Business Cycle Research

Alexander M. Goldfinger

[Reprinted from The Gargoyle, June, 1960]

Recently, during a social evening sponsored by the Henry George School of New Jersey, several Georgists were discussing economic conditions now prevalent. One said that the economic boom of 1959 is continuing and will continue through 1960. Two others replied that we are now experiencing a recession in business that may develop into a depression.

All three were well read individuals whose interest in and knowledge of economics is above average for most people and all three are very active in Georgist circles.

All three had read and were cognizant with the facts which are daily reported in newspapers, periodicals and reports. They knew that the stock market has, for four months, been trending downward and that though total employment has increased, unemployment has also increased due to increases in population and those seeking employment. They knew that department stores were reporting increased sales as compared with sales a year ago, and that "money is tight" for those seeking credit, causing high interest rates.

Many other facts concerning the economy they knew and yet came to opposite conclusions concerning the well being of the total economy. It is safe to say that among professional economists a similar divergence of opinion exists.

Is it because economics is not an exact science that the ability to "predict" which is so apparent in the physical sciences is lacking in economics, a social science? This is an ordered universe in which causes inevitably result in effects. If, as in the physical sciences, the pattern of change can be adequately analyzed, if cause and effect relationships can be determined, predictions can be made that similar causes will inevitably have the same effects.

But, it has been argued, since man's behavior is not always predictable, a similar ability to predict is lacking in the social sciences. Is this so?

This problem concerned an earnest, intelligent thinker, Wesley Clair Mitchell as long ago as 1918. He was a Columbia professor who had this to say:

"While I think that the development of social science offers more hope for solving our social problems than any other line of endeavor, I do not claim that these sciences in their present state are very serviceable. They are immature, speculative, filled with controversies. ...Those of us who are concerned with the social sciences are engaged in an uncertain enterprise; perhaps we will win no great treasures for mankind. But certainly it is our task to work out this lead with all the intelligence and the energy we possess until its richness or sterility be demonstrated."

Mitchell believed in scientific method. First, observe, then hypothesize as to cause and effect, and then, verify. After much planning, Mitchell procured the necessary funds and personnel to found the National Bureau For Economic Research in Washington,. D. C. in 1919. The purpose, of the Bureau was (and still is) to examine man's economic behavior in detail over a long period of time to try to determine whether any patterns emerge, any repetitions of facts and of factors which inevitably have, the same or similar results. If these be found, then to trace similar conditions seeking to verify that given economic behavior will always cause given results, and if so, then predictions can be ventured as to similar economic behavior in the future.

Most of us are familiar with the conclusions that can be reached by under standing Henry George, that an increase in speculation in land, making access to land more difficult, will tend to cause production to diminish and bring on an economic recession. This very astute observation by George, arrived at, largely, by deductive reasoning has been verified many times by facts.

Mitchell decided that deduction served a useful purpose, but, starting at the opposite extreme, taking nothing for granted, with no preconceptions, if economic facts could be determined over a long period of time, and then studied to try to determine cause and effect relationships, such relationships might be useful in anticipating from day to day and month to month the probable state of the economy, both in total and in its many parts.

Mitchell and his associates in the National Bureau set themselves the task of assembling data concerning business cycles. After reviewing the past business cycles for almost 100 years, determining as exactly as possible their peaks and troughs, Mitchell set out to determine what was happening in the months or years between peaks and troughs and back to peaks again. Specific information was not easily obtained, but sufficient research and digging brought to light data from which some 600 economic time series were assembled and studied. Such tine series included a survey, from peak-to-trough-to-peak again, of industrial production, factory employment, freight-car loadings, stock prices, commercial failures, factory payrolls, department store sales, wholesale commodity prices, corporate profits, unemployment, bank deposits and many others.

It was observed that increases or decreases in these time series roughly coincided with the peaks or troughs of the business cycles, but not uniformly in time. Some of the decreases in the time series anticipated the coming downtrend in economic activity, some decreases were coincident with the decrease in economic activity and some decreased lagged behind the decrease in the economic cycle.

By studying many such series and what relation they bore to the economic cycle, twenty one such series were found to be of such consistency, as being leading, coincident or lagging of the economic activity that they have been used and have been verified in the cycles subsequent to the time of their formulation.

There are eight leading indicators, eight coincident indicators and five lagging indicators for which statistical data is obtained from various sources from week to week. From this data trends of these indicators, either up or down, are plotted on graphs with a moving three-month average, and from such graphs much economic knowledge is obtainable as to whether, months hence, the economy will be advancing or retrograding.

There is one serious difficulty in using the National Bureau's indicators. Since the graphs are plotted on a moving three-month average, some of the indications of a movement, either up or down, may be stale and outdated, and thus less useful in current decisions and in forecasting coming economic conditions.

To a great extent this difficulty is met by the graphs and charts prepared by the American Institute for Economic Research of Great Barrington, Mass. The American Institute uses the same indicators as the National Bureau, but the former shows on its graphs and charts the movement of the indicators, up or down, for the latest month, thus telling more about contemporary conditions and changes than the National Bureau does.

It is not thought or asserted that the use of business cycle indicators is the last word in predicting coming economic conditions. A start has been made to make economics an exact science using scientific methods. But much more can be and probably will be discovered in the future to dispel the false conception that man's behavior is so erratic that no prognostications can be made as to his future behavior.

Economics, then has a firm need of both the deductive process which Henry George used and the inductive process as now employed by the National Bureau and the American Institute. And perhaps, in the future, the graduate student of economics, the researcher scientist, will uncover and make plain not only the rationale of economic behavior, but the daily guide posts for man's use, so that the day will come, envisioned by Henry George, when business cycles, recessions and depressions will be no more and involuntary poverty will no longer scourge mankind.