Booms, Bubbles, and Busts: Three Essays in Business Cycles and the Housing Crisis of 2008

Geoffrey Lea

Advisor: Peter J. Boettke

Committee Members: Richard E. Wagner, Virgil Storr, Mercatus Center

Enterprise Hall, 318
October 22, 2010, 06:00 AM to 08:00 AM


Over seventy years after The Keynesian Revolution and the ascendancy of macroeconomics, a survey of the theoretical landscape shows answers in some areas and questions looming still in others. Within the span of the last decade, the elds of economic growth and development have undergone what might be called an institutional counter-revolution, where questions once shakily answered by aggregate production functions, optimal or "golden rule" savings rates, and convergence estimations are now being fruitfully addressed by institutional explanations. On the other hand, the modern business cycle landscape is mired in competing approaches, each grounded in a speci c set of behavioral and institutional assumptions, which, taken together, produce equilibrium conditions at either full employment or some level of involuntary unemployment. These gains made in the fields of growth and development may in fact serve as a guide for the remaking of business cycle theory.

Drawing on a Kohn's (2004) distinction between a "value paradigm" and an "exchange paradigm," this dissertation puts forward a rudimentary vision of an "emergent" macroeconomics in line with many of the insights developed by the older "coordinationist" approach of O'Driscoll (1977) and Leijonhufvud (1981), primarily with respect to discoordination business cycle theory and their explanation of macroeconomic fluctuation. This emergent macroeconomics rests fi rmly in the exchange paradigm, where macroeconomic theorizing is both methodologically and theoretically better grounded. The rst essay traces the history of growth theory and development up to the recent institutional counter-revolution, making the case that the institutional approach ts better with an exchange paradigm than a value paradigm. After a brief, critical analysis of modern business cycle theory, it develops an emergent business cycle theory by resurrecting Say's law of markets as an institutionally-rich theory and one that comports better to the exchange paradigm. The second essay considers Austrian Business Cycle Theory in light the general theory outlined in the first chapter, particularly the application of the law of markets and an emphasis on the exchange paradigm over the value paradigm. By recasting the Austrian theory in this new theoretical landscape, certain aspects of theory are further emphasized, while others are left aside, resulting in a theory of institutional causes and consequences of the business cycle. The third chapter turns to the housing and financial crisis of 2008 as a testing ground for the ability of this emergent approach to business cycles to explain real-world macroeconomics.