Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

500 Money, Bank Credit, and Economic CyclesSOME EMPIRICAL TESTING OF THE AUSTRIAN THEORYOF THE BUSINESS CYCLESeveral fascinating studies have lent strong empirical supportto the Austrian theory of the business cycle. This hasoccurred despite the difficulties in testing a theory based onthe impact of credit expansion on the productive structure andthe irregular manner in which such expansion affects the relativeprices of products of the different production stages. It isdifficult to empirically test these economic processes, especiallywhile an attempt is made to continue using national accountingstatistics, which, as we know, exclude most of the grossvalue produced in the intermediate stages of the productionprocess. Charles E. Wainhouse has carried out one of theseoutstanding empirical studies. 112 Wainhouse lists nine propositionswhich he deduces from the Austrian theory of the cycleand empirically tests them one by one. 113 These tests yield severalmain conclusions. Wainhouse first empirically tests theproposition that changes in the supply of voluntary savingsare independent of changes in bank credit. He uses statisticalseries which date from January 1959 to June 1981 and findsthat in all cases but one the empirical evidence confirms this112 Wainhouse, “Empirical Evidence for Hayek’s Theory of EconomicFluctuations,” pp. 37–71. See also his article, “Hayek’s Theory of theTrade Cycle: The Evidence from the Time Series” (Ph.D. dissertation,New York University, 1982). Wainhouse methodology is also followedby P. Le Roux and M. Lewin, “The Capital Structure of the BusinessCycle in South Africa,” Journal for Studies in Economics and Econometrics22, no. 3 (1998): 91–109.113 Wainhouse states:Within the constellation of available tests of causality,Granger’s notion of causality—to the extent that it requiresneither the “true” model nor controllability—seems to offerthe best prospects for practical implementation. (Wainhouse,“Empirical Evidence for Hayek’s Theory of Economic Fluctuations,”p. 55)Wainhouse mentions the following articles by Granger and bases hisempirical testing of the Austrian theory on them: Clive W.J. Granger,“Investigating Causal Relations by Econometric Models and Cross-Spectral Methods,” Econometrica 37, no. 3 (1969): 428ff.; and “Testing for