The Skyscraper Curse--and How Austrian Economists Predicted Every Major Economic Crisis of the Last Century.

Author:Hendrickson, Joshua R.
 
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The Skyscraper Curse--and How Austrian Economists

Predicted Every Major Economic Crisis of the Last Century

By Mark Thornton

Auburn, Ala.: Ludwig von Mises Institute, 2018.

Pp. 275. $17.95 paperback.

On some level, the Austrian Business Cycle Theory (ABCT) is simple. The basic idea is that changes in the interest rate alter the structure of production. Lower interest rates encourage more-roundabout methods of production, and higher interest rates encourage less-roundabout methods of production. If this change in the interest rate is driven by changes in the rate of time preference, then it helps to coordinate the behavior of individuals and firms. The problem occurs when the central bank makes the market interest rate artificially low, which encourages firms to adopt more-roundabout methods of production. However, when the market interest rate rises, it becomes clear that the change in the structure of production represents a misallocation of resources. The boom that comes from the shift to more-roundabout methods of production is followed by the inevitable bust.

Despite the apparent simplicity of this broad interpretation of the ABCT, the finer details can be somewhat elusive. For example, why does production become more roundabout at lower interest rates? Why are firms and entrepreneurs systematically fooled by artificially low interest rates? How might one measure production's degree of roundaboutness? To what extent is evidence of the ABCT just ex post overfitting?

The strength of The Skyscraper Curse is Mark Thornton's ability to provide an answer to some of these questions using a unique approach. In the late 1990s, an investment analyst by the name of Andrew Lawrence developed something called the Skyscraper Index. According to Lawrence, the construction of the world's tallest skyscraper tends not only to coincide with economic booms but also to be a predictor of subsequent economic crises. Certainly, it is not the actual construction that is causing these economic crises. Nonetheless, the premise of Thornton's book is that this socalled Skyscraper Curse is actually emblematic of the dynamics of the ABCT, and the usefulness of the index might be due to this relation to the ABCT.

In part 1 of the book, Thornton explains the Skyscraper Index and even extends the index beyond the evidence provided by Lawrence. He then explains the ABCT and how it relates to the Skyscraper Index. In doing so, he highlights a number of the key features of...

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