America’s Great Depression Quote of the Week: The Nature of the Boom and Bust

Boom and Bust: What must be explained in any theory of the business cycle?

First and foremost is the general cluster of errors. See Hulsmann’s Toward a General Theory of Error Cycles:

 The explanation of depressions, then, will not be found by referring to specific or even general business fluctuations per se. The main problem that a theory of depression must explain is: why is there a sudden general cluster of business errors? This is the first question for any cycle theory. Business activity moves along nicely with most business firms making handsome profits. Suddenly, without warning, conditions change and the bulk of business firms are experiencing losses; they are suddenly revealed to have made grievous errors in forecasting.

Second, what has been recognized in real business cycle theory as a stylized fact of cycles, is the greater fluctuation of time dependent industries (capital goods and consumer durables) relative to industries serving more immediate consumption.

 Another common feature of the business cycle also calls for an explanation. It is the well-known fact that capital-goods industries fluctuate more widely than do the consumer-goods industries. The capital-goods industries—especially the industries supplying raw materials, construction, and equipment to other industries—expand much further in the boom, and are hit far more severely in the depression.

Third is the correlation between money and output over the cycle.

 A third feature of every boom that needs explaining is the increase in the quantity of money in the economy.

This third feature is highlighted by real business cycle models as well but is viewed as harmless reverse causation. But as Rothbard shows, the money and credit creation during the expansion, rather than being a harmless endogenous response of banks to changing market conditions, sets the stage for the boom-bust pattern of the cycle.

All quotes are from pp. 8 and 9.

Comments

  1. Because there are economic problems even when there is no monetary expansion you cannot hold firmly to the third principle. While it may be a factor we must dig deeper than monetary causes alone.

Comments are closed.