Real Business Cycle Theory Should Get Less Attention

A blog about business and economics.
May 7 2012 4:18 PM

Real Business Cycle Theory Should Get Less Attention

1336436758796

Garrett Jones thinks we should talk more about real business cycle theory:

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.
Advertisement

As with most discussions about what's overrated and what's underrated, there's a question of how to specify the model here. Jones says RBC rarely makes it into mainstream discussions. I would say that mainstream discussions are absolutely dominated by a RBC-esque confusion of the sources of long-term prosperity with short-term business cycle issues. But one important reason why RBC shouldn't make it into mainstream discussions is that it's totally ridiculous. The above is a chart of the business cycle in the United States of America.

That is simply not a chart of technology shocks buffeting the economy. No way no how. If you think the rate of technological progress plummeted at a nearly unprecedented pace during the winter of 2008-2009 or that 1983-84 was a two-year span of technology progress unequaled in the rest of postwar American history then you're badly confused.

Contemplation of RBC does, however, raise an important point about economists' use of the word "technology." In English, "technology" occurs when you invent new stuff and you assess the pace of technological innovation by looking at the quantity of new inventions. In growth economics, you do it backwards. You look at the extent to which the quantity of output increases, and then you subtract out the contribution of capital accumulation (more machines) and increased labor supply (more workers) and call the residual factor "technology." If you get a better survey that can include the impact of greater education (i.e., "human capital") rather than quantity of workers, the residual gets smaller and you still call it "technology." And in this tautological sense, it becomes easy to prove that technology is the key to prosperity. You can also apply the method to short-term output fluctuations. Things like the weather clearly lead to output fluctuations, as do disasters like the earthquake Japan had recently. But then it turns out that a very large share of output fluctuations in modern economies (as opposed to farm-dominated ones) aren't attributable to these identifiable shocks. By analogy with the long-term growth process, you can simply label the residual "technology" and thus illustrate the central importance of technology shocks to the business cycle. And then there's reality....

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

Two Damn Good, Very Different Movies About Soldiers Returning From War

The XX Factor

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Politics

Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

Trending News Channel
Sept. 19 2014 1:11 PM Watch Flashes of Lightning Created in a Lab  
  News & Politics
Weigel
Sept. 20 2014 11:13 AM -30-
  Business
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
  Life
Quora
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Tv Club
Sept. 21 2014 1:15 PM The Slate Doctor Who Podcast: Episode 5  A spoiler-filled discussion of "Time Heist."
  Arts
Brow Beat
Sept. 21 2014 2:00 PM Colin Farrell Will Star in True Detective’s Second Season
  Technology
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 21 2014 8:00 AM An Astronaut’s Guided Video Tour of Earth
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.