The recession of 1990: An Austrian explanation

Review of Austrian Economics

Volumn 10, Issue 1, 1997, Pages 107-123

  Hughes, Arthur Middleton ^a  

^a UNIVERSITY OF MARYLAND   (United States)

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EID: 33644550815     PISSN: 08893047     EISSN: None     Source Type: Journal    
DOI: 10.1007/BF02538145     Document Type: Article

References (22)

1. Friedrich A. Hayek, New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago: University of Chicago Press 1978), p. 212-13.
2. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt Brace, 1936), p. 245. "This does not mean that we assume these factors [including capital] to be constant; but merely that, in this place and context, we are not considering or taking into account the effects and consequences of changes in them."
3. James Clark and James Keeler, "Misconceptions about Austrian Business Cycle Theory: A Comment," Review of Austrian Economics 4 (1990): 208-11.
4. In 1986, according to the Department of Commerce study "The Interindustry Structure of the United States," 43.8 percent of the output of all business units was of "intermediate goods" (or capital goods requiring further work before they are ready for the ultimate consumer). The remaining 56.2 percent were final goods, for purchase by individuals, governments, and other businesses. This 43.8 percent representing intermediate goods does not show up in the Gross National Product accounts at all, which treats capital as consisting only of the final goods purchased by businesses. Millions of Dollars Percent Gross Intermediate Products $3,297,977 43.8 Gross National Product $4,235,116 56.2 Gross National Output $7,533,093 100.0
5. Friedrich A. Hayek, The Pure Theory of Capital (Chicago: University of Chicago Press, [1941] 1975), chaps. 5 and 6.
6. Paul Samuelson, Economics, 10th ed. (New York: McGraw-Hill, 1976), p. 332.
7. Paul Samuelson, Economics, 10th ed. Ibid., p. 345.
8. Roger W. Garrison, "New Classical and Old Austrian Economics: Equilibrium Business Cycle Theory in Perspective," Review of Austrian Economics 5, no. 1 (1991): 91-103.
9. Mark Skousen, The Structure of Production (New York: New York University Press, 1990), pp. 300-1.
10. Economic Report of the President 1992 (Washington, D.C.: U.S. Government Printing Office, 1992), pp. 300 and 373.
11. The Quarterly Financial Report Program (QFR) of the Bureau of the Census publishes aggregate statistics on the financial results and position of U.S. corporations based on an extensive sample survey. The series began in 1947 and is issued in a 145-page book every quarter. Data are extracted from IRS Form 1120 reports. Use of statistics such as these, which were gathered for another purpose entirely, is bound to result in certain inaccuracies for analytical purposes. Most corporations produce a product mix that does not easily fit into standard SIC (Standard Industrial Classification) codes. The series is used as a basis for the analysis in this paper because it is, basically, the only game in town. The categories covered by the data into which corporations are divided include the following (these are a sample). The column headed "Long-Term Loans" represents long-term loans (due in more than 1 year) from banks in the first quarter 1982 as stated in millions of dollars. Long-Term Loans Long-Term Loans All Manufacturing 74,129 All Durable 39,198 All Non-Durable 34,931 Stone, Clay 2,431 Food 7,364 Primary Metals 7,597 Textile Mill 1,824 Iron Steel 5,453 Paper 2,222 Non Ferrous 2,144 Printing & Publ 3,656 Fabricated Metals 4,575 Chemicals 5,238 Machinery 10,428 Indus Chem 2,346 Electrical 3,870 Drugs 352 Transport 4,627 Petroleum & Coal 6,919 Motor Vehicles 1,211 Rubber 1,737 Aircraft 1,802 Other Non-Durable 2,158 Instruments 1,296 Other Durable 4,373 Note: The figures do not add up to the total because they are a selection from a large government survey. The selection of industries to illustrate this paper was a subjective one. The statistics in the survey were not collected based on the stage of production. Every industry grouping for which statistics exist is a combination of different heterogeneous companies making different products. I picked the groupings (iron and steel, primary metals, food, textiles, rubber, wholesaling, and retailing) because they seemed to, in general, represent examples of higher-order and lower-order industries. They help to illustrate the Mises-Hayek trade-cycle theory. These examples do not prove the validity of the theory, which is an apriori statement which does not require empirical verification.
12. Minerals Yearbook 1985, United States Department of the Interior, p. 577. In 1982 - the year of the greatest long-term capital borrowing in the industry - capacity utilization in raw steel was only 48.4 percent.
13. Minerals Yearbook 1985, p. 555-56, reports the following: From 1981 to 1985 US Steel invested $300 million over four years to modernize its Pittsburg, California mill. Timken invested $500 million in a new plant at Canton, Ohio. Tuscaloosa Steel built a new $75 million rolling mill in Alabama. Great Lakes Steel spent $200 million to modernize its plant in Michigan. Wheeling-Pittsburgh, in bankruptcy, began construction on a $50 million plant in West Virginia.
14. Minerals Yearbook 1985. p. 320-26. Newmont Mining closed their Superior Mine in 1985, taking a $40 million loss. Despite this, they planned to invest $71 million to open a new San Manuel Mine. In 1985, the Burro Chief Copper Company completed a $15 million program to double their operations. Phelps Dodge planned on a $90 million investment at their Morenci Mine in 1985.
15. It is easier to describe the concept of higher-stage and lower-stage industries than to obtain statistics on them. Logging obviously comes before sawmills which come before drying kilns. Most businesses are involved in many different activities in which the stages overlap. Statistics are not collected based on the structure of production. The best government source which provides a breakdown relevant to the structure of of production is a survey done every 5 years by the Department of Commerce, called the "Interindustry Structure of the United States," based on work by Wassily E. Leontief, whose first tables were prepared for 1919, 1929, and 1939. It provides a rough guide to understanding the position of the industries in the QFR, although not a definitive one.
16. From 1981 to 1986, real consumption spending in 1987 dollars increased by 19.7 percent, whereas real GNP increased only 15.7 percent in the same period. Consumers were trying to restore their spending patterns after the recession of 1982.
17. From $60.5 billion in 1981 to $197.2 billion in 1991, in current dollars. Quarterly Financial Report of the Bureau of the Census, 1982-1992.
18. Minerals Yearbook 1989 (Washington, D.C.: United States Department of the Interior Bureau of Mine's, 1989), vol. 1, pp. 523-24. U.S. consumption of iron ore from 1980 through 1986 tells the story (p. 554): Thousands of Metric Tons 1980 91,983 1981 97,903 1982 57,203 1983 63,050 1984 68,450 1985 66,049 1986 57,513
19. Minerals Yearbook 1989, p. 359. Despite this buildup of inventory from 1980-83, world consumption of copper was almost flat from 1980 to 1989. The buildup, therefore, cannot be ascribed to increased demand (p 352).
20. F. A. Hayek, Prices and Production 2nd ed. (New York: Augustus M. Kelley, [1935] 1967), p. 96.
21. As Friedrich Hayek said in Monetary Theory and the Trade Cycle (New York: Augustus M. Kelley, [1933] 1966). "The corroboration of statistical evidence provides, in itself, no proof of correctness. A priori we cannot expect from statistics anything than the stimulus provided by the indication of new problems. In thus emphasizing the fact that trade cycle theory, while it may serve as a basis for statistical research, can never itself be established by the latter, it is by no means desired to deprecate the value of the empirical method. On the contrary, there can be no doubt that trade cycle theory can only gain full practical importance through exact measurement of the actual course of the phenomena which it describes." pp. 31-32.
22. Economic Report of the President 1993, pp. 411, 433, 434, 447.