Topic: Business cycle

Quotes

Allan Meltzer, “Monetarist, Keynesian, and Quantity Theories” (1977)

• Keynesians, like Keynes, treat all cyclical unemployment as “involuntary,” a loss of output to society and, if not compensated, a loss of income to the individuals who are unemployed. This reasoning ignores the distinction between income and current receipts basic to the model of time preference that economists use. Monetarists, like mainstream classical economists, distinguish between current receipts and income and regard much of the unemployment observed during mild cycles as a consequence of fluctuations in receipts. Cyclical unemployment alters permanent or anticipated income streams and consumption only if fluctuations in receipts cause a reevaluation of the mean level or variability of earnings from particular occupations and in the aggregate.#

Nicholas Barberis, Robin Greenwood, Lawrence Jin, & Andrei Shleifer, “Extrapolation and bubbles” (2018)

• Models of rational bubbles assume homogeneous investors and therefore cannot explain any volume, let alone highly specific patterns of volume documented in the literature.#
• Nearly all bubbles from tulips to South Sea to the 1929 U.S. stock market to the late 1990s Internet occur on the back of good fundamental news.#

David Beckworth & Josh Hendrickson, “Transaction Asset Shortages” (2018)

• Changes in the degree of resalability are the important source of changes in [the money] multiplier.#

Finn Kydland, “Business Cycles: Real Facts and a Monetary Myth” (1990)

• Theories with deterministic cyclical laws of motion may a priori have had considerable potential for accounting for business cycles; but in fact, they have failed to do so. They have failed because cyclical laws of motion do not arise as equilibrium behavior for economies with empirically reasonable preferences and technologies—that is, for economies with reasonable statements of people’s ability and willingness to substitute.#

Robert Lucas, “Some International Evidence on Output-Inflation Tradeoffs” (1973)

• In a stable price country like the United States, then, policies which increase nominal income tend to have a large initial effect on real output, together with a small, positive initial effect on the rate of inflation. Thus the apparent short-term tradeoff is favorable, as long as it remains unused. In contrast, in a volatile price country like Argentina, nominal income changes are associated with equal, contemporaneous price movements with no discernible effect on real output. These results are, of course, inconsistent with the existence of even moderately stable Phillips curves. On the other hand, they follow directly from the view that inflation stimulates real output if, and only if, it succeeds in “fooling” suppliers of labor and goods into thinking relative prices are moving in their favor.#
• Nominal output is determined on the aggregate demand side of the economy, with the division into real output and the price level largely dependent on the behavior of suppliers of labor and goods.#

Steven Horwitz, Microfoundations and Macroeconomics (2000)

• Keynes’ theoretical framework is constructed on the two assumptions of wage and monetary rigidity, without ever asking whether institutional changes that would make those assumptions inappropriate might better address the problems Keynes is trying to solve.#
• Where Keynesian approaches would see the difficulty as an inability to demand (a lack of ‘aggregate demand’), Hutt’s approach would argue that it is an unwillingness or inability to supply (at the market clearing price) that is starting the process.#
• The analog of forced saving during inflation, is that there is what we might term ‘forced investment’ during deflation. That forced investment takes the form of unplanned inventory accumulations and unintended excess productive capacity.#

Richard Wagner, “Austrian Cycle Theory: Saving the Wheat while Discarding the Chaff” (1999)

• An increase in the volume of miscoordination in a society will shift the pattern of activity in a society, but it need not alter the total volume of activity,and would represent a meaningful notion of waste instead.#
• It does not follow that nonsustainable price signals must show up as variations in aggregate series through time. It is conceivable that miscoordination could increase without any impact on aggregate time series. Miscoordination induces revisions in plans. Labor is shifted from the execution of plans to the revision of plans. It is conceivable that this shift of labor can be accommodated within an unchanged aggregate volume of employment.#
• If there is any merit in Austrian cycle theory, it resides not in an explanation of booms and busts but rather in an explanation of structural shifts in the pattern of economic activity without aggregate implications.#
• A cycle theory that depends on the inability of people to distinguish, in the aggregate, between an increase in personal saving and an increase in central bank holdings of government debt must rightfully be dismissed on the grounds that it fails to incorporate any reasonable requirement of individual rationality in economic action.#
• Observed variability in aggregate data might be a sign of avoidable and correctable miscoordination, but it can also be a sign of progress in an interdependent world with capital complementarity.#

Lawrence White, Free Banking in Britain (1995)

• The primary weakness of any trade cycle theory invoking a ‘wave of optimism’ as its initiating impulse is that it begs the question of the origin of the wave of general optimism. Unless it answers that question it offers no account of why, from a state of equilibrium, there should occur a general shift in the demand curve for loanable funds, rather than simply a relative shift from declining to expanding industries. Secondly, it does not explain why such a shift would not simply raise the entire structure of interest rates – deposit as well as loan rates – in the market for loanable funds, leaving equilibrium in the market for currency balances undisturbed except insofar as the demands for currency and specie reserves are interest-elastic.#

Milton Friedman & Anna Schwartz, A Monetary History of the United States, 1867-1960 (1963)

• Velocity tends to rise during the expansion phase of a cycle and to fall during the contraction phase#
• Cyclical fluctuations in credit quality, arising out of fluctuations in the standards used by lenders to assess risk and by borrowers to assess the prospects of ventures, may well play a part in the cyclical process. But it is the fluctuations, not the level of credit quality, that play a part; and it is fluctuations in the standards, not in the ex post outcome, that alone are a separate contribution of the credit mechanism toward the amplification of disturbances. Fluctuations in the ex post outcome without a change in standards are a consequence of other forces, and will have their impacts in turn elsewhere; they involve simply the transmission of impulses through the credit mechanism. In the 1929-33 episode, changes in the ex post outcome were far more dramatic than in the standards adopted.#

