------------ EH.NET BOOK REVIEW --------------  
Published by EH.NET (October 2005)  
  
Todd A. Knoop, _Recessions and Depressions: Understanding Business   
Cycles_. Westport, CT: Praeger, 2004. xiv + 289 pp. $55 (hardback),   
ISBN: 0-8018-8203-6.  
  
Reviewed for EH.NET by David Glasner, Federal Trade Commission.  
  
  
Like its subject matter, the study of business cycles is itself   
something of a cyclical phenomenon. Not surprisingly, attention to   
this branch of economics varies countercyclically with the overall   
rate of economic activity and procyclically with measures of economic   
distress such as unemployment, bankruptcies, and the like. Thus the   
volatile 1920s and the disastrous 1930s were a boon to business cycle   
theory and stimulated the first serious empirical studies of business   
cycles. Attention wandered in the prosperous decades after World War   
II, but the troubled period from the mid-1970s to the early 1980s   
stimulated another burst of intellectual activity focused on business   
cycles. But that stimulus, too, wore off and interest flagged in the   
late 1980s and most of the 1990s, with only an evanescent stock   
market crash and a short and shallow recession in 1991-92 to keep   
interest from evaporating totally. More recently, the rapid   
succession of crises in Mexico, East Asia and Argentina, followed by   
the bursting of the U.S. stock market bubble and the subsequent mild   
but lingering recession in the United States, with the intractable   
Japanese recession casting a lengthening shadow on the overall   
landscape have combined to cause another upturn in interest in   
business cycles. This useful book by Todd Knoop of Cornell College   
(in Mt. Vernon, Iowa, not Ithaca, NY), provides a historical survey   
of business cycles and of important business-cycle theories, as well   
as an up-to date (2003) survey of recent cyclical events.  
  
The author explains in the preface that the book grew out of an   
upper-level undergraduate class in business cycles that he has been   
teaching for some time. Because there was no text available for such   
a course, Knoop began to type out and disseminate his class notes to   
students and eventually those notes were developed into the book   
under review, which is therefore aimed primarily at an audience of   
upper-level undergraduates. Specialists or advanced graduate students   
will find little in the volume that they don't know already, but   
researchers in other areas who want a quick introduction to basic   
approaches to cycle theories or the main empirical issues related to   
business cycles may find the text to be of some value.  
  
Knoop begins in Part I (Chapters 1-2) with a general descriptive   
overview of business cycle facts and terminology. In Part II   
(Chapters 3-9), Knoop turns to a survey of the leading business-cycle   
theories. In chapter 3, lightly touching on a number of the   
pre-Keynesian monetary and real cyclical theories, he presents at   
greater length a stylized version of a Classical macroeconomic model   
which, owing to its adherence to Say's Law, can account for periods   
of generally falling employment and output, only by attributing them   
to misguided government policies or adverse economic shocks. In   
successive chapters, Knoop surveys the contributions of Keynesian,   
Monetarist, Rational Expectations, Real Business Cycle, and New   
Keynesian theories. Part III concludes with an excellent survey of   
macroeconomic forecasting. Part III is devoted to an historical and   
empirical survey of the Great Depression (chapter 10) and post-war   
business cycles (chapter 11), and then considers (chapter 12) whether   
our "new economy" is substantially less vulnerable to the business   
cycle than the "old economy." Part IV surveys recent international   
business cycle experience: the East Asia crisis (chapter 13), the   
Argentine Crisis (chapter 14), and the Great Recession in Japan   
(chapter 15). Some concluding observations are offered in chapter 16.  
  
Although the book is generally well written, it does suffer from   
sloppiness in thinking or editing, so that the exposition at times is   
obscure or confusing. On a more substantive level, I was troubled by   
tendency to present the basic business-cycle models in terms of   
overly simplified assumptions and categories. The resulting   
theoretical paradigms, particularly the Classical, Keynesian, and   
Monetarist models turn out to be strawmen rather than realistic   
presentations of historical models that real people actually believed   
in.  
  
