Mitchell and Clark on the business cycles

Starting my seminar on business cycles this week. Mainly theories and then a discussion of both Great Depression and Recession. In the US the original authority, and the intellectual driving force of the analysis of the cycle which started at the National Bureau of Economic Research (NBER), was undoubtedly Wesley Clair Mitchell. The figure above comes from an early analysis of global cycles published in the New York Times back in 1926 (subscription required). The Times quotes him saying that there was: "a trend in the direction of a world economy in which all nations will prosper or suffer together." In other words, a tendency to a global cycle.

In fact, Mitchell is often remembered more as a founder of the NBER and of the quantification of business cycles than his role as a disciple of Veblen and a founder of American Institutionalism.* His institutionalism, however, is often reduced to empiricism. In other words, Mitchell generally is not considered as a theorist. Howard Sherman suggests (subscription required), however, that: "embedded in his theory, but not made explicit in those terms, is a theory of the multiplier and the accelerator." In other words, a Keynesian approach to the cycle.**

This is consistent with the work we published with Luca Fiorito on another institutionalist from Columbia, namely: John Maurice Clark. As we noted then, the fact that the less mechanical, and also non-neoclassical version of Keynesian ideas, basically in contrast to the so-called Neoclassical Synthesis, was relegated to secondary status in the US in part explains how Keynesianism was reduced to a simple case of rigidities and imperfections. Not surprisingly the multiplier-accelerator interaction as the basis of the cycle, even though the empirical evidence for both components is strong, is not part of the mainstream macroeconomic textbooks.

* He was also one of the founders of the New School for Social Research in 1919.

** Mind you he did write with Arthur Burns, who eventually became a Monetarist associated with Milton Friedman and the chairman of the Fed, a famous NBER book on the cycle.

Okun's Law at 50

The IMF has written a good paper on Okun's Law (here), suggesting (from the abstract) that: "Okun’s Law is a strong and stable relationship in most countries, one that did not change substantially during the Great Recession [and] accounts of breakdowns in the Law ... are flawed." nothing new really; I have said so a few months ago (here). Bill Mitchell has good post (here), which suggests correctly that the problem with the recoveries is not Okun's Law, but excessive fiscal austerity. I would add one more thing, not only Okun's Law works well in developed countries (advanced economies according to the IMF paper), but also in developing countries. Figure below is a crude representation of the Law for Argentina.

Note that the coefficient is more or less the same as in the US or other advanced economies. An increase in GDP growth of 1.87% reduces unemployment in 1%. Close to the 2 to 1 ratio. A more sophisticated and better estimatimated version that takes into account trend issues associated with Kaldor-Verdoorn, by Fabián Amico, Alejandro Fiorito and Guillermo Hang is available here (but in Spanish).