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:
Feb '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Also: the nature of warfare tended to reduce government micromanagement which would likely have taken place in any government-funded project. For example, during WWII GE needed to produce power plants for a new line of destroyer-escorts. After recommending turbine-electric drive instead of geared turbines (because all the gear-cutting equipment in the country was fully engaged), they built an entirely new factory and staffed it...in 9 months. If you tried to do that in today's peacetime environment, you'd have 9 months of debating the technology alternatives, with plenty of lobbying on both sides; 12 months of infighting about whose Congressional district the plant would be built in; 24 months of environmental lawsuits; and 24 more months of argument about who should get hired for the plant and whether aptitude tests could be used in the iring processs.
Also, the level of patriotism inspired by a major war probably acts at least to some degree as a check on corruption.
Aug '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
How's this for a counter-theory:
Rather than war being the solution to high unemployment, war is actually the near-inevitable result of high unemployment.
Once a nation has a very high proportion of unemployed able-bodied young men sitting idle, it is nearly inevitable that war will occur. The only question for the government at that point is, will it be a civil war or a foreign war?
When France's economy collapsed in the 18th century, the result was the French Revolution. In the 19th century, it was the Napoleonic Wars. Around the World today, the most war-like countries are the ones with the highest levels of young male unemployment.
The pattern repeats through history. When you have too many young men idle, you ship 'em off to die outside your borders so they cannot cause violence at home.
Now, the unemployment rate had already been dropping prior to Pearl Harbour, which mitigates this theory somewhat.
However, it is possible to imagine that if the unemployment rate had gone up again, and Japan had NOT attacked Pearl Harbour, there might have been enough domestic discontent for violent uprisings to occur.
Only a theory.
Apr '12
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Destruction cannot create wealth. Again, go back to Bastiat's "What is Seen and What is Unseen." If it appears that wealth is being created by statist policies, you have not accounted for all variables.
Here's a scientific analogy: you can easily design a limited experiment that will apparently violate the law of conservation of energy. Suppose I were to calculate the total of all energy on planet earth today and tommorow. You would see a net increase, making it appear energy is created out of nothing. But not everything has been accounted for - the sun is transmitting energy to the earth. Statist economists design similarly flawed studies all the time. Part of this is b/c accounting for all economic variables requires enormous effort.
There is a constant battle among statist economists to repackage data in an effort to distort reality, and free market economists to discover their inevitable errors. Exhibit A: the maleducated and ignorant Paul Krugman.
I hope this clears up why principled thought is important. For instance, government takeover of private industry is ALWAYS deleterious in the net; there is not some special exception for health care on Wednesdays, or energy during a full moon.
Edited on April 25, 2012 at 12:40amJul '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Liberty Dude, I nearly quoted Bastiat to explain to Valiuth who the parasites were that I was discussing.
"When under the pretext of fraternity, the legal code imposes mutual sacrifices on the citizens, human nature is not thereby abrogated. Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices. Now, is it the most unfortunate who gains from this struggle? Certainly not, but rather the most influential and calculating."
Jan '12
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
While I don't doubt that war material was valued incorrectly and that this distorted the GDP stats, the issue is a more fundamental one. GDP measures what is produced, not what is consumed.
Even assuming that war material was valued correctly, GDP would not be an accurate reflection of the overall welfare of society at that time since so much of what was produced was not available to be consumed since it was diverted for use in the war.
Mar '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
But destruction can certainly lead to greater future wealth creation. And in the case of war, destruction of certain resources prevented an even greater casualty to the economy by foreign invasion.
Jun '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
On the whole, its obvious that war destroys more than it creates. And, not just human lives. But, as for economic growth, or I should say, the appearance of it, nothing is better. The thing that war provides, or space races, or stimulus packages (sometimes) provide is a guaranteed, deep-pocketed customer who is committed to a series of purchases in the economy in order to achieve the outcome. Not like consumers, or businesses, who have that pesky decision to make every time they want to buy a good or service. War must be won, therefore, there's little quibbling over the spending.
Of course, long term, the only improvements are the innovations -- as stated above -- which are also the byproducts of the need to win. Oh, and the winning, if that's granted to you.
Apr '12
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Doc Jay,
That's a good quote; Bastiat is awesome. His prinicpled & logical analysis eliminates any rational basis for 90% of modern government activity.
We really should start a Bastiat party - once we acquire power we'd fix the country overnight, and EVERYONE would be better off.
Apr '12
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Mendel,
I'm not sure where we disagree - destruction did not create wealth but stifled it's creation. It's true that a certain % of resources must be diverted for physical defense, but that doesn't mean that force created wealth.
I need glasses to study, and without them I could never ace the test. However, I would've had more time to study if I didn't need them in the first place.
Jeff B,
Government activity stifles innovation as well. Colored television, for example, was delayed significantly by WWII. Capital was being consumed to destroy the lives and resources of others - people we would have traded with if the war hadn't occurred. This captial would've gone to more productive uses in the private sector if not for the war. I'm not syaing the war should not have been waged, or encouraging pacifism - only that it does not create wealth.
