Making Economic Sense
Making
Economic Sense
by Murray Rothbard
(Contents
by Publication Date)
Chapter 66
The National Bureau And Business Cycles
Not only is there confusion about whether or not a
recession is imminent, but some
economists think that we're already in one
(1988). Thus, Richard W. Rahn, chief economist for
the U.S. Chamber of Commerce, recently declared: "The economic slowdown
is not coming: it's
here, and soon it will be gone." Not knowing whether or not we're in a
recession is not as silly as
it sounds. It takes a while for data to come in, and then to figure out
if a decline is a mere glitch
or if it constitutes a new trend. But the natural confusion is
compounded by the thrall in which
virtually all economists, statisticians, and financial writers have
been held by the National Bureau
of Economic Research.
Everyone waits for the National Bureau to speak;
when the oracle finally makes its
pronouncement, it is accepted without question. Thus, in 1966, the
economy slowed down and
receded to such an extent that I, for one, concluded that we were in a
recession. But no, GNP had
not declined quite long enough to meet the Bureau's definition of a
recession, and that,
unfortunately, was that. And since we were not in what the Bureau
called a "recession," we by
definition continued to be in a "boom." The reason is that, by the
Bureau's peculiar and arbitrary
standards and methods, the economy cannot be just
sort of lolling along, in neither a boom nor a
recession. It has to be in one or the other.
To say that the Bureau is fallible should go
without saying; but instead, its
pronouncements are taken as divine writ. Why is that? Precisely because
the Bureau was cleverly
designed, and so proclaimed, to be an allegedly value-free, purely
"scientific" institution.
The Bureau is a private institution, supported by a
large group of associations and
institutions, business and union groups, banks, foundations, and
scholarly associations, which
confer upon it an almost painful respectability. Its numerous books and
monographs are very
long on statistics, short on text or interpretation. Its proclaimed
methodology is Baconian: that is,
it trumpets the claim that it has no theories,
that it collects myriads of facts and statistics, and that
its cautiously worded conclusions arise solely, Phoenix-like, out of
the data themselves. Hence,
its conclusions are accepted as unquestioned holy "scientific" writ.
And yet, despite its proclamations, the National
Bureau's procedures themselves
necessarily manipulate the data to arrive at conclusions. And these
procedures are not free of
theory, indeed they rest on faulty and questionable theoretical
assumptions. Hence, the
conclusions, far from being strictly "scientific," are skewed and
misshaped to the extent that they
are determined by the procedures themselves.
Specifically, the Bureau selects "reference
cycles," of the general economy, and then
examines "specific cycles" of particular prices, production, etc. and
compares these with the
reference cycles. Unfortunately, all depends on the Bureau's dating
theory, that is, it picks out
only the trough and peak months, first for the general cycles, and then
for each specific cycle. But
suppose, as in many cases, the curve is flat, or there are several
peaks or troughs close to each
other.
In these cases, the Bureau arbitrarily, takes the last
month of the plateau, or the
multi-peak or trough period, and calls that the
peak or trough month. There is no earthly
economic reason for this; why not take the whole period as a peak or
trough period, or average
the data, or whatever? Instead, the Bureau takes only
the last month and calls that the peak or
trough, and then compounds that error by arbitrarily squeezing the
distance between the
designated "peak month" and "trough month" into three equal parts, and
assuming that
everything in between peak and trough is a straight line of expansion
or contraction, boom or
bust.
In other words, in the real world, any given time
series, say copper prices, or housing
starts in California, might have dawdled near the trough, gone quickly
upward, and stayed at a
plateau or multi-peak
for many months. But on the Procrustean rack of National Bureau
doctrine, the activity is squeezed into a single, one-month trough; a
straight line expansion,
divided into three parts by time; reaching a single-month peak; and
then going down in a similar
linear, jagged-line contraction. In short, National Bureau methods
inevitably force the economy
to look falsely like a series of jagged, sawtoothed, straight lines
upward and downward. The
triumphant conclusion that "life is a series of sawtooth lines" is
imposed by the way the Bureau
massages the data in the first place.
That massaging is bad enough. But then the Bureau
compounds the error by averaging all
the specific cycles, its leads and lags, etc. as far as the data will
go back, say from the 1860s to
the 1980s. It is from that averaging that the Bureau has developed its
indices of "leading," "coincident," and "lagging" indicators, the first
of which are supposed to (but not very
successfully) forecast the future.
The problem with this averaging of cycle data over
the decades is that it assumes a
"homogeneous population," that is, it assumes that all these cycles,
say for copper prices or
housing starts in California, are the same thing, and operate in the
same context over all these
decades. But that is a whopping assumption; history means change, and
it is absurd to assume
that the underlying population of all this data remains constant and
unchanging, and therefore can
be averaged meaningfully.
When the National Bureau set forth this methodology
in Arthur F. Burns and Wesley C.
Mitchell, Measuring Business Cycles (National
Bureau of Economic Research, 1946), it was
correctly criticized by a distinguished econometrician for being
"Measurement without Theory"
in the Journal of Political Economy, but still it
quickly swept the board to achieve oracular
status.
Particularly irritating were the claims of the
Bureau that those of us who held definite
business cycle theories were partial and arbitrary, whereas the Bureau
spoke only from the facts
of hard, empirical reality. Yet the Bureau has had far less respect for
empirical reality than have
allegedly "anti-empirical" Austrians. Austrians realize that empirical
reality is unique,
particularly raw statistical
data. Let that data be massaged, averaged, seasonals taken
out, etc. and then the data necessarily falsify reality. Their Baconian
methodology has not saved
the Bureau from this trap; it has only succeeded in blinding them to
the ways that they have been
manipulating data arbitrarily.
Previous Page * Next Page