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The only honest answer (IMO) is We don't know at this point. Explaining business cycles has been a primary motivation for macroeconomics' existence as a field.

The only honest answer (IMO) is We don't know at this point. Explaining business cycles has been a primary motivation for macroeconomics' existence as a field. There are many theories, but theories are hard to disprove in economics. The two big, long-lived families of macroeconomic explanation are from the Keynsian and Austrian/liberal "schools." Austrian economics has Hayek & Mises' nobel prize winning theories, and built on by monetarists like Milton Friedman. These theories revolve around credit/money supply. Too much money is available at too low a rate, causing bad investments. When these undertperform, a downturn occurs. Keynsian explanations revolve around "aggregate demand." When people and businesses are worried, they borrow/spend less and save more. This leads to less stuff being made, the definition of economic contraction. The Austrian explanations are a little more straightforward to understand in a simple form. Keynesian is s bit harder. I recommend starting from the "paradox of thrift" concept, if you're interested in Keynesian.

conistonwater 9y ago
Milton Friedman wasn't Austrian, as far as I can tell: http://economistsview.typepad.com/economistsview/2006/01/milton_friedman.html http://economistsview.typepad.com/economistsview/2006/01/mil... https://krugman.blogs.nytimes.com/2013/08/11/friedman-and-the-austrians/ https://krugman.blogs.nytimes.com/2013/08/11/friedman-and-th... Usually people compare with Chicago school macroeconomics (freshwater/saltwater economics), Austrian is not really mainstream.
- wavefunction 9y ago
  OP didn't claim Friedman was an Austrian, merely a monetarist.
  - conistonwater 9y ago
    He wasn't "building on" Austrian school either. I think you're being pedantic, that sentence seems relatively clear to me.
    - wavefunction 9y ago
      How am I being pedantic? You mentioned that Friedman was not considered part of the "Austrian school" which is true but I pointed out that wasn't what was claimed. I'm not arguing the nature of the facts, just pointing out the fact. Hopefully you can relax a bit, this is just a dialog and not a debate where I'm trying to score points against your claims.
    - dalbasal 9y ago
      I meant Friedman as an example of monetarism, if that's the confusion. I consider him closely related to Austrian economics, neoliberal economics... at least when it comes to business cycles. A lot of "keynsians" are much more removed from keynes himslef than Friedman is from Hayek, Mises, Bastiat.. Obviously every individual is different and taxonomies are fuzzy. I'm not attached to my taxonomy, just trying to comment without lots of footnotes.
      - conistonwater 9y ago
        Friedman was pretty clearly opposed to Austrian views, so I don't really see where you're coming from.
alexanderstears 9y ago
Both of those schools of thought are too ideological to really get to the heart of the matter. Additionally, I don't see this distinction made often enough, but bubbles and recessions are 'abnormal economics' - economic axioms still hold in abnormal situations but the situations are completely different. Trying to understand abnormal situations through ideological (i.e normative) lenses is challenging and bound to be incomplete. 'Freshwater' economics / econometrics and even complexity / system theorists have given us a lot of insights into bubble formation. Dealing with recessions is something that doesn't really have an expert consensus beyond 'avoiding obviously bad things'. Heck, go ask economists to reconcile recessions with the efficient market theory. In terms of maturity, economics is where medicine was after people accepted Ignaz Semmelweis’ theory that doctors and surgeons should wash their hands. The consensus opinion is against things like leeching (a gold standard) and people more or less agree on the right things to optimize (low, stable inflation; lower unemployment; somewhat high reserve requirements for banks, etc.). For anyone reading this, I recommend the book "Manias, Panics, and Crashes" it's not well organized but it's very interesting. Bubbles have a few things in common, they're speculative in nature, they're hypergeometric, and they’re fueled by credit expansion. More or less – too much money chasing ideas that aren’t going to pay off. I’ve been warning people about used car prices since 2015 (though I expected the prices to decline about 8 months before they did). That clearly fits the pattern – after the recession used car prices were high so banks felt it was a relatively secure loan to make, but then the volume of car credit products (loans and leases) went up and made car credit too cheap, people bought too many new cars and now those cars are starting to flood the market which is a problem because banks expected to get more money out of the cars. There’s speculation (I think cars will be worth a lot when they’re off lease). There’s credit (here Mr. 610 FICO, you can get a new RAM). There’s hypergeometric growth (the U.S auto industry sales grew much faster than the economy – a weak case of hypergeometric growth). And now there’s the bust. We haven’t seen panic selling yet, but we might soon. In my opinion, the clearest sign that something’s wrong is in the bond market. Something like ¼ of the world’s government bonds have a negative interest rate. People put up money today in exchange for less money in the future, it doesn’t make sense. It’s a sign that something is seriously wrong in the world economy. Too much money chasing too few ideas. I have a heterodox view – many economists think that interest rates are too low, but I think they’re too high. The market is trying to burn off excess value that’s not being used well and world governments are trying to insolate rich people from those effects. At the same time there’s a few trillion in negative interest rate bonds, it’s hard to raise capital to start a business. That’s messed up. There is some hope. I think we could continue the expansion for a at least 4 more years if we overhauled the tax code, we slashed rentier’s regulations (zoning, occupational licensing, and a few more), and we opened our boarders to high performance immigrants – not drug slingers but Ph. Ds / Executives / etc.
gnaritas 9y ago
> The two big, long-lived families of macroeconomic explanation are from the Keynsian and Austrian/liberal "schools." That's like saying there's two families of space research, Astronomy and Astrology. One of these things is mainstream and taken seriously, one is not. As the other guy said, it's Keynsian vs Chicago, Austrian isn't in the game, it's fringe stuff.
- dalbasal 9y ago
  Sheesh! Taxonomy is dangerous on HN. Call it Chicago, if you like. I consider them part of the same family, chronospecies or something like that. ..at least relative to this topic, busines cycles.
jefurii 9y ago
> The two big, long-lived families of macroeconomic explanation are from the Keynsian, Austrian/liberal "schools". You left out Marx.
- kgwgk 9y ago
  Do you think the Marxian school is big?
  - SideburnsOfDoom 9y ago
    > the Marxian school Marxist.
    - kgwgk 9y ago
      > Marxist. I'm indeed Marxist, how did you know? We recently commemorated the 40th anniversary of Groucho's death, by the way. Or maybe you were correcting me? https://en.wikipedia.org/wiki/Marxian_economics https://en.wikipedia.org/wiki/Marxian_economics
      - SideburnsOfDoom 9y ago
        That's actually informative, thanks.
- dalbasal 9y ago
  I dunno if there's a Marxist interpretation of recessions. Iirc there's something somewhere about recessions leading to socialist revolutions, but I don't remember anything about why they happen. I don't think das capital has anything. I think there's very little Marxist economics left, in the technical sense. Marx is pretty early.
  - s_kilk 9y ago
    There's a great book called The Long Depression which offers a Marxian analysis of these boom bust cycles. It basically boils down to Marx's Law of Profitability, where the rate of profitability tends to fall as investment in fixed capital increases: https://en.m.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_to_fall https://en.m.wikipedia.org/wiki/Tendency_of_the_rate_of_prof...
nerfhammer 9y ago
The Austrian school is tiny, obscure, and not taken seriously except on the internet. While we're at it, original Keynesian theory has been considered disproven by the existence of stagflation, which the theory would consider impossible. See instead: https://en.wikipedia.org/wiki/Saltwater_and_freshwater_economics https://en.wikipedia.org/wiki/Saltwater_and_freshwater_econo... https://en.wikipedia.org/wiki/Mainstream_economics https://en.wikipedia.org/wiki/Mainstream_economics

