An Irishman's Diary

WHATEVER ELSE it achieves as the world’s new highest building, the Burj Khalifa has given a big credibility boost to one of the more eccentric ideas of modern economics: the “Skyscraper Index”.

First advanced in 1999 by Andrew Lawrence, the Skyscraper Index is a more sophisticated version of the theory that when your shoeshine boy starts giving stock tips, it’s time to get out of the market. That said, it too began life as a joke, more or less.

A bank research director, Lawrence studied 20th-century history and concluded, irreverently, that the construction of a new “world’s tallest skyscraper” at any given time was a harbinger of economic doom. At any rate, he suggested, the two things appeared to coincide closely.

Evidence for the prosecution included New York’s Singer Building, begun just in time for the collapse of the Knickerbocker Trust and the panic of 1907; the Empire State Building, which was finished on cue for the Great Depression and took 40 years to achieve full occupancy; and the Petronas Tower in Kuala Lumpur, completed in 1997, even as the Asian stock-market nosedived.

The SI’s retrospective powers of prediction were not always so reliable, admittedly. There had been occasional market collapses when no new “world’s highest building” was in construction: including 1937, and in the early 1980s. Also, the index had sometimes cried wolf.

Thus, if the SI was to be believed, the completion of New York’s World Trade Center and Chicago’s Sears Tower within a year of each in the early 1970s should have presaged deep recession; whereas the oil crisis did not quite live down to the billing.

For this and other reasons, economists tended to dismiss the index as a serious indicator of impending collapse. One who didn’t was Mark Thornton, an American member of the so-called “Austrian School” of economics (whose leading institution, confusingly, is in Alabama).

Like most “Austrians”, Thornton is an admirer of the 18th-century Irish banker Richard Cantillon, about whom we were writing here recently. Born in Co Kerry circa 1690, Cantillon lived in an era when the world’s tallest buildings were all cathedrals, their construction sometimes spanning centuries, never mind economic cycles.

But he didn’t need the skyscraper index or the advice of shoeshine boys to know when to get out of the market. Possessing not only the genes of a cute Kerryman, but also a very sophisticated understanding of what makes people part with money (arguably the same thing, I suppose), Cantillon made vast fortunes from the Mississippi scheme and South Sea Bubble, before publishing a classic work on economics that remains influential today.

In a 2005 paper he wrote for the Austrian School’s quarterly journal, Thornton decided to apply a number of “Cantillon effects” to the Skyscraper Index, showing why record-setting high buildings might well presage the end of a boom.

Declining interest rates at the start of a growth cycle led to an increase in land prices, he pointed out. Cheap money also allowed companies to expand, requiring ever-more office space. And the same low interest rates brought investment in construction technologies, enabling new height records to be set. All these factors peaked at the end of a cycle, Thornton concluded, by which stage work on a new world’s highest building had often begun.

Not many economists predicted the crash of 2008, but credit where it’s due. Here is Thornton waving a tentative red flag on his blog in the first week of August 2007, when the work-in-progress Burj Dubai (as it was still known) had just become the world’s tallest structure: “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. Maybe the economic damage will be confined to the UAE.”

No, it was not the sort of warning to start a run on Anglo-Irish shares. Even so. It was more than most experts were saying. But by way of Irish context, it was written the same week that the still-bullish Bertie Ahern complained about a minority of critics “moaning and cribbing” and wondered why they didn’t “commit suicide”.

Anyway, now complete at a breathtaking 800 metres high, the Burj Khalifa is unlikely to be bettered for a few years. So there should be time for the Skyscraper Index to be further refined before it is needed again.

Incidentally, the SI is probably an intellectual cousin of a somewhat older theory, advanced by the British naval historian C Northcote Parkinson. Now best known for Parkinson’s Law – “work expands so as to fill the time available for its completion” – the same man also proposed a rule governing great works of architecture, namely: “Perfection of planned lay-out is achieved by institutions on the point of collapse”.

His prime example was New Delhi, created by the great English architect Edwin Lutyens, and completed in 1931, just as the sun was setting on the Raj. “The British Versailles”, Northcote Parkinson called India’s magnificent new capital.

The aforementioned Sears Tower is arguably another example. Built at a time when Sears was the world’s biggest retail chain, it was supposed to be an expression of the company’s grandeur. In fact, the building’s grandeur lasted rather longer. It presided over Sears’ long-drawn-out decline, which led to its 2005 takeover by Kmart, and which arguably continues.

• fmcnally@irishtimes.com