Hi all,
I was wondering, have any Austrian economists done any work on trying to explain why there wasn't a crash after WW2? If you think about it, all the building blocks are there for a second Great Depression. First, during the War, the Federal Reserve increased the monetary base on such scale that it made look like they were asleep during the 1920s (when expansionary monetary policy supposedly set the stage for the first Great Depression).
Second, the Federal Reserve went beyond manipulating the money supply and used coercion to directly alter the capital structure of the economy. New factories were built for the express purpose of building fighter planes and munitions. Old factories that once produced consumer goods were converted to producing supplies and equipment for a fighting army.
And of course, let's not forget about the men who could have learning/refining skills and getting job experience that instead were off fighting the enemy. Those that didn't come back maimed or dead came back with 4 years of their lives wasted on destruction.
So why, after all this, did the economy not fall into a Second Great Depression in the late 1940s after the war had ended and a capital structure altered to support a war effort had to suddenly support a civilian economy? Certainly, there was a brief recession immediately after the war, but compared to the 1930s it was a cake walk.
This is hard for me to understand. Monetary expansion in the 1920s supposedly distorted the capital structure so much that the economy crashed and unemployment rose to the double digits. But, then, an even greater monetary expansion and government coercion in the 1940s distorts the capital structure so much that the economy unemployment moves to the single digits after demobilization??
Not to say things in the post-WW2 era were perfect, but there is a suspicious lack of a monumental economic crash here.
I tried googling but couldn't find any articles on the subject from an Austrian perspective (may have been the search strings I was using). So if anyone could point me to some sources, I would greatly appreciate it.
Ambition is a dream with a V8 engine - Elvis Presley
There was a massive liquidation of government spending after the end of the war, which freed up a lot of capital for other production. Since the labor unions had been liquidated during the war to release manpower for the army, there was no obstacle to a very sudden and rapid recovery of all industries.
And that's what happened. There was a sudden depression, but it was too short to notice.
The fallacies of intellectual communism, a compilation - On the nature of power
But I thought Austrians stressed that capital was heterogeneous. Just because the government isn't using this factory for bombs anymore doesn't mean an entrepreneur could easily use it to make cars or that entrepreneurs would have any use for it all.
Indeed, I thought the fact that you can't easily convert capital from one use to another was the main reason recovery so difficult in the 1930s with labor unions being at most a secondary reason.
It seems to me the problems of a misaligned capital structure would be more exaggerated here than they were in the 1920s, so I don't see why the war wasn't followed by a Second Great Depression.
Student:But I thought Austrians stressed that capital was heterogeneous. Just because the government isn't using this factory for bombs anymore doesn't mean an entrepreneur could easily use it to make cars or that entrepreneurs would have any use for it all.
You can't easily convert it to automobile production without additional investment, which is why capital liquidation is essential. This did not happen in the 1930's.
Tom Woods on the topic:
http://www.youtube.com/watch?v=6XbG6aIUlog
Article he mentions "The great depression of 1946"
http://mises.org/journals/rae/pdf/R52_1.pdf
Student:explain why there wasn't a crash after WW2
I think your faulty line of reasoning is right here in the question.
The former economies of the former Soviet Union and the Eastern block had practically no boom/bust cycles either, thus, some people wrongly concluded that they enjoyed greater economic stability.
The solution to your problem is the same as for the former socialist economies. They were already in a permanent stage of a slump due to the controlled economy. There were no entrepreneurs to make the mistakes caused by artificial low interest rates. There were no entrepreneurs at all that could invest the capital in accordance to the needs of the consumers. There was no boom/bust precisely because they were in a permanent slump that they could never recover from.
A similar situation occurred during WWII. The economy was already in misalignment due to the heavily controlled economy during the war. What more, the US has not even recovered from the great depression. The economy was already in a slump. The new money went to finance the war and all those industries that supported the war. That is, by definition, a misalignment of the structure of production from what the free market would have dictated if not for government spending. Once the war was over, all of these misalignments were in fact corrected.
DD5,
I was not aware that lending to private businesses was suspended during world war 2. You quite likely are right, but do you have any sources to verify that?