conistonwater 9y ago

Milton Friedman wasn't Austrian, as far as I can tell: http://economistsview.typepad.com/economistsview/2006/01/milton_friedman.html http://economistsview.typepad.com/economistsview/2006/01/mil... https://krugman.blogs.nytimes.com/2013/08/11/friedman-and-the-austrians/ https://krugman.blogs.nytimes.com/2013/08/11/friedman-and-th... Usually people compare with Chicago school macroeconomics (freshwater/saltwater economics), Austrian is not really mainstream.

wavefunction 9y ago
OP didn't claim Friedman was an Austrian, merely a monetarist.
- conistonwater 9y ago
  He wasn't "building on" Austrian school either. I think you're being pedantic, that sentence seems relatively clear to me.
  - wavefunction 9y ago
    How am I being pedantic? You mentioned that Friedman was not considered part of the "Austrian school" which is true but I pointed out that wasn't what was claimed. I'm not arguing the nature of the facts, just pointing out the fact. Hopefully you can relax a bit, this is just a dialog and not a debate where I'm trying to score points against your claims.
  - dalbasal 9y ago
    I meant Friedman as an example of monetarism, if that's the confusion. I consider him closely related to Austrian economics, neoliberal economics... at least when it comes to business cycles. A lot of "keynsians" are much more removed from keynes himslef than Friedman is from Hayek, Mises, Bastiat.. Obviously every individual is different and taxonomies are fuzzy. I'm not attached to my taxonomy, just trying to comment without lots of footnotes.
    - conistonwater 9y ago
      Friedman was pretty clearly opposed to Austrian views, so I don't really see where you're coming from.

