Recessions and Depressions: Understanding Business Cycles (review)

This book covers "the empirics, the theory, and international case studies of recessions and depressions" as a "contribution to the ongoing debate over the nature and causes of recessions and depressions" (p. xiv). It does this with non-technical narratives that can be understood by upper-level undergraduates and the general reader with some economics background: a welcome goal that the author achieves. Chapters include useful data tables and charts without being overwhelming and conclude with further reading suggestions.

Part I, on describing business cycles and defining the difference between recessions and depressions, defines nine macroeconomic variables relevant to analysis and six summary "basic facts," which emphasize that business cycles are not regular, predictable, or symmetrical in length and depth nor do they exhibit the same behavior among the various components of gross domestic product (GDP). What cycles seem to have in common is an association "with big changes in the labor market," which "appear to be driving a large portion of changes in output" (p. 16). Given this emphasis, case studies are essential.

A strength of the book is that almost half of it is devoted to case studies: (Part III) Business Cycles in the United States, including the Great Depression, postwar business cycles, and the case of a "new economy"; (Part IV) Modern International Recessions and Depressions, including the East Asian crisis, Argentina and the role of the International Monetary Fund (IMF), and the Great Recession of Japan during the last decade of the twentieth century. Each case is sharply focused and summarizes the chain of cause and effect in a manner that makes complex subjects understandable. They each include explanations from different theoretical points of view. What is missing, however, is an explanation of why these particular case studies were chosen over others. All the cases are recessions, except for the Great Depression of the 1930s. Another depression case would have added to our understanding and allowed for more focus on the question of why some recessions become depressions and not others.

The purpose of Part II on theory is to survey the evolution of thought on business cycles beginning with early theories followed by Keynes, Keynesian theory, and a chapter on each of the following: the monetarist model, the rational expectations model, real business cycle models, and new Keynesian models. A short concluding chapter in Part II reviews four primary forecasting techniques: macroeconomic indicators, econometric methods, structural modeling, and dynamic general equilibrium modeling. Students and general readers alike should find these last five chapters useful and informative. They make clear the differences in approach and assumptions among these theories and their relationship to the case studies.

The initial two chapters on theory, however, do not adequately explain the evolution of economic thought. Knoop follows Keynes in describing all theory before his own General Theory as classical. This creates some confusion as this is not the usual classification, and important distinctions are lost between labor theories of value, production cost theories of value, and the later evolution of marginal analysis based on a utility theory of value. The latter is what is usually meant by neoclassical, a term Knoop uses exclusively for those post-Great Depression theories that are based on an assumption of perfect competition rather than Keynes' imperfect competition.

In addition, there is no cohesive thread showing the evolution or historical context of early theory. Something of a hodgepodge of theories is presented. For example, "early agricultural theories" make no mention of the Physiocrats but present first the Sunspot theory of 1884, then the Cobweb theory of 1938, and finally Malthus's model of economic cycles from 1798. Also, there is no mention of the relevant debate between Malthus and Ricardo that focused on the role of demand and the possibility of gluts (underconsumption) and influenced Keynes' thinking in rejecting Say's Law over a century later.

Knoop's references to underconsumption theories are only in terms of John Hobson. He also references profit margin...