20 Jan 2011

Can Austrian Business Cycle Theory Explain Construction Employment?

Economics, Federal Reserve, Shameless Self-Promotion 19 Comments

With all the excitement over my favorite Keynesian, I almost forgot about the untimely demise of Scott Sumner yesterday.

Joking aside, I really think I snatched victory from the jaws of defeat for Arnold Kling in his argument with Sumner (concerning housing starts and the Great Recession). I emailed this to Kling myself, but I don’t know if he checks his “fan mail.” If any of you personally know Kling–and of course if you agree that I made a great case on his behalf in this article–then please make sure he sees it. UPDATE: He got it.

If you are busy and need to prioritize, I would say this is one of the most important Mises Daily articles* I have ever written. It bolstered my own belief in the power of Austrian business cycle theory.

* Some might argue that this isn’t saying much.

19 Responses to “Can Austrian Business Cycle Theory Explain Construction Employment?”

  1. Bob Roddis says:

    In my snarky comment yesterday on the Krugman blog entry which mentioned you, I quoted from and linked to your excellent article:


  2. Justin says:

    Great article!

    With regards to the following:

    “I am an economist, not an expert in housing or construction. I do not pretend to know exactly what construction workers were doing in the two years after housing starts peaked.”

    Nonresidential and public construction spending continued to expand, largely offsetting the decline in housing construction until late 2007. By my calculation, 88.6% of the decline in nominal construction spending from peak to trough occurred after September 2007.


  3. Greg Ransom says:

    Excellent work. Linked at “Taking Hayek Seriously”.

  4. Greg Ransom says:

    Robert, a small little book taking apart the economic fallacies of Paul Krugman would teach a lot of economics — and would easily make the author a little chunk of change.

    There’s a $50 bill sitting on the sidewalk waiting to be picked up.

    _The Politically Incorrect Guide to the Economics of Paul Krugman_.

    Yes, I think it would sell.

    • bobmurphy says:

      Hmm I would need more than $50…

      That’s tricky. In order to make it marketable, the publisher would it to be punchy and personal. But then the Keynesians would say, “See, these Austrians can appeal to the mob, but not the journal editors.”

      • Greg Ransom says:

        And who is it that Krugman is appealing to?

        The worst part would be the requirement to read all his books.

        Two was enough for my fill.

      • Greg Ransom says:

        You could put of picture of Paul Krugman hanging Lieberman in effigy and burning McCain in effigy.

        You might even find pictures documenting Krugman’s little McCain burning party.

        Yes, it would see books.

        Damn the critics.

        • Greg Ransom says:


  5. Tom Grey says:

    (First time here – Bob? or Robert?)
    I like this, and your graphs on employment and housing vacancy.

    However, I think all the statistics are wrong because of the difficulty in handling illegal construction workers. The Recession is actually much, much deeper, if the hundreds of thousands of illegals who were working pre-2006 would be included.

    Still, I’m afraid that I actually continue to support QE 2, at this point after the other mistakes. TARP was bad, bailouts were bad, most gov’t spending stimulus was bad.
    But I support tax cut based fiscal stimulus, thinking that helps the adjustment process.

    Also, I’d support printing money, now, with the future inflation distortion cost being less, in my view, than the current expected costs of foreclosure and failed agreement resolutions. Better to have “successful” agreements with unexpectedly less valuable money, for this crisis.
    I know about the slippery slope of the inevitable next crisis — so money printing AND no debt limit increase AND a balanced budget, etc.

  6. Matt Flipago says:

    I remember when Bob was underground, crackpot theories that every thought was just noise. No he is stringing argument left an right that make sense. I want my old Bob o back.

  7. Wonks Anonymous says:

    Bryan Caplan says durable vs non-durable distinction is more important than capital vs consumer goods:
    Yeah, I know I’m replying to an older post.

    • Wonks Anonymous says:

      This was the post I’m responding to:

    • Captain_Freedom says:

      How does one define the difference between durable and non-durable goods without recourse to just making a list of goods that are supposedly contained in each category, which is not really a definition?

      Most definitions I see are either time-based (i.e. less than 3 year expected lifespan is non-durable, greater than 3 years is durable), or number of times it is “used” (i.e. non-durable used once, durable used more than once).

      I think the time element is most important, and in Austrian theory, those goods that encapsulate a relatively longer amount of production time are considered “more capital intensive”, and those goods that encapsulate a relatively shorter amount of production time are considered “less capital intensive”.

      Thus, I am sure that if you asked Rothbard or Mises, whether, during a boom, car production is stimulated more so than say apple production, they would probably say that car production is more stimulated, because it has more “roundaboutness” to its production.

      Most Austrians today consider housing to be a “capital intensive” good and relatively more sensitive to artificially low interest rates and credit expansion, even though it technically is a “consumer good” at the end of the day.

      The distinction between capital goods versus consumer goods and durable goods versus non-durable goods is I would say a welcome explication of general principles already established by Austrian theory. It is not a replacement so much as a clarification.

      Caplan’s argument is,

      • Captain_Freedom says:

        Woops, ignore that last bit “Caplan’s argument is,”

      • TGGP says:

        If it takes a long time to produce, that might be capital intensive. But that’s a distinct issue from length of use. So we should be able to gather empirical evidence to compare the theories.

        • Captain_Freedom says:

          Woops, you’re exactly right.

          I falsely equivocated “time” as referring to two separate concepts.

  8. Christopher says:

    The funny thing about Sumners’ fetish for aggregates is that it completely contradicts with one of his posts in which he tried to justify the high income of investment bankers by saying their work (i.e. allocating ressources according to Sumners) is most valuable for the economy. http://www.themoneyillusion.com/?p=8258

  9. Dan says:

    Dr. Murphy,

    Has Sumner responded to this yet?

  10. Dan says:

    Never mind, he responded to it today. I would assume you will respond to his latest claims.