Review of Austrian Economics - The Ludwig von Mises Institute

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Garrison: Equilibrium Business Cycle Theory 101 horse cannot be observed directly by econometricians. Available data consist only of the points of contact between runners and floor. Thus, inferring the structure from the data requires that there be some movement in these points of contact. Since the needed variation in the independent variables falls as the sample size increases, the prospects for identifying the economic structure increase with the length of the period that serves as the basis for the empirical research. The typical data base used is the time series of macroeconomic variables from the end of World War II to the latest quarter for which data are available. Parameter estimates, then, are based upon data for the entire period whether or not the constituent sub-periods were part of a noticeable or a not-so-noticeable cyclical episode. Revealingly, the most noticeable of all cyclical episodes, the Great Depression, is viewed by New Classicists as an outlier that defies explanation by existing economic analysis (Lucas 1981, p. 284). Contrasting examples of Austrian-based historical research and New Classicist-based empirical research are easily identified. Lionel Robbins's The Great Depression (1934) and Murray Rothbard's America's Great Depression (1975) clearly exemplify the analysis of a particular historical episode as the empirical counterpart of ABCT. The econometric testing of hypotheses consistent with EBCT is exemplified by Robert Barro's "Unanticipated Money Growth and Economic Activity in the United States" (in Barro 1981) and Thomas Sargent's "A Classical Model for the United States" (1976), both of which test an extended time series for relative movements in macroeconomic variables thought to be characteristic of cyclical activity. An interesting hybrid is Charles Wainhouse's "Empirical Evidence for Hayek's Theory of Economic Fluctuations," in which a number of hypotheses derived from ABCT are tested on the basis of monthly data for the period January 1959 through June 1981. There seems to be no hybrid of the other sort, in which EBCT is shown to illuminate some historical account of a particular cyclical episode. Concluding Remarks EBCT in its Lucas and Barro formulations and ABCT as spelled out by Mises and Hayek have a certain formal similarity. The two theories both owe something—though something different—to Knut Wicksell. Policy implications of the two theories, not discussed in this article, are clearly similar. Yet, in terms of the well recognized methodological distinctions that separate the Austrian school from the modern orthodoxy, EBCT and ABCT are worlds apart. Theorists who are more at home with ABCT than with EBCT will do well, though, to monitor
102 The Review of Austrian Economics, Vol. 5, No. 1 developments of EBCT. These New Classical models continue to provide a forum for Old Austrian ideas. References Barro, Robert J. 1981. Money, Expectations and Business Cycles. New York: Academic Press. Bellante, Don, and Roger W. Garrison. 1988. "Phillips Curves and Hayekian Triangles: Two Perspectives on Monetary Dynamics." History of Political Economy 20 no. 2 (Summer). Butos, William. 1985. "Hayek and General Equilibrium Analysis." Southern Economic Journal 52, no. 2 (Oct.): 332-43. Cowen, Tyler, and Richard Fink. 1985. "Inconsistent Equilibrium Constructs: The Evenly Rotating Economy of Mises and Rothbard." American Economic Review 75, no. 4 (Sept.): 866-69. Friedman, Benjamin M. 1978. "Discussion" [of Robert E. Lucas and Thomas J. Sargent, "After Keynesian Macroeconomics"]. In After the Phillips Curve: Persistence of High Inflation and High Unemployment. Conference Series No. 9, Federal Reserve Bank of Boston. Pp. 73-80. Frisch, Ragnar. 1933. "Propagation Problems and Impulse Problems in Dynamic Economics." Economic Essays in Honour ofGustav Cassel. London: Allen and Urwin. Pp. 171-205. Garrison, Roger W. 1986. "Hayekian Trade Cycle Theory: A Reappraisal." Cato Journal 6, no. 2 (Fall): 437-53. . 1989. "The Austrian Theory of The Business Cycle in the Light of Modern Macroeconomics." Review of Austrian Economics 3: 3-29. . 1991. "Is Milton Friedman a Keynesian?" In Dissent on Keynes. Mark Skousen, ed. New York: Praeger Publishers. Forthcoming. Hayek, Friedrich A. 1948. Individualism and Economic Order. Chicago: University of Chicago Press. . [1935] 1967. Prices and Production. 2nd ed. New York: Augustus M. Kelley. . 1975. Full Employment at Any Price? Occasional Paper 45, London: Institute of Economic Affairs. Kim, Kyun. 1988. Equilibrium Business Cycle Theory in Historical Perspective. Cambridge: Cambridge University Press. King, Robert G., and Charles I. Plosser. 1984. "Money, Credit, and Prices in a Real Business Cycle." American Economic Review 78, no. 3 (June): 363-80. Kydland, Finn E., and Edward C. Prescott. 1982. "Time to Build and Aggregate Fluctuations." Econometrica 50, no. 6 (Nov.): 1345-70. Lucas, Robert E. Jr. 1981. Studies in Business Cycle Theory. Cambridge, Mass.: M.I.T. Press.
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