alexanderstears 9y ago

Both of those schools of thought are too ideological to really get to the heart of the matter. Additionally, I don't see this distinction made often enough, but bubbles and recessions are 'abnormal economics' - economic axioms still hold in abnormal situations but the situations are completely different. Trying to understand abnormal situations through ideological (i.e normative) lenses is challenging and bound to be incomplete. 'Freshwater' economics / econometrics and even complexity / system theorists have given us a lot of insights into bubble formation. Dealing with recessions is something that doesn't really have an expert consensus beyond 'avoiding obviously bad things'. Heck, go ask economists to reconcile recessions with the efficient market theory. In terms of maturity, economics is where medicine was after people accepted Ignaz Semmelweis’ theory that doctors and surgeons should wash their hands. The consensus opinion is against things like leeching (a gold standard) and people more or less agree on the right things to optimize (low, stable inflation; lower unemployment; somewhat high reserve requirements for banks, etc.). For anyone reading this, I recommend the book "Manias, Panics, and Crashes" it's not well organized but it's very interesting. Bubbles have a few things in common, they're speculative in nature, they're hypergeometric, and they’re fueled by credit expansion. More or less – too much money chasing ideas that aren’t going to pay off. I’ve been warning people about used car prices since 2015 (though I expected the prices to decline about 8 months before they did). That clearly fits the pattern – after the recession used car prices were high so banks felt it was a relatively secure loan to make, but then the volume of car credit products (loans and leases) went up and made car credit too cheap, people bought too many new cars and now those cars are starting to flood the market which is a problem because banks expected to get more money out of the cars. There’s speculation (I think cars will be worth a lot when they’re off lease). There’s credit (here Mr. 610 FICO, you can get a new RAM). There’s hypergeometric growth (the U.S auto industry sales grew much faster than the economy – a weak case of hypergeometric growth). And now there’s the bust. We haven’t seen panic selling yet, but we might soon. In my opinion, the clearest sign that something’s wrong is in the bond market. Something like ¼ of the world’s government bonds have a negative interest rate. People put up money today in exchange for less money in the future, it doesn’t make sense. It’s a sign that something is seriously wrong in the world economy. Too much money chasing too few ideas. I have a heterodox view – many economists think that interest rates are too low, but I think they’re too high. The market is trying to burn off excess value that’s not being used well and world governments are trying to insolate rich people from those effects. At the same time there’s a few trillion in negative interest rate bonds, it’s hard to raise capital to start a business. That’s messed up. There is some hope. I think we could continue the expansion for a at least 4 more years if we overhauled the tax code, we slashed rentier’s regulations (zoning, occupational licensing, and a few more), and we opened our boarders to high performance immigrants – not drug slingers but Ph. Ds / Executives / etc.

gnaritas 9y ago

> The two big, long-lived families of macroeconomic explanation are from the Keynsian and Austrian/liberal "schools." That's like saying there's two families of space research, Astronomy and Astrology. One of these things is mainstream and taken seriously, one is not. As the other guy said, it's Keynsian vs Chicago, Austrian isn't in the game, it's fringe stuff.

dalbasal 9y ago
Sheesh! Taxonomy is dangerous on HN. Call it Chicago, if you like. I consider them part of the same family, chronospecies or something like that. ..at least relative to this topic, busines cycles.

jefurii 9y ago

> The two big, long-lived families of macroeconomic explanation are from the Keynsian, Austrian/liberal "schools". You left out Marx.

kgwgk 9y ago
Do you think the Marxian school is big?
- SideburnsOfDoom 9y ago
  > the Marxian school Marxist.
  - kgwgk 9y ago
    > Marxist. I'm indeed Marxist, how did you know? We recently commemorated the 40th anniversary of Groucho's death, by the way. Or maybe you were correcting me? https://en.wikipedia.org/wiki/Marxian_economics https://en.wikipedia.org/wiki/Marxian_economics
    - SideburnsOfDoom 9y ago
      That's actually informative, thanks.
dalbasal 9y ago
I dunno if there's a Marxist interpretation of recessions. Iirc there's something somewhere about recessions leading to socialist revolutions, but I don't remember anything about why they happen. I don't think das capital has anything. I think there's very little Marxist economics left, in the technical sense. Marx is pretty early.
- s_kilk 9y ago
  There's a great book called The Long Depression which offers a Marxian analysis of these boom bust cycles. It basically boils down to Marx's Law of Profitability, where the rate of profitability tends to fall as investment in fixed capital increases: https://en.m.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_to_fall https://en.m.wikipedia.org/wiki/Tendency_of_the_rate_of_prof...

nerfhammer 9y ago

The Austrian school is tiny, obscure, and not taken seriously except on the internet. While we're at it, original Keynesian theory has been considered disproven by the existence of stagflation, which the theory would consider impossible. See instead: https://en.wikipedia.org/wiki/Saltwater_and_freshwater_economics https://en.wikipedia.org/wiki/Saltwater_and_freshwater_econo... https://en.wikipedia.org/wiki/Mainstream_economics https://en.wikipedia.org/wiki/Mainstream_economics