I don't suppose the leaders of the Chinese Communist Party have spent much time studying economic history. If they had, their responses to the huge instability of their stock markets, in turn sparking huge falls around the world this week, might have been less clumsy. They might even have taken some basic steps to prevent it.
J.K. Galbraith's The Great Crash has long been one of my favourite books. He wittily dissects the speculative fever that built up the great bull market of the late 1920s and the inevitable crash and depression that followed. None of the players in that market had learned from the economic crises of the late 19c. They permitted speculative buying of securities, in particular the pernicious practice of borrowing to buy, using the securities themselves as collateral. If stock market prices had risen in the past this was taken as proof that they would go on rising. So speculators borrowed more in order to make more guaranteed profits and as they eagerly lapped up new issues from promoters who themselves promised to invest the proceeds into other securities, so the rising prices of these meta-securities induced more buying and rising confidence on a steadily eroding foundation. Everybody in the market assumed that they could always liquidate their holdings at any time and realise their profits because there would always be others eager to buy.
Economists call this the Greater Fool theory and it has been proven many times. Investors staring at the plunging prices on the Shanghai market in recent days are just the latest victims of the fallacy that there will always be a buyer. It does not seem to occur to them, until it is too late, that if everyone in a market is buying in order to sell later on, and then they all try to sell at the same time (which must inevitably happen once the market peaks and all the automated stop-loss systems kick in) then there may be no buyers at all. Or not until prices have tumbled way below what anybody would consider good value. Clever investors buy at such times but they need good nerves.
Markets in the long run may well rise steadily. You can draw a straight line from the past to the future and see it pointing upward. But the long run is a very long time, much longer than the febrile memories of the young men shouting into phones in stock markets. In the short run huge movements may take place beyond the ability of any computer program to calculate (study Chaos theory if you need convincing). And it is in the short run that loans to finance share purchases need to be repaid.
The Chinese cut interest rates today, by a derisory 0.25%. If they knew anything about economic history, or Keynesian monetary theory, they would know this is likely to be futile. Who is going to want to borrow in order to invest in a falling market? They need to convince investors that the economy is stable and growing, that the banks have plenty of liquidity and that businesses are not about to go bust in a big way because consumer confidence is shot to pieces. It's a hard act to bring off.