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
I don't even know what you're talking about at this point. You seem to have a real problem with dynamics and capital theory (which is inherently dynamic). Investments aren't instantaneously completed. They begin at period X and are completed at period Y. At period X they absorb labor (what Hayek means when he says a "misdirection of the original means of production"), and need a steady flow of savings (real capital) to be completed profitably and on time. There was a recession which freed up the productive powers (the extent to which is unknown), and allowed for more warranted investments, aka a boom. Then the government, backed by Keynesian theory, stimulated investments with inflation and artificially low interest rates. Investments which require an artificially low interest rate (inflation) will fail as soon as the interest rate rises towards the natural rate, thus they need perpetual inflation (which has diminishing returns). If there's an increase in the demand for current goods relative to future goods (boost in "aggregate demand") the market rate will rise and force the liquidation ("forced savings"). This is why Hayek is considered to be an "overconsumptionist" (as opposed to underconsumptionist--Keynes/Friedman).
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Esuric, No matter how many times you say it, there was no severe recession in 1946 to free up capital that had misallocated during World War 2.http://mises.org/journals/rae/pdf/R52_1.pdf
Hence the central question behind this thread.
Just had to say it....again. Before I let the thread die.
Student:Esuric, No matter how many times you say it, there was no severe recession in 1946 to free up capital that had misallocated during World War 2.
There was a recession, the severity of which, I guess, is controversial. I've been taught that it was quite severe. Either way, I've already addressed this point. Go back one page and read my last comment (don't need complete liquidation for robust booms, and can delay bust for an extended period of time. And that there was liquidation during the great depression (the degree of which is unknown), an influx of labor after the war, and deficit reductions--what Mises' suggests as government policy during a recession).
That article says that output fell by 22.7% and productivity fell by 25%.... And then mentions that these numbers were revised. You're entirely misunderstanding this article. He's attacking the Keynesian belief that government spending (expansionary fiscal policy) is an effective counter-cyclical tool, and he makes a distinction between depression and recession.
You're trying to find inconsistencies, but failing miserably.
Esuric: Then the government, backed by Keynesian theory, stimulated investments with inflation and artificially low interest rates.
It must be noted that, by the monetary base graph that Student posted, money supply growth stopped dead in 1945 and did not pick up again before 1950. That means that the recovery before 1950 had nothing to do with an expanding money supply. It was pure old-fashioned liquidationist policy.
The fallacies of intellectual communism, a compilation - On the nature of power
Esuric,
Don't need complete liquidation for robust booms, and can delay bust for an extended period of time.
I have never seen a source thoroughly discuss the degree of liquidation that would be required for a robust boom to take place. This would come close to answering my question though. Do you have any sources that describes in greater detail the amount of liquidation that is required? If its a book, please provide specific page numbers (or at least the chapter where it is discussed). Cheers!
I am not quite sure how closely you read this article. You are right that the authors are attacking Keynesian countercyclical policy prescriptions. But the thrust of the argument is that the late 1940s represented one of the greatest government spending CONTRACTIONS of all time (not only was the nation demobilizing, but they note that President Truman refused to support large public works, tax cuts, and other Keynesian countercyclical prescriptions for fiscal policy see page 15) and YET the economy was able to avoid collapse. They are using the LACK of a collapse as evidence against Keynesian countercyclical policy. Also, as a side note, at one point they go beyond simply saying there was no sever collapse, when citing the work of Robert Higgs (page 13): "Carefully examining the work of Simon Kuznets...Robert Higgs believes that there was prosperity and no downturn in the post war conversion era." They do not disagree with his conclusions.
And you're right they cite those figures, but they don't simply say they were revised. They spend a good deal of time explaining why those numbers are flawed and give a misleading impression of the period. Here are their conclusions stated explicitly on page 5:
"Conventional wisdom is correct on one thing, there was no depression in 1946 or anything resembling one. Accordingly, aggregate economic statistics [like those GNP numbers you're quoting] need to be viewed with a skeptical eye, particuarly in periods where there are pronounced government interventions in markets."
And later on page 29...
"Modern statistical sources suggest that there was a very severe economic downturn in 1946. The evidence does not support that conclusion and it is clear that the statistical revisions have served to distort the historical experience"
Haha. I think I made myself clear in an earlier discussion that I thought I had with you (maybe it was some one else). I have a great appreciation for the Duhem-Quine thesis (google it). I do not believe that any piece of empirical evidence can refute any hypothesis a particular theory yields. Why? Because the assumptions of the original hypothesis can be revised to preserve the validity of the original theory. This is why I don't ever say ABCT (or any theory) is wrong, I only say that I find it unconvincing.
As a result, I am not interested in naively trying to refute ABCT using individual instances of economic history.
I am just interested in seeing how Austrians explain the Post WW2 economy. Simple as that.
Though I must say that the defensive posture of some people in this thread has been frustrating.
Student: I am just interested in seeing how Austrians explain the Post WW2 economy. Simple as that.
Student,
I think it's a topic that would require more research than most forum members are willing to invest into just to answer your question.
