One of the many odd incidents of history is, with seemingly only one exception, every time a record-breaking skyscraper is completed, the world economy falls into the depths of a recession.
This could easily be dismissed as one of the manifold coincidences that inevitably arise out of dataset as large and with so many players as all of modern history–if it were not for the work of Mark Thorton, economist and Senior Fellow at the Ludwig von Mises Institute. His new book, “The Skyscraper Curse” posits a causal theory that links the completion of sky-scraping megastructures to economic recession.
Thorton’s thesis is that ultra-long-term investments, such as 100-story skyscrapers, begin in times of “easy money,” when central banks keep interest rates low and thus construction becomes profitable despite the temporal and financial sacrifices necessary to build them. If interest rates are low because investors are making sufficient long-term capital available for these projects, there’s no problem. However, if rates are kept artificially low, investors are tricked, in a sense, into believing there’s sufficient real resources and real capital available to complete projects such as the World Trade Towers or the Burj Khalifa.
Thorton’s book is actually an application of the Austrian Business Cycle Theory popularized in the 20th century by economic giants the likes of F.A. Hayek and Ludwig von Mises (hence Thorton’s Senior Fellow position at the Mises Institute). The theory hypothesizes that interest rates below natural market rates cause investors to push capital into longer-term projects because these projects are now profitable. Prior, real resources weren’t available to accommodate these investments.
Eventually, whether it’s the construction of houses in the suburbs or skyscrapers in major cities, the amount of real resources runs out. The higher prices they command bankrupts many of the more marginal firms that need these resources as inputs for long-term investments, originally catalyzed by artificially-low interest rates.
Take a look at a period of history devoid of any theoretical framework through which to interpret the sequence of events, and you can find almost any pattern to fit practically every story. Data is important: knowledge of facts and figures and dates and names is a necessary ingredient for the fruitful study of history. However, alone these things are of little use in shaping a coherent narrative around past events. “Gazing at sheaves of statistics without prejudgment” is, as the economist Murray Rothbard once wrote, “futile.”
Prejudgment takes the form of a logical superstructure, a blueprint of sorts, within which to frame the superstructure of historical narrative. Dr. Mark Thorton provides a blueprint we would do well to examine, especially given the rough correlation of openings of record-breaking skyscrapers and modern recessions, such as Sears Tower and the World Trade Towers in 1973, Burj Khalifa in 2010, and Saudi Arabia’s mammoth 167-floor Jeddah Tower, set to open in 2020.