The Business Cycle: A Georgist-Austrian Synthesis

Article excerpt

I

Introduction

The case for a geo-Austrian cycle theory would be less compelling if new-classical, real, and new-Keynesian theory, offered satisfactory explanations. But such has not been forthcoming (Sinha, 1988). Conventional theory centers on supply and demand shocks, with little consensus as to why such shocks should generate fluctuations with recurrent characteristics and duration. As Peter Hammond (1984, p. 61) states, "The modern view is that we have no acceptable economic theory of the basic cause of business cycles."

Will Lisner (1983, p. 429) stated that despite millions spent by the National Bureau of Economic Research (NBER) on business cycle research, "No satisfactory theory of the expansion and contraction of business activity known as the business cycle has yet been empirically validated." New-classical economist Thomas Sargeant stated, "I do not have a theory, nor do I know somebody else's theory that constitutes a satisfactory explanation of the Great Depression" (Klamer, 1983, p. 69). New Keynesian models of menu costs, efficiency wages, hysteresis, and insider-outsider labor may offer explanations of rigidities, but hardly explain the regularity of cycles. Satya Das (1993) notes that there was no evident external shock for the 1990-91 downturn.

Real business cycle models have attempted to fill the gap, arguing that clusters of technological innovations can create cycles. But these models are found to be problematic when applied to international data (Hartley et al., 1997). Barsky and Miron (1989, p. 6) conclude that the technologicallydriven seasonal cycle "casts doubt on the plausibility of aggregate technological shocks in explaining business cycles." As well, the "radical" political economy school that draws on Marxist theory also has not provided an adequate general explanation. Jonathan Goldstein (1996) observes that the cyclical profit squeeze caused by labor costs has been weak or inoperative since 1980. As there is still no consensus, the geo-Austrian synthesis as a testable hypothesis may provide some significant elements.

The Austrian theory explains the financial side of the cycle and the role of capital goods. The geo-economic theory explains the real side, "real" in this case meaning non-financial plus emphasizing the real-estate market and the role of speculation, which is tied to the financial side via the banking system. The synthesis thus not only brings together the Austrian and geo-economic theories, but also the real and financial sides of the cycle, to provide a more comprehensive explanation. While the Austrian and geo-economic theories have existed for decades, they have not heretofore been synthesized. Conventional macroeconomic theory has not assimilated either theory; perhaps the synthesis will provide a more convincing and less disregardable theory, particularly one with predictive power.

II

A Generic Theory of the Business Cycle

The geo-Austrian theory of business cycles can be better understood by first postulating a general theory of cycles. A basic question is whether macroeconomic fluctuations are cyclical to begin with. Alvin Hansen (1964, p. 6) maintains that an analysis of macroeconomic fluctuations supports the hypothesis that the significant changes in variables are cyclical rather than less regular fluctuations. Each phase of a cycle is related to preceding phases. This proposition has been disputed, but the case for cycles is buttressed by the realization that there is more than one type of cycle, and that the various cycles have different durations. When one examines the major depressions and panics of the 19th century in the United States - in the 1830s, 1850s, 1870s, and 1890s - one unavoidably sees a 20-year pattern.

The proposition that fluctuations are indeed cyclical implies that general theoretical propositions can be made about cycles. Gottfried Harberler (1960, p. 276) posits that a "very general theory of the most important aspects of the cycle can be evolved. …