You also suggest government monopsony leads to innovation. How do you account for socialized medicine's complete lack of innovation compared to more privatized health care systems?
Edited on April 25, 2012 at 1:13amAug '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Mendel
But destruction can certainly lead to greater future wealth creation.
Destruction of the other guy's industrial capacity, not your own.
Jun '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
More Russ Roberts! Bring it on!
Mar '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Liberty Dude: Mendel,
I'm not sure where we disagree - destruction did not create wealth but stifled it's creation. It's true that a certain % of resources must be diverted for physical defense, but that doesn't mean that force created wealth.
We're not disagreeing - I just wanted to rephrase your statement to point out that destruction of resources is often a necessary prerequisite to the ability to create wealth at a later time. On a small scale, I destroy gas every winter to heat my house: no wealth creation, but necessary to create the opportunity to generate wealth during the day.
Also, even though GDP is an inadequate measure during wartime, it is clear that we received more value for our government spending on sunken battleships during WWII than had we simply built them and immediately scuttled them off the East Coast (an exercise not dissimilar to many New Deal programs). Thus there was a certain value to this "destructive" spending, and what is wealth creation if not an increase on the return to the dollar?
Jun '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Liberty Dude:
You also suggest government monopsony leads to innovation. How do you account for socialized medicine's complete lack of innovation compared to more privatized health care systems? · 12 minutes ago
Edited 5 minutes ago
Hey, I'm not arguing for either war or government spending. I'm just saying that when any buyer says that they'll buy something no matter the cost, you get to see a lot of money flowing. Property bubbles work like that, war works like that, disasters work like that. Ultimately, the nation pays for it, and you don't move ahead.
Mar '12
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Misthiocracy: How's this for a counter-theory:
Rather than war being the solutiontohigh unemployment, war is actually the near-inevitable resultofhigh unemployment.
Wattenberg in his book "Fewer" would agree with you in a round about way. He asserts that by 2050 Russia, because of declining population, will be physically unable to hold onto its eastern geography, while China with an exploding male population (which will be largely unemployed) will seek to grab the mineral and resource rich Siberia for itself.....
Oct '10
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
"war materiel was valued incorrectly and therefore the GDP data overstate economic conditions."
I love this point. My understanding from Higgs and Russ Roberts' teaching of Higgs, is as follows: GDP has no mechanism for valuing the utility of the goods we produce, so it relies on prices to approximate utility (higher prices mean higher utility). But when the price system is more or less rigged because of price controls and rationing and government spending, as it was in WWII, GDP becomes meaningless in terms of measuring our economic well-being.
Feb '12
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
I love Peter Robinson---he's smarter than all of us, yet genuinely asks questions to the field. I didn't respond to his bleg, but had I, I think my response would've been, "Peter, whatever explanation you end up believing, let me know and I'll go with it."
Dec '11
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
In the original graph, it looked almost like per capita real GDP started to grow before the war, and peaked before it ended. That would suggest that the war did not end the Great Depression, and that continued high levels of government spending were not sufficient to maintain that growth. Because there are problems with using real GDP data across long periods of time, and because government spending is a part of the output measured by GDP, I took a look at real per capita personal income from 1929 through 1945.
Personal Income is roughly the sum of salaries and benefits; rents, interest and dividends; proprietor’s income; and transfer payments to individuals. Personal income is what is available for households to spend and save. Real per capita Personal Income grew between the end of the 1937-38 recession and 1944. But, the largest growth rates were in 1941 and 1942. By 1945, when the federal government’s share of GDP reached its highest level, 44%, per capita personal income shrank 2.4%. There are many good reasons already expressed to think that WWII was not a successful Keynesian experiment, but it appears that the effect occurred before the cause.
Apr '12
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Well my good friends, it looks like most, including the great Peter Robinson, are in agreement that war & government spending do not create wealth.
Here's the best part ladies & gentlemen - all of us are more qualified to write about economics than NY Times columnist Paul Krugman.
"To deal with this preference, Keynes whimsically suggested burying bottles full of cash in disused mines and letting the private sector dig them back up. In the same vein, I recently suggested that a fake threat of alien invasion, requiring vast anti-alien spending, might be just the thing to get the economy moving again"
http://www.nytimes.com/2011/10/31/opinion/bombs-bridges-and-jobs.html
Mendel,
Do you specialize in genetics per chance?
Edited on April 25, 2012 at 6:14amApr '12
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Valiuth
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.
Valiuth,
It would be interesting to see your description of a "moral and humane society." Would you reference our (US) founding documents?
Recourse to these, though utterly appropriate for this collection of thinkers (likely pre-supposed by DocJay in his postings), may be something you might either amplify mightily or curtail in your description of a just society.
I bet it would be a popular thread!
And I wonder which political party has had extensive interaction with those espousing eugenics and social darwinism in modern American history?
Re: Re: Was Keynes Right...Once? (Yesterday's Bleg)
Welcome to Ricochet, Shane. You give me too much credit--honestly you do. But until you realize, as you will soon enough, that I'm really no smarter than my teenaged children think I am--well, until then I'm going to be printing out your comments to show to selfsame teens.
Edited on April 25, 2012 at 8:07am