I have a hypothesis, which although I do not necessarily ascribe to, it would be interesting to research further. During the Second World War, industries were heavily planned in the effort to churn out as much war material as possible. I wonder if this represents Jesús Huerta de Soto's theory that an increase in credit that is directed towards consumption will lead to a flattening of the structure of production. According to him, this will not lead to an investment boom, just continued depression. As a result, a steep contraction in 1946 was unnecessary.
Please take into consideration that this is just an idea that I have, and is not necessarily supported by any real evidence.
Johnathan,
I agree that it would be a lot of reasearch, but that's also why I asked in the initial post for peer-reviewed articles and other sources. I am a big fan of arm chair theorizing, but in this thread I was hoping to dig into the existing literature. I normally just google for this stuff, but I found nothing. And this thread is starting to convince that there is no extensive lit on the subject.
I think your theory sounds interesting, but I am not sure it fits the facts of 1946. As Vedder and Gallaway note (linked above), there simply wasn't a continued depression during this time. Indeed, the post-war economy was relatively robust. For example, unemployment was in the low single digits for the remainder of the decade. But I might be misunderstanding you. Hopefully I didn't get it wrong.
Have you read anything by Robert Higgs? Admittedly, the information he offers may not be enough, either. As for my "theory", I meant depression during the war, not after (i.e. the war represented a flattening of the structure of production, not a lengthening; this is something I would have to research to verify, however).
Stranger:It must be noted that, by the monetary base graph that Student posted, money supply growth stopped dead in 1945 and did not pick up again before 1950. That means that the recovery before 1950 had nothing to do with an expanding money supply. It was pure old-fashioned liquidationist policy.
Oh, thank you. Non interventionism wins again.
Student:I agree that it would be a lot of reasearch, but that's also why I asked in the initial post for peer-reviewed articles and other sources.
I don't think you're going to find anything. Austrian's weren't the ones predicting another great depression after the war.
Esuric:Don't need complete liquidation for robust booms, and can delay bust for an extended period of time. Student:I have never seen a source thoroughly discuss the degree of liquidation that would be required for a robust boom to take place. This would come close to answering my question though. Do you have any sources that describes in greater detail the amount of liquidation that is required? If its a book, please provide specific page numbers (or at least the chapter where it is discussed). Cheers!
Esuric:Don't need complete liquidation for robust booms, and can delay bust for an extended period of time.
Student:I have never seen a source thoroughly discuss the degree of liquidation that would be required for a robust boom to take place. This would come close to answering my question though. Do you have any sources that describes in greater detail the amount of liquidation that is required? If its a book, please provide specific page numbers (or at least the chapter where it is discussed). Cheers!
Let me know if you ever come up with anything.
Student:Let me know if you ever come up with anything.
Recessions don't instantaneously purge the economy of malinvestments, and booms can be created at will--use some logic, and get the necessary conclusion. The mainstream has a real problem with the element of time. Your neoclassical training is preventing you from understanding/conceptualizing dynamics.
Well, since its so obvious it should be easy for you to grab a source that explains your point in more detail to help me understand.
Thanks for the help! I greatly appreciate it.
PS* Remember if its a book, dont forget the page numbers or chapter. That would really help as well.
Student: Esuric, Well, since its so obvious it should be easy for you to grab a source that explains your point in more detail to help me understand. Thanks for the help! I greatly appreciate it. PS* Remember if its a book, dont forget the page numbers or chapter. That would really help as well.
So, essentially, you're looking for an appeal to authority. Is this necessary?
lol Don't be so defensive.
I have never seen anything like what you describe in the literature on ABCT and I would like to understand it better as part of my goal of better understanding ABCT as a whole.
So, yes, articles and/or books are necessary. I am not interested in debating you or anyone else on this subject, I am just interested in learning about ABCT (and more relevant to this thread, how it may or may not relate to understanding the US postwar economy). For me, that means reading someone that considered the issue, gathered supporting evidence, and submitted their arguments to peer-review.
I know that may sound elitist, that I don't equally value the arm-chair theorizing of everyone with an internet connection, but I am okay with that lol. Johnathan makes an excellent point that essentially boils down to the fact that internet forums are simply not the place for communicating original research and I have to agree.
I mean no offense by this, its just the way I am. So if you are looking for a "fight", you're probably looking at the wrong guy. Like I said in my very first post, I just want some things to read to help me answer a question I have (believe it or not, this is just something I am curious about, I don't get paid to study the Post-WW2 economy or to win arguments on the interweb).
lol This has to be my 4th or 5th post just re-explaining what I am looking for and I am getting the vibe you are getting emotionally invested in this. So if you were wanting to fight, I'll just concede that you won. But, hey, if you do come across any of those sources explaining your points in debt, I would gladly take that as a consolation prize. Cheers, mate!
In my opinion, you are heading in the wrong direction. If you want to understand ABCT, you're going to have to become more familiar with the relevant economics before you consider to test the theory by applying historical and empirical data. Otherwise, you're never going to acquire the tools to thoroughly and objectively evaluate any of these research papers that you are looking for.