Abstract
This and the next four chapters present historical evidence for the validity of Austrian business cycle theory (ABCT). I start with an analysis of the deep recession of the early 1980s.1 This recession provides the best illustration in recent history of the causes of the business cycle. It does so for three reasons. First, it was a fairly severe recession. This means the factors causing the cycle exerted a strong influence on the economy. Second, the recession of the early 1980s is also a great recession to study because the episode was like an economic experiment. The Federal Reserve chairman at the time, Paul Volcker, made an explicit effort to reduce inflation in the late 1970s, and he actually did end up reducing the money supply growth. He even announced his intentions in advance. So we get to see, given that he did this, what effect it had on the economic system. This is probably as close to an economic experiment as one can get in an economy. This was a situation in which the money supply and prices were rising rapidly and then the increase in the money supply was abruptly reduced. The effects this had, as I will show, were dramatic.
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Notes
A significant portion of this chapter is based on Chapter 3 of Brian P. Simpson, Trade Cycle Theory: A Market Process Perspective (Ann Arbor, MI: Bell & Howell Information and Learning Company, 2000) and
Brian Simpson, “Money, Banking, and the Business Cycle,” audio recording (Irvine, CA: Second Renaissance, Inc., 2005).
For a detailed critique of the contemporary method of aggregate economic accounting and a detailed description of the better method described here, see George Reisman, Capitalism: A Treatise on Economics (Ottawa, IL: Jameson Books, 1996), pp. 673–715. This material is used as the basis for my discussion.
The value for GDP was obtained from the Federal Reserve Bank of St. Louis, FRED database, series ID GDPA. The value was obtained February 18, 2013. Data for GNR are based on the total wage payments in the economy and the gross receipts for corporations, partnerships, and nonfarm proprietorships. For the sources of the gross receipts data, see the same sources for the 2010 gross receipts data given in chapter 2 in the discussion of total spending in the economy. The data used from these sources conform to data obtained for earlier years for gross business receipts from the Statistical Abstract of the United States and are used for the purpose of including gross income from ongoing business activities. Operating revenue would be a better figure to use to estimate the revenues of businesses because gross receipts include revenues from sources that are not the principal economic activities of the business, such as interest. Operating revenues include only revenues earned from the principal activities of the business. Gross receipts were used based on data availability and should not change any of the conclusions drawn from the data. For more on this topic, see Jay Cochran III, “Of Contracts and the Katallaxy: Measuring the Extent of the Market, 1919–1939,” The Review of Austrian Economics vol. 17, no. 4 (2004), pp. 407–466. See especially p. 442, note 44. For the source of the wage data, see the source of the wage data in chapter 2 in connection with the discussion of total spending in the economy in 2010. As I said in chapter 2, to calculate total wage payments the wage rates of government workers are assumed to be the same as the wage rates of workers in the private sector. Although this is not true, it should not change any conclusions drawn from the GNR data.
Gross receipts for 2007 for corporations, partnerships, and nonfarm proprietorships were obtained from the US Census Bureau, Statistical Abstract of the United States: 2012, 131st ed. (Washington, DC, 2011), p. 491. GDP and wage data for 2007 were obtained from the same sources as the 2010 data.
The method of calculating the business failure rate changed in 1984 and values on either side are said by some to not be comparable. However, there is reason to believe that the peak failure rate of the early 1980s recession was dramatically greater than the peak rate of the mid-1970s recession. See Michele I. Naples, “Business Failure and the Expenditure Multiplier, or How Recessions Become Depressions,” Journal of Post-Keynesian Economics vol. 19, no. 4 (Summer 1997), pp. 511–523. She creates an index post-1983 that is consistent with pre-1984 values and shows that values in the early 1980s recession are still much higher than values in the mid-1970s recession.
Carol Corrado, “Industrial Production and Capacity Utilization: The 2002 Historical and Annual Revision,” Federal Reserve Bulletin vol. 89 (April 2003), pp. 151–176. See p. 155.
See David E. Lindsey, “Recent Monetary Developments and Controversies,” Brookings Papers on Economic Activity vol. 1 (1982), pp. 245–271 for more on this topic.
Ludwig von Mises, Human Action, 3rd rev. ed. (Chicago: Contemporary Books, Inc., 1966), pp. 426–428 and 469.
On this point, see Cheryl L. Edwards, “Open Market Operations in the 1990s,” Federal Reserve Bulletin vol. 83 (November 1997), pp. 859–874. While this article mainly focuses on Fed policy in the 1990s, the author does make brief comments regarding the late 1970s/early 1980s.
For one account, see Marcia Stigum, The Money Market, rev. ed. (Homewood, IL: Dow Jones-Irwin, 1983), pp. 257–258.
For a number of other examples of the economically destructive nature of violating individual rights, see Brian P. Simpson, Markets Don’t Fail! (Lanham, MD: Lexington Books, 2005). In that book I show the economically destructive nature of violating individual rights in connection with socialism and the mixed economy, monopolies, the antitrust laws, “externalities,” “public goods,” asymmetric information, economic inequality, the environment, and the regulation of the quality of goods, services, and working conditions.
See Chapters 4–8 of Brian P. Simpson, Money, Banking, and the Business Cycle, Volume 2: Remedies and Alternative Theories (New York: Palgrave Macmillan, 2014) for a discussion on how laissez-faire capitalism virtually eliminates monetary induced recessions and depressions. See Chapter 1 of Simpson, Markets Don’t Fail! for how laissez-faire capitalism leads to the highest rate of economic progress that is possible
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Simpson, B.P. (2014). The Recession of the Early 1980s. In: Money, Banking, and the Business Cycle. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137331496_6
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