Empirical evidence, taken alone, cannot conclusively confirm a business cycle theory. Pieces of positive evidence can be given alternative interpretations, or may provide support for more than one theoretical explanation. The evidence, in some clear-cut cases, can conclusively falsify a theory, but even negative evidence usually admits of competing interpretations. Whether or not we accept or reject a business cycle theory therefore depends upon a variety of considerations, including logical consistency, the reasonableness of the assumptions, theoretical persuasiveness, and the ability of the theory to account for stylized facts. Statistical evidence provides only one piece of the relevant picture. Nonetheless the evidence should strongly influence our estimation of the plausibility of a theory, and for that reason I examine the statistical evidence of relevance to investment-based and Austrian business cycle theories.
I focus on modern statistical tests involving the US economy, usually in the twentieth century or post-war period. I hold no particular belief that the US economy provides a superior or more appropriate ‘laboratory’, but most of contemporary empirical macroeconomics, for better or worse, has taken an American slant. For reasons of space and my own linguistic constraints, I do not survey writings published in languages other than English, even though much of this material is relevant.
Most of the writings discussed below do not set out to test any version of Austrian theory at all. Typically these writings are testing some other set of propositions about macroeconomics or finance. I will try to show how these tests also apply to the theories discussed in this book. I will focus my discussion and interpretations on the risk-based investment theory, although most of the tests apply to the traditional Austrian theory as well.
I will limit the presentation to statistical evidence and neglect the considerable historical and case study literature on business cycles. More specifically, I do not examine the literature which seeks to explain the