The Skyscraper Curse: And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century

The Skyscraper Index expresses the strange relationship between the building of the world’s tallest skyscraper and the onset of a major economic crisis. This relationship only came to light in 1999 when research analyst Andrew Lawrence published a report noting the odd connection between record-height buildings and noteworthy economic crises — that is, the skyscraper curse, a relationship that dated back nearly a century. Without a theory to support it, journalists largely dismissed Lawrence’s report as the fun story of the day.

However, from the vantage point of Austrian business cycle theory, or ABCT, Lawrence’s report was important for understanding the business cycle: booms and busts. ABCT is the business cycle theory developed by the economists of the Austrian school during the early twentieth century.

In the 1860s, Austrian financial journalist Carl Menger (1840–1921) began to ponder economic activity that he was reporting on in light of the economics of the classical school — that is, Adam Smith (1723–90), David Ricardo (1772–1823), John Stuart Mill (1806–73), and so on. He found huge gaps in the explanation of many basic concepts, such as supply and demand. To close those gaps he developed some fundamental elements of modern economics, such as marginal analysis and the rudiments of opportunity cost, marginal utility, and subjective value.

His students at the University of Vienna learned from him and built on his insights. For example, Eugen von Böhm-Bawerk (1851–1914), who served as finance minister of the Austro-Hungarian Empire, built on Menger’s work to show that production can be less or more time consuming, or roundabout. From this perspective, we can see that laborers get paid very quickly, while capitalists are paid interest for delaying their rewards until the product is actually sold. Böhm-Bawerk showed that interest was based on the time preferences of workers and capitalists, savers and borrowers. The interest rate is a critical economic factor because it helps determine the size and complexity of an economy’s capital structure. The capital structure is simply the non-natural world around us: all the business assets related to mines, farms, factories, utilities, transportation, warehouses, wholesale and retail businesses, and so on. Austrian economics has been described by Peter Klein as mundane economics.1

For example, a market economy populated with individuals with low time preferences and interest rates would, over a long period, be characterized by a large accumulation of savings that is turned into large amounts of “brick and mortar” capital and advanced-technology production processes. The division of labor would be highly specialized. People would be wealthy and have a high standard of living.

Ludwig von Mises (1881–1973) was a student of Böhm-Bawerk who extended Austrian analysis into the area of money, solving the classical school’s problem of how to connect the workings of the real economy with monetary economics. He accomplished this with his regression theorem, which was based in part on Menger’s explanation for the origin of money. Mises also formulated a theory of the business cycle based on the interaction of the interest rate and capital allocation. His approach is based on distortions of the market rate of interest. His student, Friedrich August von Hayek (1899–1992), further elaborated and extended Mises’s theory, a contribution for which he was awarded the Nobel Prize for economics in 1974. Their theory is now known as Austrian business cycle theory. (See Roger Garrison for a technical explanation of Austrian macroeconomics.2 )

Inspired by ABCT, my reflections about skyscrapers eventually resulted in an academic working paper, “Skyscrapers and Business Cycles.” The manuscript was summarily rejected by several mainstream economic journals. The replies from the journal editors would often include a short or cryptic explanation such as “This paper does not have a testable hypothesis.” The article3 was eventually published in the Quarterly Journal of Austrian Economics in 2005. It uses ABCT to explain how record-breaking skyscrapers are linked to business cycles and economic crises. In particular I drew on the economic theories of Richard Cantillon (1680s–1734?), the first economic theorist and a proto-Austrian economist, in order to establish causal links between skyscrapers and business cycles.

Cantillon showed how the interest rate and the money supply can create changes and distortions in the economy, a phenomenon now referred to as Cantillon effects. The paper describes three such effects: (1) the relationship between the interest rate, land prices, and building height; (2) the relationship between the interest rate, the size of firms, and the demand for office space; and (3) the relationship between building height and the enhanced incentive for advanced — or premature — technological innovations in both design and construction.

The time period of my research on skyscrapers and business cycles was crucial for my early identification of the housing bubble. In my February 2004 article “ ‘Bull’ Market?” I used a trend-channel technique to define the initial stage of the bubble. Then in June 2004 I wrote “Housing: Too Good to Be True,” a full explanation of how the Federal Reserve’s monetary policy had caused a massive housing bubble. I also began giving presentations on this subject to the general public.

As a result of this publicity, I was invited in 2005 to contribute a chapter to a book, Housing America: Building Out of a Crisis, edited by Randall G. Holcombe and Benjamin Powell. I submitted the resulting chapter, “The Economics of Housing Bubbles,” to the editors the first week of June 2006.

