Skyscraper: Economics and Business Cycle

Topics: Economics, Skyscraper, Business cycle Pages: 37 (11253 words) Published: May 3, 2011
Skyscrapers and Business Cycles
Abstract: The construction of skyscrapers that qualify as the “World’s Tallest Building” tends to coincide with major downturns in the economy. The Skyscraper Index, created by economist Andrew Lawrence shows a high level of correlation between skyscraper construction and the business cycle. Is this just a coincidence, or perhaps do skyscrapers cause business cycles? A theoretical foundation of “Cantillon Effects” for the skyscraper index is provided here showing how the basic components of skyscraper construction such as technology are related to key theoretical concepts in economics such as the structure of production. The findings, empirical and theoretical, suggest that the business cycle theory of the Austrian school of economics has much to contribute to our understanding of business cycles, particularly severe ones.

Mark Thornton Senior Fellow Ludwig von Mises Institute 518 West Magnolia Avenue Auburn, AL 36832-4528 334-321-2100 Fax=321-2119

*** Comments welcomed. Please do not quote without permission. ***

Skyscrapers and Business Cycles

The skyscraper, that unique celebration of secular capitalism and its values, challenges us on every level. It offers unique opportunities for insightful analysis in the broadest terms of twentieth-century art, humanity, and history. When criticism becomes captive to centers of power or prevailing theories or fashions, unwilling or unable to probe the process and the results, something important has gone wrong with one of the stabilizing and balancing forces of a mature society. 1

In the overheated speculation of the 1920s, as land prices rose, towers grew steadily taller. Or should the order be: as skyscrapers grew taller, land prices rose? The variables that contributed to real estate cycles were even more complex than this “chicken and egg” conundrum. 2


The skyscraper is the great architectural contribution of modern capitalistic society and is even one of the yardsticks for 20th century superheroes, but no one had ever really connected it with the quintessential feature of modern capitalistic history—the business cycle. Then in 1999, economist Andrew Lawrence of Dresdner Kleinwort Benson created the “skyscraper index” which purported to show that the building of the tallest skyscrapers is coincidental with business cycle, in that skyscraper construction is highly correlated with severe swings in the business cycle and he finds that the building

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Huxtable (1992, p. 120). Willis (1995, p. 88).


of "world's tallest building" is a good proxy for dating the onset of major economic downturns. Lawrence describes his index as an “unhealthy 100 year correlation. ” The ability of the index to predict economic collapse is remarkable. For example, the Panic of 1907 was presaged by the building of the Singer Building (completed in 1908) and the Metropolitan Life Building (completed in 1909). The skyscraper index also accurately predicted the Great Depression with the completion of 40 Wall Tower in 1929, the Chrysler Building in 1930, and the Empire State Building in 1931. There are apparent exceptions in the ability of the index to predict, so the first question is ; how good of a predictor is the skyscraper index? Second, what is the nature of the relationship between skyscraper building and the business cycle? Surely, building the world’s tallest building does not cause economic collapse, but just as clearly, there are economic linkages between building booms and financial busts. What then, if any, theoretical connections can be made between skyscraper building and business cycles? Andrew Lawrence mentions over- investment, monetary expansion, and speculation as possible foundations for the index, but does not explore these issues. With the destruction of the World Trade Towers and the increased threat of terrorism, the skyscraper index may have already lost its usefulness for future...
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