Anyways, even if that is the case, then we are still left with the *government* making malinvestments. It built factories, bases, many things that simply were not needed after the war ended. And if there were no private loans, who was replacing non-war related capital that existed before 1941.
And I don't think your post answers the question of why correcting these malinvestments didn't cause a PROLOGNED recession as unneeded capital sat idle like it did in the 1930s. How did the economy in the late 1940s do such a good job of shedding bad capital and transitioning to a more appropriate capital structure?
Student:And I don't think your post answers the question of why correcting these malinvestments didn't cause a recession as unneeded capital sat idle.
It did cause a recession, a very severe one. However, it was so short-lived that anyone hardly noticed.
Student: Not to say things in the post-WW2 era were perfect, but there is a suspicious lack of a monumental economic crash here.
Maybe you should consider reading Robert Higgs, according to him from the end of WWII to 1946 "the largest single-year drop of income in American History." Here is a video as well.
Stranger: Student:And I don't think your post answers the question of why correcting these malinvestments didn't cause a recession as unneeded capital sat idle. It did cause a recession, a very severe one. However, it was so short-lived that anyone hardly noticed.
Sorry, you must have caught me mid-edit. I am asking why it didn't cause a *prolonged* recession like it did in the 1930s. The fact that it was short-lived (especially compared to the Great Depression) is what is so amazing.
Giant_Joe: Tom Woods on the topic: http://www.youtube.com/watch?v=6XbG6aIUlog Article he mentions "The great depression of 1946" http://mises.org/journals/rae/pdf/R52_1.pdf
Giant Joe, I skimmed the article (I am at work so can't fully read it until tonight), but it looks like he focuses exclusively on the drop in measured GDPwhen he is describing how "great" the recession if 1946 was (and even then he notes the decline was smaller than it was in the Great Depression). However, GDP is a single number that aggregates away much information (maybe the drop in GDP has more to do with government spending taking a dive during demobilization than it does with falling private output), so that shouldn't be the only metric for a recession.
If you look at unemployment, Tom Wood's reports that unemployment after the war was in the low single digits. However, during the great depression, it rose to almost 20%. This seems like an interesting point and a VERY interesting contrast.
But like I said, I only skimmed the article and I will look more tonight. So I will shut my trap until I do that. :)
Student: Stranger: Student:And I don't think your post answers the question of why correcting these malinvestments didn't cause a recession as unneeded capital sat idle. It did cause a recession, a very severe one. However, it was so short-lived that anyone hardly noticed. Sorry, you must have caught me mid-edit. I am asking why it didn't cause a *prolonged* recession like it did in the 1930s. The fact that it was short-lived (especially compared to the Great Depression) is what is so amazing.
The "prolonged" recession is always the result of government policy that delays the corrections. It was precisely the absent of such policies at the end of the war that made the transition much smoother and quicker. It was pointed out above by Angurse, in reference to the Higgs article,about the sharp drop in wages after the war. The fact that unemployment didn't also soar was precisely because wages were allowed to drop.
Student: Sorry, you must have caught me mid-edit. I am asking why it didn't cause a *prolonged* recession like it did in the 1930s. The fact that it was short-lived (especially compared to the Great Depression) is what is so amazing.
It's really not that extraordinary. After the war there was no organized political constituency that could lobby for protectionism, as everything had been subjected to the wartime government. The government was thus able to drop all price controls as it slashed government spending. Demobilized soldiers returned home and lived off their savings for a few months while the industries retooled for peacetime production.
This is my last post then I gotta get to work. lol
I am not sure what you are describing is actually essential to ABCT. If you read Roger Garrison for example he can explain ABCT without any mention of wage flexibility. In his description, it is the misalignment of capital resources and the fact that those resources cannot be realigned easily that make the recession prolonged.
For example, many people on this board describe the current recession using ABCT. Butwhat government policies are preventing wages from falling now? If you're going to say unions, you should really reconsider. If you look at the sectors experiencing the most unemployment they are not ones dominated by unions. How many unions are there for financial analysts for example? investment bankers? residential construction workers? architects?
Anyways, i gotta run! BBL
Student:For example, many people on this board describe the current recession using ABCT. Butwhat government policies are preventing wages from falling now?
Government policies are preventing capital market liquidation right now, as well as increasing government labor employment.