Ludwig Von Mises, Human Action (1949)

• Entrepreneurial errors result in losses for the inefficient entrepreneurs which are counterbalanced by the profits of the efficient entrepreneurs. They make business bad for some groups of industries and good for other groups. They do not bring about a general depression of trade.#

George Selgin, “Bank Lending ‘Manias’ in Theory and History” (1992)

• Historical banking booms have typically involved falling rather than rising rates of interest until their final stages. This means that banking booms have usually been driven, not by changes in the demand for credit, but by rightward shifts in bank credit supply schedules.#

Ludwig Lachmann, Capital and Its Structure (1956)

• That the economy ‘hits the ceiling’ may mean that a new railway line cannot be completed, or cannot be completed within the time planned, or at the cost planned. But it may also mean that even if it is completed as planed, it will lack complementary factors in the rest of the economy. Such a lack of complementary factors may well express itself in a lack of demand for its services, for instance where these factors would occupy ‘the later stages of production’. To the untrained observer it is therefore often indistinguishable from ‘lack of effective demand’.#

Ludwig Lachmann, Capital, Expectations, and the Market Process (1940)

• Whatever the merits of such a [cheap money] policy in depression or during the early stages of revival, there is one aim it cannot achieve: to maintain the level of investment activity under boom conditions.#
• There can be no major change which leaves the existing structure and composition of capital intact. All such change tends to create situations in which there is too much of some capital assets and too little of others. In this fact lies the ultimate reason for that instability of the “capitalistic” economy which so many deplore and so few understand.#

Leland Yeager, “The Significance of Monetary Disequilibrium” (1986)

• The very fact that no one sees himself as having any appreciable influence over the value of the money unit helps explain the sluggishness of the pressures working to correct a disequilibrium value.#
• Any particular output thus constitutes demand, either at once or eventually, for other (noncompeting) outputs. Since supply constitutes demand in that sense, any apparent problem of general deficiency of demand traces to impediments to exchange, which discourage producing goods to be exchanged. #
• Price changes tend to correct or forestall the monetary disequilibrium but do not and cannot occur promptly and completely enough to absorb the entire impact of the monetary change and so avoid quantity changes.#
• A businessman’s difficulties in finding profitable customers or a worker’s in finding a job are unlikely to trace wholly, and perhaps not even mainly, to his own pricing policy or wage demands.#
• One of the market system’s virtues is that it does not require or impose collective decisions. The dispersion of knowledge and the fact that certain kinds of knowledge can be used effectively only through decentralized decisions coordinated through markets and prices—rather than coordinated in some magically direct way—is one of the hard facts of reality. It forms part of the reason why monetary disturbances can be so pervasively disruptive: they overtax the knowledge-mobilizing and signaling processes of the market.#
• Taking the lead in downward price and wage adjustments is in the nature of a public good, and private incentives to supply public goods are notoriously inadequate.#

Leland Yeager, “Essential Properties of the Medium of Exchange” (1968)

• Demand for current output cannot be excessive or deficient unless, at the same time, the opposite is true of the medium of exchange in particular: at not-yet changed levels of income and prices, people must be wanting to hold less or more money than exists.#
• An economywide excess demand for money shows up not as specific frustration in buying money but as dispersed, generalized frustration in selling things and earning incomes.#

Leland Yeager, “A Cash-Balance Interpretation of Depression” (1956)

• Apparent overproduction in some industries shows not general overproduction but only disharmony between the relative outputs of various industries and the pattern of consumers’ investment preferences. . . . The catch is this: While an excess supply of some things does necessarily mean an excess demand for others, those other things may, unhappily, be money.#

G. Poulett Scrope, Principles of Political Economy (1833)

• A general glut—that is, a general fall in the prices of the mass of commodities below their producing cost—is tantamount to a rise in the general exchangeable value of money; and is a proof, not of an excessive supply of goods, but of a deficient supply of money, against which the goods have to be exchanged.#Quoted in Leland Yeager, “The Significance of Monetary Disequilibrium” (1986)

Roger Garrison, Time and Money: The Macroeconomics of Capital Structure (2001)

• Expectations can be regarded as endogenous in a special sort of way when the market process has been set against itself by policies that affect the intertemporal allocation of resources.#
• In general and for any given stage of production, [in response to a change in the interest rate] the specific factors undergo price adjustments; the nonspecific factors undergo quantity adjustments.#
• The Austrian theory of the business cycle is a theory of the unsustainable boom. It is not a theory of depression per se. In particular, it does not account for the severity and possible recalcitrance of the depression that may follow on the heels of the bust.#
• When [Keynes] deals with cyclical unemployment, the high demand for money is a secondary phenomenon; the primary problem is a collapsed marginal efficiency of capital. When he deals with high money demand as a primary problem, he links it to secular and not cyclical unemployment.#
• In the judgment of the Austrians, Keynes had disaggregated enough to reveal potential problems in the macroeconomy but not enough to allow for the identification of the nature and source of the problems and the prescription of suitable remedies. By contrast the Monetarists, in the Austrians’ judgment, have not disaggregated enough even to reveal the potential problems.#
• Austrian theory may best account for some nineteenth-century downturns and for the downturn at the end of the 1920s easy-money boom; Monetarist theory may best account for the prolonged contraction that followed the initial downturn in 1929 and for the subsequent downturn in 1937, which seems to be wholly attributable to an unexpected and ill-advised monetary contraction.#