Sunday, February 10, 2013

Exogenous But Truly Cyclical Theories

"One group of theories, which includes the writings of W. S. JEVONS, H. S. JEVONS, and H. L. MOORE, seeks to account for the periodicity of business cycles by establishing the existence of a similar periodicity in agricultural output. The chain of causation runs from cosmic influences to weather conditions, from weather conditions to harvests, and from harvests to general business." -- Gottfried Haberler, Prosperity and Depression, p. 151

This type of theory fills in the box for "truly cyclical but also exogenous." These are true cycle theories: there is a real causal explanation of the economy coming around to what is in some ways the "same" state: the economy cycles because, say, for W.S. Jevons, sunspots cycle. But obviously sunspots are about as exogenous as a cause of economic events can be.

By the way, just what constitutes a cycle, in the sense of going back through the "same" states, is going to be somewhat in the eyes of the theorist. The moon is usually thought to arrive at the "same" position vis-a-vis the earth again and again, but in fact its orbit is getting bigger by a couple of centimeters a year. But I don't think anyone will object to an astronomer who says "The moon was in the same position relative to the earth x years ago."

Obviously with business cycles there is a lot more than that (of relevance) that changes between the crest of one boom and the crest of the next: different products are for sale, different people, and a different number of people, are alive, their preferences have changed, central bank policy will not have been exactly the same, technology has developed, and so on. So what, exactly, counts aas an occurence of the "same" events in a cycle? Obviously, this will depend very much on what theory of the cycle one holds: such a theory is an abstraction from all the complexity of the real social world, and theorists will likely consider some events "the same" when the fit with identical abstractions in their theories.

Consider a medical analogy: for a doctor doing transfusions, two people are "the same" when their blood types match; for kidney transplants, they will have to have near identical genes; for a doctor looking at their risk of a heart attack, they are "the same" when they have matching genetic and environmental risk factors; and for a plastic surgeon, they are "the same" when their bone and skin structures are close enough together.

Similarly, an Austrian cycle theorist is going to look for the same sort of central bank policies, a market monetarist for the same movements in NGDP, and a psychological theorist for the same kind of mania.

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