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How We Should Name Business Cycles

Tags Booms and BustsMoney and BanksBusiness CyclesMoney and Banking


Economists have long played semantic games with business cycles. In particular, they try to downplay the significance of the crisis and to obfuscate its cause.

First of all, bubbles and economic crises are initially denied and then usually not named until after they end and particular sectors of the economy are revealed to be what Lionel Robbins called “a cluster of entrepreneurial errors.”

The housing bubble was an exception because it was obvious to Austrian economists that there was a bubble as early as 2002 and that it was concentrated in housing due to various government subsidies, tax breaks, and regulations.

Murray Rothbard explained that economists have played semantic games regarding the naming of business cycles. Up until the Great Depression an economic crisis typically started with a boom, followed by a “panic” and concluded with a “depression.”

After the disaster of 1929, economists and politicians resolved that this (i.e., a “depression”) must never happen again. The easiest way of succeeding at this resolve was simply to define “depression” out of existence. From this point on, America was to suffer no further depressions.

This quote comes from Rothbard’s brilliant and concise pamphlet Economic Depressions: Their Cause and Cure which was first published in 1969 on the eve of what could be called the Depression of 1970–1982, but is now referred to as the Stagflation of the 1970s. We still have not had a “depression” to date, only recessions!

Even the term recession can seem too harsh so that alternative terms such as “downturns” and “slowdowns” have been substituted and if the term recession is used it typically only occurs after the slowdown is over when the Business Cycle Dating Committee of the National Bureau of Economic Research meets and issues its pronouncement. Conveniently, the Committee has no fixed definition of economic activity.

Downplaying the negative fallout of economic crises is to be expected given that government economists are supposed to keep the economy on track with monetary and fiscal policies. Most mainstream economists agree with Karl Marx that business cycles are inherent to the market economy. Entrepreneurs and consumers do irrational things so economists have to come along and fix the situation.

Prior to the Great Depression, America experienced the more aptly named Panics of 1819, 1837, 1857, 1873, 1907 and their subsequent depressions, along with the quickly resolved Depression of 1920–21. While more appropriately named in terms of severity, these names give the impression to readers of American history textbooks that these crises mysteriously emerged from the market economy and from a fearful and psychologically depressed population. Sure, people are fearful in a panic and depressed during a depression, but the world is a place of economic cause and effect. As Rothbard noted:

In fact, if we look around at the economy on an average day or year, we will find that losses are not very widespread. But, in that case, the odd fact that needs explaining is this: How is it that, periodically, in times of the onset of recessions and especially in steep depressions, the business world suddenly experiences a massive cluster of severe losses? A moment arrives when business firms, previously highly astute entrepreneurs in their ability to make profits and avoid losses, suddenly and dismayingly find themselves, almost all of them, suffering severe and unaccountable losses? How come? Here is a momentous fact that any theory of depressions must explain.1

My preference is to name bubbles for their cause, rather than the effect. For example, Austrian economists attempt to find the mystifying cause of an economic problem rather than the obvious effects. So, for example, for Austrians “inflation” is an increase in the money supply, which in turn has many effects. Mainstream economists use the word inflation to refer to an increase in prices; one of the several effects from an increase in the money supply.

Rothbard hints at this approach in the Preface of his book The Panic of 1819: Reactions and Policies.

Neither could it be simply attributed to the machination or blunders of one man or to one upsetting act of government, which could be cured by removing the offending cause. In such a way had the economic dislocations from 1808–15 been blamed on “Mr. Jefferson’s Embargo” or “Mr. Madison’s War.” In short, here was a crisis marked with strong hints of modern depression; it appeared to come mysteriously from within the economic system itself.

Based on this name-calling approach, I would prefer to call the current bubble the Bernanke-Yellen bubble because they caused it. Also, the housing bubble could be renamed the Greenspan-Bernanke bubble. The dot-com bubble can likewise be re-labeled the Greenspan bubble. By using the cause as the adjective, a great educational service is provided. Not only does it identify the cause, it removes the mystery, and it also hints at possible cures.

Is the chairman of the central bank at fault? Is the interest rate setting committee at fault? Or is it the system of central banking that is at fault? Surely, it is not homebuilders or technology company entrepreneurs that are at fault.

It also is a particularly useful approach for the current bubble because so many sectors in the economy have been significantly impacted. Agricultural land, motor vehicles and auto loans, banking, bonds, contemporary art, corporate stocks, higher education and student loans, mergers and acquisitions, ocean shipping and cruise lines, social media, technology, housing, real estate, land markets, etc., have been noticeably affected. Might all this bubbling be just sustainable economic growth?

Possibly, but a long period of ultra low interest rates would indicate otherwise. Plus, there are tidbits of information that clearly hint the bubble is upon us.

  • 1. Murray Rothbard, Economic Depressions: Their Cause and Cure (Auburn, Ala.: Mises Institute, 2009), pp. 17–18.

Contact Mark Thornton

Mark Thornton is a Senior Fellow at the Mises Institute and the book review editor of the Quarterly Journal of Austrian Economics. He has authored seven books and is a frequent guest on national radio shows.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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