Re: Was Keynes Right...Once? (Yesterday's Bleg)
In a post yesterday, I asked (to put it briefly), "Shouldn't the rapid growth in GDP that the United States experience during the Second World War, during which the federal government engaged in massive spending, taxing and borrowing, count as a success for Keynesian economics?" Dozens of Ricochetians responded, providing one of the most fascinating conversations we've had here in our happy online world. Thanks to you all.
Now a final note.
This morning my friend Meir Kohn, an economics professor at Dartmouth, sent along an article about this very question. The author, an economist named Art Carden, discusses Depression, War, and Cold War, a book by the libertarian author Robert Higgs. Carden makes a point so basic--and, the moment you see it, so obvious--that it stopped me cold. Here's the central passage, which represents a long fuse leading, in the final sentence, to a spectacular detonation:
What about World War II? Did it end the Great Depression? More generally, is war good for the economy? I answer both in the negative and borrow here from Ludwig von Mises: "War prosperity is like the prosperity that an earthquake or a plague brings."
As Higgs points out, because of the array of interventions in the wartime economy, war materiel was valued incorrectly and therefore the GDP data overstate economic conditions. Moreover, conscription and arms production gave a misleading employment picture. Instead, Higgs argues, the war was a period of capital consumption rather than capital accumulation. Tanks, bombs, and helicopters have limited uses outside of military applications. The labor that was used to produce them was not available to produce consumer goods and services; in fact, people went without consumer goods. The warships at the bottom of the world's oceans represented lost opportunities for real consumption and prosperity. Conflict is sometimes necessary, but we should recognize what wartime expenditures represent: destruction of life and resources. If a depression constitutes a widespread contraction in living standards, then the Great Depression cannot have ended during the war.
The Second World War, with all the Keynesian stimuli it involved, did not end the Great Depression because it cannot have done so.
Zowie. That's a beaut, isn't it? If you're like me, you may want to read that two or three times, savoring it.
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Comments:
Oct '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Peter, I can only assume you haven't yet seen the Fight of the Century.
Jul '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
What if the parasitic of the world have a massive die off and only the productive are left. Not possible but wouldn't this destruction of life be inherently beneficial to world economies?
Jun '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
You could say the same about the 1960s Space Race, but without it, the appearance of fast computers and satellite communications would've been greatly delayed. It's not just how much money is wasted building things that will soon be destroyed, or unnecessary. It's how much valuable information is gained in the process of building them. Engineers learn by doing hard things. That's where the lasting value comes from.
Mar '12
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
I think a follow on question would be something like: once the war was over why didn't the US fall back into a depression? And I surmise that the answer, as Peter Robinson put in a podcast or two ago, is "rubble!". The manufacturing bases of Europe and Asia was destroyed leaving the US as the only manufacturer of any size on the planet. So, if that is the case, did Europe and Asia go back to depressions after the war? And the answer there is "Yes", rationing and unemployment were almost systemic in both places until well into the late 50's.
Edited on April 24, 2012 at 11:23pmApr '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Who are the "parasitic" persay...babies, children, imbeciles, cancer patients, the every old? It was the essence of eugenic thinking to prescribe death as a cure for social ills. The loss of people is always a loss of overall capital and potential, not to mention grossly inhuman. Never discount the value of having a moral and humane society.
As to Peter's post. I always did think it odd that any one would think the production of weapons for the purpose of destroying property could be viewed as any kind of GDP gain. If you make 50 million dollars of bombs and use them to destroy 100 million dollars of buildings all you have done is lost 150 million dollars of stuff. This is only worth it if destroying those buildings is in order to prevent greater loss.
The question I have then is what did end the depression. What ever it was happened during or just after WWII. Was it savings?
Jul '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Do not underestimate the esprit de corps that comes from everyone pitching in to fight a great evil. That alone is worthwhile in beating an economic disaster. Since our current crisis is by it's very nature divisive and our current president the most divisive in history, I anticipate no real recovery at all as long as 1) Obama is in office and 2) the progressive lice infestation in the hair of lady liberty is eradicated.
Oct '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
As folks mentioned on the original thread, Mark beat us all to posting Keynes vs. Hayek, Round 2, but it was worth reposting repeatedly. :-)
Jul '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Valiuth, to me parasitic does not mean any of those groups you mentioned at all. A large amount of my time and money is tied up helping some of those groups in ways that most people would not understand outside of medicine. I hold only compassion for all those groups you mentioned.
Let me clarify. I am referring to takers compared to producers in the Ayn Randian sense. People who are capable of self support or at least contributing but refuse to do so. The problem is worsening.
Far worse than those on the lower end are the bribed politicians and the crony capitalists who game the system. They are the takers who must go, one way or the other.
Apr '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
DocJay: Valiuth, to me parasitic does not mean any of those groups you mentioned at all. A large amount of my time and money is tied up helping some of those groups in ways that most people would not understand outside of medicine. I hold only compassion for all those groups you mentioned.
Let me clarify. I am referring to takers compared to producers in the Ayn Randian sense. People who are capable of self support or at least contributing but refuse to do so. The problem is worsening.
