How to predict and avert economic crisis

TL;DR

This paper proposes that economic crises can be predicted by monitoring stock market convergence to perfect competition and full employment, revealing that crises may be stable equilibria within classical economic models.

Contribution

It introduces a novel perspective that economic crises are feasible equilibria in the Arrow-Debreu model, challenging traditional views on their origins.

Findings

Economic crises occur when stock markets approach perfect competition and society reaches full employment.

Many firms would go bankrupt at full employment in a perfectly competitive market.

Economic crises can be stable equilibria within the Arrow-Debreu framework.

Abstract

Our study shows that many firms would accumulate at zero output level (namely, Bankruptcy status) if a perfectly competitive market reaches full employment (namely, those people who should obtain employment have obtained employment). As a result, appearance of economic crisis is determined by two points; that is, (a). Stock market approaches perfect competition; (b). Society reaches full employment. The empirical research of these two points would lead to early warning of economic crisis. Moreover, it is a surprise that the state of economic crisis would be a feasible equilibrium within the framework of the Arrow-Debreu model. That means that we can not understand the origin of economic crisis within the framework of modern economics, for example, the general equilibrium theory.