Recession in the mainstream is defined by GDP and/or unemployment. If GDP drops by x amount in y quarters or if unemployment rises p amount in q quarters, we are in a recession. Otherwise we are not in a recession. This may seem simple, but what is the Austrian definition of a recession? Or for that fact the definition of a boom or bust? Also, ABCT speaks of malinvestment and misallocation of capital and resources. Does ABCT have something to say about unemployment during the bust or even the boom? From my understanding although the boom bust cycle and unemployment may interact and react, so to speak, unemployment is another topic all together, namely regulations restricting growth, unions, and wage rates. Sent from my iPhone
I'll take a stab at this one:
recession is the same as bust.
boom is when people are geeting richer in paper money, but under the surface resources are being malinvested [=wasted].
bust is when the phony economy is laid bare, and people feel the lack of those wasted resources. This includes unemployment.
boom has increased employment, bust increased unemployment.
yes, all the things you mentioned contribute to chronic unemployment, and the bust adds even more unemployment on top of it all.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Here's Rothbard on the definition of recession...
We live in a world of euphemism. Undertakers have become "morticians," press agents are now "public relations counsellors" and janitors have all been transformed into "superintendents." In every walk of life, plain facts have been wrapped in cloudy camouflage. No less has this been true of economics. In the old days, we used to suffer nearly periodic economic crises, the sudden onset of which was called a "panic," and the lingering trough period after the panic was called "depression." The most famous depression in modern times, of course, was the one that began in a typical financial panic in 1929 and lasted until the advent of World War II. After the disaster of 1929, economists and politicians resolved that this must never happen again. The easiest way of succeeding at this resolve was, simply to define "depressions" out of existence. From that point on, America was to suffer no further depressions. For when the next sharp depression came along, in 1937–38, the economists simply refused to use the dread name, and came up with a new, much softer-sounding word: "recession." From that point on, we have been through quite a few recessions, but not a single depression. But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957–58. For since then, we have only had "downturns," or, even better, "slowdowns," or "sidewise movements." So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns." Such are the wonders of the "New Economics."
No less has this been true of economics. In the old days, we used to suffer nearly periodic economic crises, the sudden onset of which was called a "panic," and the lingering trough period after the panic was called "depression."
The most famous depression in modern times, of course, was the one that began in a typical financial panic in 1929 and lasted until the advent of World War II. After the disaster of 1929, economists and politicians resolved that this must never happen again. The easiest way of succeeding at this resolve was, simply to define "depressions" out of existence. From that point on, America was to suffer no further depressions. For when the next sharp depression came along, in 1937–38, the economists simply refused to use the dread name, and came up with a new, much softer-sounding word: "recession." From that point on, we have been through quite a few recessions, but not a single depression.
But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957–58. For since then, we have only had "downturns," or, even better, "slowdowns," or "sidewise movements." So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns." Such are the wonders of the "New Economics."
The bust/crisis/panic is when the malinvestments of the artificial boom become apparent.
The depression/recession/downturn/slowdown is the period where market forces are reallocating resources to best satisfy consumers' desires again, following the distortions of the boom. Hence it is characterized by "higher than average" unemployment (reallocating labor), bankrupcies (reallocating capital), and foreclosures (reallocating land).
Government Explained 2: The Special Piece of Paper
Law without Government
Quote: "The bust/crisis/panic is when the malinvestments of the artificial boom become apparent."
If I may play devil's advocate, are booms and bust only identifiable ex-post, as opposed to ex-ante?
Quote: "boom has increased employment, bust increased unemployment."
Moving from "wrong" to "right" things is a process. At the beginning of that process, factors (including labor) need to be freed up from the unsound projects, which means lay-offs, and therefore a temporary period of high unemployment which gradually improves as workers are hired for sound projects throughout the recovery.
ViennaSausage: Quote: "boom has increased employment, bust increased unemployment." Why is it that the period when the economy is moving capital into the "right" things (the bust), there is high unemployment, whereas when it's moving it into the "wrong" things (the boom), there's low unemployment? Doesn't this seem counterintuitive?
I'll add a bit to Grayson's reply.
Say you hire the whole town to a big party, in which the festivities include burning the whole town to the ground [= moving capital into the wrong things] . They are getting paid to do it, so there is high employment.
When the party ends, and the whole town is gone, they have no work to do anywhere. Unemployment has set in. And so they sift through the rubble to see what can be saved, pack their bags, and move to another town [=doing the right things]. They will be unemployed as they do these right things, because they have not yet reached a new town and gotten a job there.
Yes it is indeed a bit paradoxical, and that paradox is why everyone hates recessions. Nobody wants to suffer through the recession, even though it must be endured to fix things up. Keynesians and politicians say "Let the govt throw another party and pay people to burn what little is left." Austrians say "Let people do as they please, and they will do what has to be done to fix things as best they know how."
Thanks everyone for the discussion.
it's when I'm required to have 3 years experience for any entry level job.
*sigh* Yes, even for a bloody bank cashier.
Freedom of markets is positively correlated with the degree of evolution in any society...
are booms and bust only identifiable ex-post, as opposed to ex-ante?
That is right, speaking strictly as an economist. The price signals have been distorted so it is impossible to tell during a boom phase whether a given business is only successful due to the artificial boom, or whether it is genuinely successful and sustainable.
So how did Peter Schiff identify the housing boom prior to the bust? Through entrepreneurship. He knew interest rates were artificially low, so there was an artificial boom somewhere, and he used his entrepreneurial ("artistic", rather than "scientific") skills to identify which industries were actually in an artificial boom.
trulib: "So how did Peter Schiff identify the housing boom prior to the bust? Through entrepreneurship"
If Schiff did it through entrepreneurship, how did economist, like Thornton, call the housing boom and predict the bust? Thornton is an economist.
If he specifically identified the booming industry as housing, and made a specific prediction about when the bust would come, then he was doing so not as an economist but as an entrepreneur.
As an economist, he knew the necessary consequences of credit expansion ceteris paribus. But when making specific predictions, he was analyzing how the various forces in the economy would interact and what the overall effect would be. This part is not economics, but 'real world' forecasting (i.e. a part of entrepreneurship).