Evidence Regarding the Structure of Production
by Larry Sechrest (Sul Ross University)
The Austrian approach to business cycles has seldom been examined in statistical terms. This paper first reviews the essentials of that approach. It then offers some simple regression results that seem to offer empirical support for several important Austrian propositions. Both business loans and industrial production are far more highly correlated with movements in monetary aggregates than with the rate of saving. Fluctuations in industrial production are largely explained by the changes in a trio of variables: money, departures of market interest rates from the natural rate, and relative prices. Finally, both M2 and the Austrian measure of the money stock are highly correlated with composite price indexes which include the prices of various real and financial assets in addition to the usual CPI and PPI. [Read Full Paper]
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Congratulations to Larry Sechrest for beginning the hard work of empirical testing of the Austrian business cycle. If it wishes to be taken seriously, Austrian economics is in desperate need of some quantification, otherwise its just all talk. One looks forward to the day when an Austrian quantitative business cycle model is constructed along the rigorous lines of neoclassical models. Austrian economics awaits its Bob Lucas and Ed Prescott.
sigh…this is the kind of myths that Austrians try to dispute. Economic theories cannot be elucidated from historical studies (which is what statistics is), because history is a complex phenomena, unlke scientific experiments where variables can be isolated and all else controlled for. Sechrest has done some interesting historical (statistical work) which illustrates the Austrian business cycle theory. However, it does not prove it (nor could contrary statistics disprove it).
Note: I did not mean to criticize the paper, nor the author of the paper (it appears to me in retrospect that that may have appeared so). I was criticizing the first post. Sechrest’s paper is excellent and very interesting.
Interesting paper. As it notes, correlation does not prove causation. But applied logic can show where it is probable.
Two things I wonder about -
1) The paper notes the impact of the Fed (and other central banks) on ABCT, but shouldn’t we also recognize that the banking system per se is as guilty of manipulating interest rates? We had business cycles before there was a Fed, and
it’s my understanding that a probable cause was the existance of fractional reserve banking.
2) I’ve wondered why taxes aren’t included in CPI statistics. The cost of government is a major burden on consumers, and when taxes go up it has an adverse impact on disposable income. So shouldn’t tax loads be considered?
Neither of which comments, of course, detracts from the paper………
Dave Garthoff – Adjunct Faculty
The University of Akron
< garthoff@uakron.edu >
Austrian theory involves rigorous derivation of the consequences of rather indisputable axioms–that individuals make choices in pursuit of their goals, that there is scarcity, etc. There’s rather little sense in trying to try to “test” that, empirically. On the other hand, applications of the theory involve additional assumptions about peoples’ actual goals and the constraints under which they operate in various circumstances. Empirical data may help us to refine these assumptions and improve our understanding of specific issues.
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