For example, the "Classical model" is characterized by perfect   
competition, a vertical short-run aggregate supply curve that   
determines real output with the price level determined by the   
quantity theory of money. Under the usual interpretation of Say's   
Law, such a model pretty much rules out business cycles. This   
interpretation, by the way, is one of the most persistent   
misconceptions in the history of economic thought. No Classical   
theorist ever denied, as belief in Say's Law presumably would have   
required, that there could be and were periods of acute and general   
economic distress, but there is no hint in Knoop's presentation that   
there is a disconnect between his version of the "Classical model"   
and what Classical theorists actually thought about business cycles.   
And they really did think hard about business cycles or financial   
crises or periods of acute economic distress. Moving on to Keynesian   
theory, Knoop would have us believe that Keynes's fundamental   
contribution was to recognize that the "classical" assumptions of   
perfect price and wage flexibility and continuous market clearing   
(neither of which were entertained by any classical theorist of whom   
I am aware) were not really valid, inasmuch as labor markets are only   
imperfectly competitive and workers are reluctant to accept piecemeal   
wage reductions. Keynes, of course, went to great lengths in the   
_General Theory_ to prove (whether successfully or not is another   
issue) that even perfectly flexible wages could not achieve   
macroeconomic equilibrium under conditions of deficient aggregate   
demand. In the process, Knoop elides two decades of debate about the   
nature of the Keynesian model and the conditions under which a   
Keynesian underemployment equilibrium may or may not hold. It is not   
Knoop's failure to summarize these debates that is troubling, but   
that he provides not even a hint of their existence. Instead we are   
told (p. 49) "Keynes believed that wages were not fixed, only sticky.   
If given enough time, workers will gradually reduce their nominal   
wage demands as they observe other similar workers taking nominal   
wage cuts. This will reduce real wages and move the economy back   
toward full employment. The problem with this approach, however, is   
that there are no assurances about how long the process will take.   
... In Keynes's opinion, policymakers cannot afford to wait patiently   
for this process to work itself out in the long run because, in his   
words, 'in the long run we are all dead.'" One is at a loss to know   
whether Knoop really believes that this is the key theoretical   
contribution of the _General Theory_, in which Keynes believed that   
he had advanced far beyond the insight of his famous observation   
(published twelve years before the _General Theory_ in the _Tract on   
Monetary Reform_) about mortality in the long run, or whether such   
details of intellectual history simply don't matter to the author.  
  
According to Knoop, the Monetarist model assumes that wages and   
prices are perfectly flexible, but, since expectations are adaptive   
not forward-looking, wage and price adjustments are slower than   
required to maintain output and employment at their "natural" levels.   
It is possible to interpret Monetarism in this way, but it surely   
does not accurately reflect how most Monetarists believed that   
markets actually work. It appears that Knoop has projected backwards   
onto earlier paradigms a style of theorizing associated with more   
recent Rational Expectations, Real Business Cycle, and New Keynesian   
theories. In a way, this projection allows Knoop to highlight certain   
differences among his simplified paradigms. But in doing so, he   
mischaracterizes what the earlier models and disputes were actually   
about. Now it may be that Knoop's evident sympathy for the New   
Keynesian explanations for sluggish wage and price adjustment have   
led him to overstate the importance of wage and price rigidity in the   
original Keynesian paradigm. Nevertheless, the belief that wages and   
prices are not flexible was not, as Knoop implies, the key difference   
that distinguished Keynesian from Classical or Monetarist economists.  
  
Knoop's discussion of the development of Rational Expectations, Real   
Business Cycle, and New Keynesian models seems to me generally more   
accurate, and more helpful than his treatment of the earlier   
paradigms. While his presentation of the newer models is even-handed,   
he does not conceal his preference for the New Keynesian models over   
the other two paradigms. While acknowledging that there are many New   
Keynesian models that focus on the macroeconomic implications of   
various sorts of market failure, Knoop attributes a greater degree of   
consensus about theory and policy than I think is warranted. In   
particular, I doubt his assertion (p. 109) that New Keynesians accept   
that there is single natural rate of unemployment and that there is   
no long-run tradeoff between inflation and unemployment. I would also   
observe in passing that, by demonstrating the link between market   
failure at the micro-level and aggregate demand failures that require   
remedial macroeconomic policy, the New Keynesians have unwittingly   
vindicated the insight embedded in the much reviled Say's Law. It is,   
precisely as Say's Law teaches, a failure of supply at the   
micro-level that triggers a cumulative failure of demand at the   
macro-level.  
  
Although Knoop's discussion of the Great Depression correctly   
highlights the recent research that shows that the Great Depression   
was largely the result of a breakdown of the international gold   
standard, he fails to note that this view of the Great Depression was   
espoused by a number of important economists at the time, most   
notably Ralph Hawtrey and Gustav Cassel. In fairness, however, it   
should be acknowledged that the early interpretations of the Great   
Depression as a breakdown of the gold standard have by now been   
largely forgotten. However, the exposition would have benefited   
greatly if it had included an explanation of the fragility of the   
post-World War I reconstruction of the gold standard and had   
discussed the destabilizing role of the huge post-war international   
transfers (repayment of U.S. loans to its wartime allies and   
reparations imposed on Germany).  
  
To close on a positive note, Knoop's discussion of the problems of   
macroeconomic forecasting, whether through the use of leading   
economic indicators, market indicators, or econometric models, is   
highly informative and insightful. The final chapters on recent   
international business-cycle experience are also generally well done.   
Despite occasional lapses in exposition, this book should be   
accessible to students, and they will gain a good deal of information   
about, and a fair understanding of, business cycles from reading it.   
However, this could easily have been a much better book than it is.  
  
  
The views expressed by the reviewer do not necessarily reflect the   
views of the Federal Trade Commission or the individual commissioners.  
  
David Glasner is editor of _Business Cycles and Depressions: An   
Encyclopedia_ (1997). Later this year Cambridge University Press will   
publish the paperback edition of his book _Free Banking and Monetary   
Reform_.  
  
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