Austrian Cycle Theory and Clustered Job Losses
Austrian Business Cycle emphasizes that monetary distortions generate "clusters" of investment errors due to the manipulation of interest rates that artificially produces the appearance of profits from longer-term investments.
This clearly means that there would be a cluster of increased employments in these "higher order" and durable-goods sectors during the upturn of the cycle, and that a "cluster" of job losses would be centered in these sectors when the downturn phase of the cycle sets in.
While the media has focused on the change in the aggregate level of unemployment, looking beneath the "macro surface" at the "micro patterns" actually shows a different picture.
The greatest amount of greater unemployment over the last year (Nov. 07 - Nov. 08) has occurred in the building construction sector, an 11.4 percent decrease in jobs (a higher order sector of the economy), and automobile manufacturing and retail, 9.3 to 14.9 percent decrease in employment (a durable goods sector), and the textile industry (that has been experiencing a continuing general decline in the face of general global competition).
Most other private sectors of the economy have only shed jobs in the range of 1.8 percent over the last twelve months.
The private sector that has seen large employment growth over the last year, perhaps not surprisingly, has been energy (oil, gas, and coal), up 9.4 to 9.7 percent.
Also certainly no surprisingly, government jobs (local, state, and federal) have continued to grow during the last year between 1 and 1.6 percent. And jobs have expanded, as well, in those sectors heavily funded by government: education (up 3.6 per cent) and in health care (2.9 percent.)
The full data on these micro employment patterns are presented in a new piece that I've written called, "Unemployment Trends and Economic Recovery."
Richard Ebeling
Comments (11)
fundamentalist
Here is some empirical evidence for the ABCT! Thanks!
The increased employment in the oil industry has probably ended with the recent collapse in oil prices and we'll see those figures appearing soon. Also, I heard that Boon Pickens has put his windmill project on hold, which is an example of higher order ventures that get caught in the gears of the cycles and chewed up.
Published: December 20, 2008 8:50 AM
Bruce Koerber
It is good to see the 'cluster' dimension of the Austrian business cycle theory addressed because it definitely adds explanatory depth to the theory.
Unless I am mistaken this 'cluster' dimension was first contributed to the economic literature by Guido Hulsmann. When I read his journal article I was very impressed with the thoroughness of his logic. That is when I fully realized that the science of economics using the subjectivist methodology would continually advance, resting firmly on the foundation laid by Menger, Bohm-Bawerk, Mises, Rothbard and the other great contributors to this school of thought.
There is no explanatory powers anywhere close to the Austrain business cycle theory out there. The alternative theories are actually just fantasies of empiricists unconnected to the human spirit.
Published: December 20, 2008 10:17 AM
Brian Macker
"Unless I am mistaken this 'cluster' dimension was first contributed to the economic literature by Guido Hulsmann. "
I think you are mistaken. When do you think he introduced this?
Published: December 20, 2008 10:45 AM
Bruce Koerber
Dear Brian,
I do not know exactly and I don't have the time to dig around for the paper.
I read it, perhaps, 5-6 years ago and it was probably published 3-5 years before that. None of this is for sure though.
What information about "clusters' in the ABCT do you have that predates the work of Guido Hulsmann?
Published: December 20, 2008 11:10 AM
Brian Macker
It's part of standard ABCT.
Rothbard mentions it in "Man, Economy, State" here.
"Why should there suddenly be a cluster of errors? "
"But since the eighteenth century there has been an almost regular pattern of consistent clusters of error which always follow a boom and expansion of money and prices."
That was published in 1962.
Rothbard also mentions clusters of errors in his book "American's Great Depression" published in 1975.
Published: December 20, 2008 12:55 PM
Bruce Koerber
Dear Brian,
Thank you very much.
I guess none of us should be surprised that Murray Rothbard laid the foundation!
With warm regards,
Bruce
Published: December 20, 2008 1:07 PM
newson
the hulsmann article which bruce refers to:
http://mises.org/journals/qjae/pdf/qjae1_4_1.pdf
"towards a general theory of error cycles". excellent reading.
Published: December 20, 2008 6:19 PM
Martinf
How can be possible that 'Real State' unemployment has increased much much less than 'Building Construction' companies? What do they do now?
Published: December 20, 2008 8:12 PM
Brian Macker
Martinf,
Probably due to churn. They can sell existing houses. A friend of mine is selling their house because they want something more affordable. Real estate agents deal with rentals also. All those people who are losing their houses have to live somewhere.
Published: December 21, 2008 11:23 AM
Brian Macker
Martinf,
Also real estate dealers are closer to consumption than construction workers. The product of construction workers is consumed over a period of 60 to 80 years or more.
The product of real estate agents is more short term. Arranging a rental has a couple year churn. Even a house is sold many times over it's lifetime. I live a pretty stable life and I haven't lived in a house for longer than 15 years.
So real estate agents are not equivalent to construction workers with regard to distance from consumption. Austrian business cycle theory claims that those industries furthest from consumption will be hurt most. So one would expect construction workers to be hit harder.
Published: December 21, 2008 11:35 AM
Martinf
Brian,
Thank you very much for your replies. I was being a little bit blind for not seeing those arguments.
Published: December 21, 2008 11:51 AM