“Economists have successfully predicted seven of the last three recessions….”
So goes the humorous, if uncomfortably accurate, adage. Business cycles have been a source of fascination for centuries. Some economists attributed them to sunspots. Others to historical cycles — Kondratiev (45–60 year waves), Juglar (7–11 year waves), and Kitchin (three-to-five year waves). These views belong neither to cranks nor obscure figures; well-known economists from William Stanley Jevons to Joseph Schumpeter championed them.
Tyler Goodspeed’s Recession: The Real Reasons Economies Shrink and What to Do About It belongs on the shelf of anyone tracking business cycles, financial markets, and economic growth. The book delivers a tour de force through US and UK economic history. Meticulously researched, it is full of data, analysis, and engaging stories about financiers, economists, politicians, and the occasional huckster.
I confess this book has done more to challenge my views of the business cycle than just about anything else I’ve read. Goodspeed argues, in fact, that the term “business cycle” is itself a misnomer. Economies do not operate according to predictable patterns or cycles. “Economic expansions don’t die of old age,” he writes, “they are murdered.”
The central claim of the book is that there are no natural or inevitable reasons why modern developed economies must experience recessions. Goodspeed, who served as acting chairman of the Council of Economic Advisers from June 2020 to January 2021 and is now chief economist at ExxonMobil, argues that there are always real shocks behind downturns — not a buildup of malinvestment, not irrational exuberance, not some self-generated collapse. He invokes Tolstoy’s famous maxim that every happy family is happy in the same way, while every unhappy family is unhappy in its own unique way.
So, he suggests, every recession is unique. Sometimes it is a drought, or locusts, or war, or unusual cold, or widespread strikes, or any number of other negative shocks. In fact, Goodspeed argues that recessions are rare precisely because they require several such shocks to occur nearly simultaneously.
Austrian economists like Mises and Hayek, and later Garrison, Rothbard, and Woods, have argued that artificial expansions of credit via central banks distort price signals around investment, its duration and sector, creating malinvestment and an unsustainable boom resulting in an unavoidable bust. Russ Roberts and John Pappola created memorable videos describing the debate between Hayek and Keynes on business cycles. One views recessions as caused by malinvestment, the other by too little spending.
Both are wrong, according to Goodspeed. Most approaches to studying or predicting business cycles — whether overconsumption, overinvestment, malinvestment, distorted price signals, or financial crisis — fall into the trap of oversimplifying historical episodes of economic contraction. These frameworks do not hold up when examining all recessions in the US and UK over the past three centuries.
With some familiarity in economic history and business cycles, I recognized many of the recessions Goodspeed highlights, though he also examines dozens of minor downturns that only specialists in economic history tend to notice. In the major cases of economic contraction and decline, he discusses the monetary policy shifts and financial crises that accompanied them — the same endpoints where many business cycle theorists stop their analysis.
Yet in case after case, significant physical shocks — often involving energy, food, or transportation — precede or accompany financial and monetary distress. Behind “malinvestment” and standard business cycle theories, then, are real, unpredictable shocks.
This aligns closely with the thesis of the New Classical economists, including Robert Lucas, Robert Barro, Thomas Sargent, Finn Kydland, and Edward Prescott. In this view, recessions and economic fluctuations are primarily driven by real physical shocks, with financial and monetary disturbances emerging as secondary effects.
The one theory of economic fluctuations that makes it through Goodspeed’s criticisms relatively unscathed was Milton Friedman’s “Plucking Model.” Friedman argued that recessions are temporary declines in economic growth below a trend line (like plucking an upward-sloping guitar string), that would eventually be reversed during recovery back to the trend line. In this model, recessions are the exception, rather than the rule, of economic dynamics.
In some ways, this makes a lot of sense. Friedman won the Nobel Prize in part due to his work distinguishing real from nominal (monetary) elements of the economy. The nominal variables shouldn’t affect real economic outcomes in the long run because people adjust their expectations and plans to changes in the money supply and the price level.
Friedman’s plucking model flips standard cycle theory. It predicts that a recovery’s speed and magnitude depend entirely on the severity of the bust, not the length of the preceding boom or the volume of artificial credit. This is exactly what Goodspeed finds across dozens of recessions. Recovery is far more predictable than recession. The worse the recession, the greater the subsequent rebound.
Recession delivers a powerful, accessible narrative of economic history, making significant claims about economic growth, contraction, and the nature of modern economies. It’s quite compelling. Still, I am not quite ready to abandon Austrian Business Cycle Theory.
The absence of a predictable pattern or regularity between credit booms and recessions does not mean they play no role. They may still matter as both a transmission mechanism and a source of financial fragility. Goodspeed himself emphasizes the importance of sound institutions, including free-market prices and effective financial risk management and distribution, in mitigating the severity of downturns.
It is no coincidence that many of the stories he tells center on stress, panic, or failure within the financial system. It may be true that “malinvestment” is not the primary driver of business cycle fluctuations, but financial leverage and distorted signals still matter. At the same time, Goodspeed’s warning against the hubris of market forecasting is worth taking seriously.
The economy, it turns out, is not only too complex to plan — it is also too complex to predict.