The publisher of the book asked me to remove some text they considered too gloomy and ominous regarding what might happen in the aftermath of the housing bust. I agreed to the changes because the book was to be marketed to people interested in zoning laws, building codes, and urban planning, not economic Armageddon. However, the editors later allowed me to include that removed text, when, after a long publishing delay, the book was finally published in 2009. At that time my gloomy predictions seemed more appropriate. The removed text was placed in a Postscript in the original publication. Indeed the editors were so kind as to mention my chapter prominently at the beginning of their preface:

The timing is noteworthy because most of the chapters were completed in 2006 when the housing boom across much of the country was reaching its peak. One chapter in particular that deserves mention in this regard is Mark Thornton’s, because he was discussing the inevitable collapse of the housing market bubble at a time when many observers were arguing that house prices could continue rising indefinitely. Thornton’s chapter does a good job of explaining the collapse of housing prices in hindsight, and it is worth noting that Thornton’s hindsight was actually foresight: he was talking about the collapse before it actually occurred.4

Between 2004 and 2007 audiences and readers generally scoffed at my analysis. This was a time when the accepted wisdom in mainstream economics and the real estate industry was that “housing prices never go down” and “you can never lose money in real estate.” Mainstream economics refers to what is widely taught at well-known universities and associated with the neoclassical synthesis, which combines neoclassical microeconomics and Keynesian approaches to macroeconomics.

One of my particularly provocative public lectures, circa 2006, “Luxury Game Day Condominiums,” was given to students at Auburn University. As it turned out local building contractors and bankers were also in attendance. The empirical evidence I presented was based on interviews of people who had purchased these game day condos during the housing bubble. The condos had been marketed to football fans of Auburn University who come to Auburn, Alabama, for the six or seven home football games per year. When I did the calculations I discovered that the condo buyers could have stayed at the best hotel in town and eaten all their meals at gourmet restaurants and saved money. I then asked the buyers, “Why buy the condo?” To this the answer would invariably be “I can always sell it for more money later.”

The complete bust in housing had not been recognized yet, but everyone in the audience knew that condo prices were falling and that some local projects had been cancelled. The students in the audience roared with laughter at those responses, but the builders and bankers were none too pleased. Of course it was not just local builders and bankers that wanted to keep the bubble going. By now Federal Reserve officials were publically cheerleading for the housing bubble and denying that it existed.5

They should have known better, or at least reexamined their models. After all, the housing industry as measured by the Philadelphia Stock Exchange Housing Sector Index peaked on June 30, 2005. On August 8, 2005, my short article “Is the Housing Bubble Popping?” was published.6 In the article I presented charts that indicated that home-builder stock prices could be headed much lower and that short-term and long-term interest rates could be heading higher. Both trends, which did continue, were harbingers that the housing bubble would eventually pop.

In 2007, the skyscraper curse struck again, the second occurrence since Lawrence’s 1999 report. This time it happened in the Middle East in the city-state of Dubai. Located in the United Arab Emirates, between Saudi Arabia and Oman and across the Persian Gulf from Iran, Dubai is a fantasy city. Its ruler has transformed his oil wealth into a highly dynamic city with very tall and ornate buildings, hotels, the world’s largest shopping mall, and even man-made islands in the Persian Gulf designed to resemble a map of the world.

It was in Dubai that construction of the Burj Dubai tower began in 2004. It was designed to be a world-record setting skyscraper in terms of all metrics such as height, highest livable floor, the most floors, and so on. The next “skyscraper signal” occurred when construction reached a new record height in late July 2007. In August I reported:

There is a new record setting skyscraper in the making in the United Arab Emirates. The Skyscraper Index predicts economic depression and/or stock market collapses to occur prior to the completion of the skyscraper.7

The tower was renamed the Burj Khalifa and opened in early January 2010. The building was renamed for the ruler of Abu Dhabi who had arranged for billions of dollars in emergency loans to bail out his cousin in Dubai. Clearly the skyscraper curse had hit once again. The media began to take it more seriously. On January 8, 2010, CNN.com’s Kevin Voigt reported:

When the Burj Khalifa officially opened in Dubai on Monday, much of the world press noted the irony of the world’s tallest building unveiled just weeks after the emirate’s debt crash.

But a look at the history of record-breaking skyscrapers and business cycles suggests otherwise  —  the opening of every single “world’s tallest” building in the past century has coincided with an economic downturn.