Far worse than those on the lower end are the bribed politicians and the crony capitalists who game the system. They are the takers who must go, one way or the other. · 3 minutes ago
I don't really like Ayn Rand or her thinking though I do find it alluring. There is probably some truth to it, but a lot of the people you are thinking off probably do very productive things too. They just also create inefficiencies.
So removing them doesn't solve any problems it just creates different ones. What we should want to do is alter their behavior, not their existence.
Feb '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
I think the idea that there was an enormous amount of capital consumption during the war is absurd. The investment in factories to build ships, tanks, planes was enormous. In addition, you had idle steel factories that were brought back into service. The infrastructure built during the war included gas pipelines (Big Inch) and roads. Facilities were built for the mass production of penicillin for the first time. And Oak Ridge was built. Those factories and roads were not sent to the bottom of the ocean although many of the goods produced were destroyed during the war.
The war was also denominated in dollars. Britain borrowed dollars and that was her biggest mistake as she had to pay back in dollars and generate foreign currency.
The savings rate during the war was also very large and that fueled post-war prosperity.
Finally, companies signed contracts with the government to deliver goods at fixed prices with profit guaranteed.
May '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Molly posted it to Ricochet long before I did. Pay it forward!
Aug '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
The upside was that lots of men were employed, fed, housed, clothed, and had access to the cutting edge in high tech machinery and transportation.
The down side was they were soldiers fighting a war.
Feb '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
And then the innovation the war caused. The Japanese had the same aircraft at the end of the war they had at the beginning. The Germans certainly innovated and had superior aircraft and tanks to the Americans, British, or Russians. But the Germans couldn't build what they innovated. The Russians and Americans could because they were not pummeled day and night.
Keynsianism can work for short periods of time. It can not work for long periods of time. We should not look to short-term solutions except under the direst of circumstances, which WW2 certainly was.
Aug '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
According to Milton Friedman, Keynes would probably have agreed with you.
Whether you agree with Keynes or not, too many politicians forget that Keynes promoted government stimulus during times of recession, and government austerity during times of prosperity. The second part of his formula tends to be forgotten.
Edited on April 24, 2012 at 11:58pmOct '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
The war did not end the depression. I was born at the beginning of WWII. As a small child in northeast Philadelphia, I remember watching the blacksmith after school as he shod the horses that pulled the milk delivery wagons. The city trash wagons were pulled by horses as were the produce wagons from the local farms.
In 1945 there were 3 TV stations in America. In 1946, there were 150.
America's actual economic growth ended in 1929, at the start of the depression, and did not resume until the war ended.
During the first quarter of the 20th century there was incredible progress in the areas of electronics and physics. The development of the actual technologies grew tremendously. KDKA radio broadcast the Harding victory in 1922, and in 1928 the first TV broadcasts began, and by 1931 there were 7 day per week TV broadcasts.
Everything slowed down tremendously when the depression started, and the war brought incredible advancement of all the technologies which languished during the poor times.
When the war ended the dam burst. America went from 1929 to 1950, 29 years, in just 3 years. Incredible growth and productivity.
Keynes? Meh!
Mar '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Regardless of whether or not GDP grew during WWII or not, it seems to me that one hallmark of a "healthy" economy is when resources are channelled to where they are most needed. This certainly occurred to a much greater extent during the war than the Depression.
Mar '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
That's a good analogy - although the war production was useless or counterproductive it paved the way for the post-war production, including dramatic improvement in aircraft design (e.g. jet engines) and the Space Race, which in turn led to our present technology.
That probably would have happened much more slowly without the war. Mr Roosevelt is unlikely to have funded all those developments, and instead America would have quite likely ended up a Socialist basket case.
In contrast, Mr Obama's stimulus money has led to no new technology, unless you count Solyndra, and America may yet end up a Socialist basket case.
Edited on April 25, 2012 at 12:12amMar '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Jim Flenniken: I think a follow on question would be something like: once the war was over why didn't the US fall back into a depression? And I surmise that the answer, as Peter Robinson put in a podcast or two ago, is "rubble!". The manufacturing bases of Europe and Asia was destroyed leaving the US as the only manufacturer of any size on the planet. So, if that is the case, did Europe and Asia go back to depressions after the war? And the answer there is "Yes", rationing and unemployment were almost systemic in both places until well into the late 50's. · 40 minutes ago
Edited 39 minutes ago
I was going to make this exact same point plus before we got into the war things were slowing getting on the right footing. 1940 the enemployment was 9.7% it had not been that low since 1930.
Feb '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Peter, Russ Roberts, a professor of economics at George Mason who co-produced that video, ran a podcast last year on this issue. He and his guest hit on all of the points that Mr. Carden makes. I highly recommend his podcas, "Econ Talk," assuming you aren't familiar with it already. I believe Mr. Roberts would make a fine a fine guest on a future episode of the flagship podcast.
Mar '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Jordan Rodriguez
I highly recommend his podcas, "Econ Talk," assuming you aren't familiar with it already. I believe Mr. Roberts would make a fine a fine guest on a future episode of the flagship podcast. · 1 minute ago
According to the Blue Yeti, Russ Roberts will be on the podcast this week.