News & Analysis
Is RBC the New Business Cycle?
Why Economies Boom ... One of the major schools of thought in macroeconomics rarely makes it into mainstream discussions: Real Business Cycle Theory. RBC, as it is known, claims that a lot of year-to-year economic volatility is caused by changes to the supply side of the economy: perhaps tax and regulatory changes, bad weather in farm economies, spikes in oil prices, and above all, the mysterious force known as the "technology shock." Finn Kydland and Ed Prescott shared a Nobel, partly for creating RBC theory ... [But] people don't switch from consuming to investing in a boom, they do more of everything. So you can see where I'm going: A change in the weather really is a technology shock. But can this possibly be relevant for explaining the boom-bust cycle in real-world economies? Not always, for sure, but I'm no monocauser: Monetary policy seems to matter a lot, as Friedman/Schwartz and Romer/Romer argued; and other business cycle stories abound. – Megan McArdle/TheAtlantic
Dominant Social Theme: The business cycle is a mysterious thing.
Free-Market Analysis: Megan McArdle is out with an interesting rumination about the business cycle. It's not merely a theoretical examination, however.
Who is she? From The Atlantic: "Megan McArdle is a senior editor for The Atlantic who writes about business and economics. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and The Economist."
The Atlantic is a truly elite thought magazine so in the end the article turns out to be a kind of defense of RBC and of the changes brought by ... wait for it ... global warming.
You see? Everything put forth by evidently "controlled" publications like The Atlantic, Economist, Reuters, AP, New York Times, etc. partakes of various elite dominant social themes.
The mainstream press is bankrolled by the modern elites who control central banking around the world. The proximate purpose of all this activity is to create ever-closer global government.
Because elite power is concentrated so heavily in the money-from-nothing it prints via central banking, this modern faux money production is to be protected at all costs. And it is.
Modern economics and economic writing including dissertations and financial media presentations are all heavily tilted toward discussing numerous different kinds of business and finance and economic issues – but not the free-market business cycle.
And yet the free-market business cycle is an adequate explanation. It explains how booms and busts can occur with furious regularity and why so many people are able to regularly predict how modern, Western economies turn.
There have been two profound turnings in the past 40 years. The first turning took place in the 1970s when gold went to US$ 700 and silver went to US$ 50. Now again in the 2000s, we've seen the same phenomenon.
This sort of business cycle turning CANNOT be explained by a "real business cycle." Such explanations are a kind of dominant social theme, a promotion of sorts promulgated by court economists and reporters.
The RBC theory has a lot of mainstream credibility. It won the Nobel Prize and its backers include the mainstream libertarian shop of CATO and the Chicago Freshwater "pragmatic libertarian" school.
But anyone with an open mind can likely see that the free-market business cycle approach provides us with a powerful analysis that proves out in real life.
The free-market business cycle is such a powerful hypothesis because of its very simplicity.
Monopoly/mercantilist (private-public) central banks always print too much money over time. That money eventually tends to circulate, once people want to use it. And they will sooner than later.
As the velocity of money picks up, so does price inflation and the creation of unnecessary business and finance. After a while, as these programs progress, they start to be valued by the larger market.
Once these programs are seen for what they are various kinds of market and funding crashes occur. Much of what has been built is never completed and the larger economy goes into shock.
At this point, it seems that credit is imploding. But this is only a natural furtherance of the over-printing of monopoly fiat money. Just as demand has been over-stimulated, now there is very little demand in economies that remain distorted, basically propped up by their various central banks.
Nothing fancy needs to be added to this theory, not even ruminations about credit. Economist Murray Rothbard likely had it right. Once economies have been artificially bid up, they come down eventually on their own. It's a natural process created out of the economic distortion of monopoly central banking.
Ms. McArdle explains she is no "monocauser" when it comes to modern booms and busts. But she needn't be anything else.
If there were no central banks, if there were monetary competition, chances are we would we have natural business cycles. But they would be mild compared to what we have now because they would be regional.
The sad thing about modern business cycles is that they are being propagated by one-worldism. It is globalism that gives the modern monetary business cycle its destructive power and allows the elites to use it to virtually reshape the world.
Conclusion: Articles that deny this great power or seek to "explain it away" are doing no service to the clarity of modern economics, in our humble view.