One person who wasn’t surprised by the economic woes greeting the dedication of the Burj Khalifa (renamed Monday from Burj Dubai in honor of the sheikh of Abu Dhabi, which recently threw Dubai a $10 billion lifeline) was Auburn University economist Mark Thornton.

He predicted tough times for the emirate two years ago in a blog entitled “New Record Skyscraper (and depression?) in the making.” He noted that economic depression or stock market collapse usually occurs prior to completion of such skyscrapers.8

So the Skyscraper Index’s “curse” has correctly forecast all major economic crises for over a century. The skyscraper curse has also experienced a good deal of mainstream media coverage; and so it would seem that the Skyscraper Index theory is accurate and alive and well.

That was until March 28, 2015, when the Economist declared the skyscraper curse was dead. In reviewing the current “skyscraper boom” they noted in their unsigned “Towers of Babel” editorial the following:

Does this frenzy of building augur badly for the world economy? Various academics and pundits, many of them cited by The Economist, have long argued as much, but new research casts doubt on it.

As a side note, the majority of major media who write about my work and this phenomenon fail to cite me as a source, although they have clearly been drawing from my publications. Of the “various academics and pundits” most draw from Andrew Lawrence.9 The Economist’s article did not include me explicitly in the text, but at least they did reference my 2005 journal article at the end as a source.10 Thank you.

The Economist based its view on a new academic article, “Skyscraper Height and the Business Cycle: Separating Myth from Reality.” The article was written by three Rutgers University economists: Jason Barr, Bruce Mizrach, and Kusam Mundra. It was published in the academic journal Applied Economics in 2015.

Their article demonstrates that skyscrapers do not cause (in a technical economic sense) business cycles as measured by changes in overall economic activity — that is, GDP. Their statistical analysis shows that skyscraper construction and overall economic activity move together, having a common cause or trend. They also found it difficult to find a correlation between the skyscraper announcement and completion dates and changes in GDP.

Let’s be perfectly clear here. Skyscraper construction does not cause business cycles. The statistical evidence presented in Applied Economics actually supports the Skyscraper Index theory.

It should be clear from my “Skyscrapers and Business Cycles” article that there is a third factor at work. Skyscrapers are essentially part of the boom phase of the cycle. The cause of both is artificially very low interest rates and artificially very easy credit conditions. This cause results in new record-breaking skyscrapers, a boom in the economy, and eventually a substantial economic crisis — the skyscraper curse.

Immediately, I wrote a letter to the editor of The Economist to inform them of the error in the 2015 article and to ask them to change the date they printed for my journal article from 2004 to 2005. The letter was never published and the date of my paper was never corrected. I did receive an email three months later that said the magazine had misplaced my letter. I also submitted a comment (with Lucas Engelhardt) on the article published in Applied Economics. Surprisingly, the editors of Applied Economics rejected the comment. Accordingly, this book is dedicated, in part, to the editors of Applied Economics and The Economist.

The main point of the Skyscraper Index and the resulting curse is to give people a tangible, concrete example of what is happening to the economy during a business cycle. ABCT is necessarily vague on some issues and silent on others. For example, it refers to capital, the structure of production, and goods of higher and lower orders without being specific. The theory presents issues, such as interest rates being artificially low relative to market-determined rates, without providing readers with a mechanism to calculate whether and when they in fact apply.

That does not mean ABCT is unrealistic, hard to understand, or difficult to apply. Austrian economists have always striven to be realistic about the economy and the limits of economic theory, but that necessarily puts limitations on the analysis and forces us to introduce significant caveats to our conclusions. For example, Austrian economists cannot “predict” in the strictest scientific sense. We speculate about the future, given the caveat of ceteris paribus — that is, all things being equal — and without illusions that economic theory can help us determine the timing and magnitude of future events. However, we can make “pattern predictions” based on economic theory and an appraisal of the facts.

In contrast, when mainstream economists are faced with the complexities of real economies or with scarcity of data, they resort to unrealistic assumptions, questionable simplifications, and inappropriate data. For most mainstream economists, their sine qua non is predicting the future. However, mainstream theories of the business cycle, such as real business cycle theory and various Keynesian theories, cannot predict anything about the future because in their view, the cycle is generated by economic shocks that cannot be anticipated. They can only predict in the sense that they use historical data in their models, like “back testing” stock market strategies. They practice retrodiction, rarely prediction.

