Recessions and Depressions: Understanding Business Cycles
Posted by Stephen Cline on January 15th, 2010
Review
“Knoop admirably achieves his stated objective of producing a teaching text. The result is simultaneously an informative, readable, balanced, and worthwhile work that will be an appealing primary or ancillary text for advanced macro classes or seminars. Highly recommended. Informed general readers; upper-division undergraduates through professionals.”–Choice;>“[K]noop’s discussion of the problems of macroeconomic forecasting, whether through the use of leading econ… Buy Recessions and Depressions: Understanding Business Cycles at Amazon
Tags: Business, Cycles, Depressions, Recessions, Understanding
Don’t believe it when they say readable. It is not actually UN-readable, but it is hard to believe any “informed general readers” actually make it all the way through. Which is a shame, since this is a very important subject.
Try “The Return of Depression Economics” by Krugman. It covers most of the same ground, and is extremely informative, but does it in a very readable fashion.
“Recessions and Depressions” is a gem of a textbook. It’s short and lucid, it combines theory and case studies, and it is refreshingly humble about the limits of economic knowledge. Best of all, the discussion of the role played by banking systems in the onset and propagation of downturns couldn’t be more topical. Prospective buyers should know that the analysis is organized around various models of the business cycle (Keynesian, Monetarist, Real Business Cycle, New Keynesian, etc.) While the discussion is never mathematical or otherworldly, anyone who hasn’t taken a basic econ class might get lost. However, that’s to be expected in a textbook. Highly recommended!
In this book, Professor Knoop summarizes academic business cycle theory. He explains the differing approaches of the classical theory, the Keynesians, the Monetarists, the neo-Keynesians, the so-called “real business models” and of various types of macroeconomic forecasting. He concludes with a discussion of some of the major downturns of the 20th century, from the Great Depression to the East Asian Crisis of the 1990s, and the recent Argentinean crisis to long recession in Japan. He does not cover the recent real estate debacle and resulting crisis.
The book is plainly intended as an undergraduate textbook, and, measured by that rather undemanding standard, is relatively readable. For the general reader, such as myself, the value of the book is that it introduces you in some detail to the various academic theories of business cycles. Knoop explains with a good deal of clarity what Keynes and Friedman thought, and how their theories work. This is valuable if, for no other reason understanding what economists are talking about.
I came away from the book dissatisfied, however. I did not feel any grievance with Professor Knoop who, as far as I could tell, handled his material competently. Rather, I came away feeling that this entire area of economic theory has a basic disconnection with reality. The business cycle, as we in the business world experience it, and the business cycle of academic theory, do not have much in common.
First and foremost, the theorists do not believe that the business cycle is cyclic. They note that the cycles are not regular in length, do not always have the same cause and, in general, are not very regular phenomena. Thus, they conclude, that the business cycle is not a cycle. Instead, they seem to view it as an always unexpected interruption of the otherwise perfect progression of their theories.
This is not how the business world perceives the business cycle. In the business world, the business cycle is part of the order of nature. Yes, its exact timing and particulars constantly change, but the thing itself is part of the established order of things. Any explanation of it which begins by denying that the cycle is a cycle- and all of the theories described here do – has a basic problem.
Second, all of the theories start with a greater or lesser degree of of idiotic simplifying assumptions. This begins with the classical theory, which assumes perfection competition, pure economic rationality, perfect information and all sorts of other perfections, which no one outside of academia has ever assumed or encountered. The classical theory, however, ends up being one of the better ones, because it at least gives you an idealized version of how the market works, which gives powerful insights into its actual functioning. You then have Keynes and his followers who make all sorts of loony-tunes assumptions, such as that prices and wages are totally inflexible in downturns and that the real cause of the Great Depression was that the entire business community freaked out simultaneously for no reason and became very afraid that the economy was falling apart.
There is no question that each of the theories has its strong points. Keynes, for example, was valuable in giving us the idea of using fiscal stimulus to reverse recessions. Friedman was valuable in giving us the idea of using monetary policy as a conscious instrument of economic policy. (Although Friedman himself, of course, was not a big believer in the practical utility of monetary policy, except on a steady state basis.) But beyond their one big policy idea, both theories have all sorts of problems both in theory and in practice. The experience of the 1960s and 1970s, for example, pretty well disproved the idea of Keynesian “fine-tuning” of the economy. As for Friedman, in practice, it is very difficult to even know how much money is loose in the economy, given the tremendous creativity of the financial system in inventing new forms of money and quasi-money.
I am also reading Kindelberger’s famous book on panics, which has referred me to Hyman Minsky’s theory of the business cycle. Minsky is not mentioned here. I am getting the impression that Kindelberger and Minksy are much more in tune with reality than are the more academic theories described here.