panic and Collapse Stage:
    Once a rumor emerges, or a change in policies occurs, or investors realize the absence of "the next fool" and that prices have reached their ceiling, the situation completely reverses.
    Greed turns into panic, and a collective rush to sell begins to minimize losses, leading to a complete lack of buy orders, and prices collapse at a crazy speed that burns everything and leads to a market crash.

The GameStop Saga: The Reverse Engineering of the Bubble and the Rise of "Populist Capitalism"

While traditional bubbles throughout history have been based on assets experiencing prosperity or promising technology, the 21st century presented the world with a unique and completely different model through the case of GameStop in 2021; where an economic bubble was built on a financial asset experiencing a clear structural collapse, driven by the mechanisms of the digital age and class revenge.

GameStop is a traditional retailer of video games through CDs and plastic boxes.
With the digital revolution and the emergence of online stores like PlayStation Store, the company's business model became outdated, resembling museums, and its revenues plummeted sharply, with the COVID-19 pandemic deepening its wounds and pushing its stock down to low levels of about $2.5 per share in 2020.

Large hedge funds and investment institutions on Wall Street (like Melvin Capital) saw this collapse as a golden opportunity to make huge profits through a financial mechanism known as "short selling". This mechanism consists of the following steps:

  • The hedge fund borrows shares of a company (like GameStop) from a broker or investor who owns them.
  • The fund immediately sells these borrowed shares in the market at the current high price (e.g., $10).
  • The fund waits for the stock price to drop according to its expectation to lower levels (e.g., $2).
  • The fund then buys back the shares from the market at the new low price, returns them to the original lender, and keeps the difference as net profit in its pocket.

However, the inherent danger in this mechanism lies in the fact that if the stock price rises instead of falling, the fund's losses become theoretically unlimited; as it will be forced to buy the stock at any price to return it to its owners. Here, the fund falls into a trap known as a "short squeeze", where the rush of short sellers to buy the stock to minimize their losses raises demand, pushing the price into further crazy increases.

Events developed dramatically when a massive block of small individual investors gathered through the r/Wallstreetbets forum on Reddit.
These small investors were using free commission trading apps like Robinhood.
Driven by a mix of the desire for wealth and a fierce anger that had accumulated since the 2008 financial crisis and the COVID-19 pandemic against the Wall Street institutions controlling the game, the small investors noticed that hedge funds had committed a financial folly; as the percentage of short-sold shares of GameStop reached about 140% of the total shares actually available in the market.

The small investors realized that if they banded together as a single digital army and bought the stock en masse, they would force the whales to capitulate and buy at the highest prices to save themselves.
This coincided with billionaire Ryan Cohen entering and contributing to the company with the intention of transforming it into e-commerce, followed by a famous tweet from Elon Musk carrying the word "GameStonk!" that ignited the market.
The price jumped from $2.5 to about $148, then continued its historic rise to touch the $500 per share mark in January 2021, multiplying nearly 190 times, achieving astronomical gains for some individuals, while hedge funds suffered massive losses that required the injection of multi-billion dollar rescue packages.

The conspiracy and crisis chapters reached their peak on January 28, 2021, when Robinhood and other brokerage platforms took an unprecedented step; represented in closing the "buy" feature for the stock and allowing only "selling" under the pretext of banks demanding massive financial guarantees due to the terrifying trading volume.
This move forcibly cut off the flow of demand, causing panic and a severe shock that led the stock to drop again to levels of $40 and then $24, revealing to the small investors that the rules of the game had been changed mid-game to protect the Wall Street whales.

Structural Critical Perspective: Karl Marx and the Rise of "Fictitious Capital"

From a deeper critical perspective, these successive bubbles cannot be read merely as reckless human behaviors or individual mistakes, but are an inevitable result of a fundamental crisis rooted in the structure of the modern capitalist system.
Critical interpretations here converge with the propositions of philosopher and economist Karl Marx regarding the nature of commodities and capital accumulation.

Marx distinguishes between two values of any commodity: "Use Value" which is the actual utility that the thing provides to society, and "Exchange Value" which is the market price of the asset.
The structural economic disaster occurs when the exchange value completely disconnects from the use value, leading to what is called "Fictitious Capital".
In the case of GameStop, the stock rose from $2 to $500 without any change in its use value or productive capacity; it is merely fictitious numbers inflated to serve rampant speculation.

The tendency of the financial system to generate and accumulate wealth at any cost and as quickly as possible turns it into a "monster of greed" in a state of perpetual hunger, and when the real and productive economy fails to meet this insatiable demand due to market saturation or declining profitability rates in factories and developmental projects, "money itself becomes a commodity", and financial markets become arenas for pure bets and speculations far removed from productive reality.

Systemic Risks and the Inevitability of Reevaluating the Rules of the Game

The great disaster lurking in these bubbles is not in some speculators losing their money, but in the "Systemic Risks" that threaten the collapse of the entire banking and financial system.
Large funds and investment companies that speculate with record ratios exceeding market sizes do not operate solely with their own money, but manage and invest the funds of large public institutions: such as pension funds, teachers' unions, university endowments, and hospitals, as well as deposits from commercial banks which are the money of ordinary citizens.
Therefore, the bursting of the bubble and the collapse of these financial entities can create a domino effect, evaporating the life savings of retired citizens and igniting economic crises that the entire society pays for, while the big players escape due to their influence.

The GameStop saga and the Tulip Bubble serve as reflective mirrors exposing the deep structural imbalances of the modern financial system; where value becomes mere illusion, and the economy becomes hostage to complex financial instruments and populist speculations.
The continued occurrence of these bubbles in a periodic and accelerating manner sends clear and loud signals:
That the current financial game rules, market oversight mechanisms, and the engineering of the global capitalist system as a whole have reached a critical stage that necessitates a comprehensive and deep reevaluation to protect the future of global economic stability.