The grand benefit of this book then is to show what Austrian economists see with the aid of the business cycle theory. ABCT shows what causes the business cycle, what happens during the business cycle, and that the boom must inevitably end in a bust or economic crisis. The value of resources is squandered in the process and people are harmed. Austrian theory can also show how to best deal with the bust, what to avoid, and how to permanently fix the problem by ending the business cycle, or at least minimizing its impact.

In section 2, I present evidence that demonstrates the real-world usefulness of ABCT by showing that Austrian economists have correctly forecast almost every major economic crisis for over a century. I also present evidence that mainstream economists have a poor record of predicting business cycles and have made some very bad predictions.

To be fair, there have been some mainstream economists who have made correct forecasts of economic crises, but their numbers are few compared to the Austrian economists, especially considering that Vedder and Gallaway11 have estimated that there are about a hundred mainstream economists for every Austrian-school economist. Obviously, not all predictions by Austrian economists have come true or in a timely manner, including those of this author.

Before leaving section 2, let me be perfectly clear on one key point. Austrian economists have used ABCT to make their predictions about booms and busts since Böhm-Bawerk’s time over a century ago. But since the concept of the Skyscraper Index is a relatively new concept, it has not been a part of the Austrian economists’ toolkit. The idea of the Skyscraper Index was only discovered in 1999, and the theoretical justification for connecting it to ABCT has only been around since 2005.
Before ending this introduction, a question arises: what are Austrian economists saying about the current economy and government policy? Austrian economists have spoken out against current fiscal and monetary policy, and many have argued that policy has been unconventional, unorthodox, and extreme even by mainstream standards. Austrian economists have recommended drastic changes to current policies, and they have speculated that the economic consequences of the next crisis will be truly horrible. There are obviously differences of opinion, but the Austrian school is united against the current policy regime.

A skyscraper alert has already been issued, in that a groundbreaking ceremony has taken place and construction has begun on the Jeddah Tower in Saudi Arabia, a prospectively record-setting skyscraper. If a skyscraper signal is issued, it will mean that that project’s height exceeds the current world record.

In conclusion, the book provides a remedy of how to best deal with the next economic crisis.

The author would like to acknowledge the assistance and support of many people and to apologize for no doubt forgetting the assistance of many others over the long course of this project.

First and foremost I would like to acknowledge the support of the officers, members, and donors of the Mises Institute who made this book possible. I would also like to thank Paul Cwik, Harry David, David Gordon, Lucas Engelhardt, Jörg Guido Hülsmann, Roger Garrison, Karl-Friedrich Israel, Floy Lilly, Greg Kaza, Jonathan Newman, Patrick Newman, Shawn Ritenour, Louis Rouanet, Joseph Salerno, Susan Schroeder, Judy Thommesen, Paul Wicks, all the economics teachers I’ve had throughout the years. I would most especially like to thank Robert B. Ekelund, Jr.

• 1Peter G. Klein, “The Mundane Economics of the Austrian School,” Quarterly Journal of Austrian Economics 11, nos. 3–4 (2008): 165–87.
• 2Roger W. Garrison, “The Austrian School: Capital-Based Macroeconomics,” in Modern Macroeconomics: Its Origins, Development and Current State, edited by Brian Snowden and Howard R. Vane (Aldershot: Edward Elgar, 2005).
• 3Mark Thornton, “Skyscrapers and Business Cycles,” Quarterly Journal of Austrian Economics 8, no. 1 (2005): 51–74.
• 4Randall G. Holcombe, and Benjamin Powell, eds., Housing America: Building Out of a Crisis (New Brunswick, N.J.: Transactions Publishers, 2009), p. vii.
• 5Mark Thornton, “Transparency or Deception: What the Fed Was Saying in 2007,” Quarterly Journal of Austrian Economics 19, no. 1 (2016): 65–84.
• 6Mark Thornton, “Is the Housing Bubble Popping?” LewRockwell.com, August 8, (2005).
• 7Mark Thornton, “New Record Skyscraper (and Depression?) in the Making,” mises.org blog, August 7, 2007.
• 8Kevin Voigt, “As skyscrapers rise, markets fall,” CNN.com.
• 9Andrew Lawrence, “The Skyscraper Index: Faulty Towers!” Property Report, January 15, 1999 and “The Curse Bites: Skyscraper Index Strikes,” Property Report, March 3, 1999.
• 10Thornton, “Skyscrapers and Business Cycles.”
• 11Richard Vedder, and Lowell Gallaway, “The Austrian Market Share in the Marketplace for Ideas, 1871–2025,” Quarterly Journal of Austrian Economics 3, no. 1 (Spring 2000): 33–42.