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Rothbard: World War 2 ended the Great Depression?

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Wesker1982 Posted: Tue, Oct 11 2011 3:21 PM

I just started reading America's Great Depression and came across this: 

 

 "Following this, the Hoover-Roosevelt New Deal policies managed to bring about a permanent and massive depression, from which we were only rescued by the advent of World War II."

Intro to the 4th edition ^

Am I missing something here? Why is Rothbard saying WW2 rescued us from the Depression? 

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Dave might be the guy to answer this, since he's reading that same text as we speak, but my guess is it's not that the Depression was ended by the war, it's that the war put an end to the New Deal.

 

 

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Wheylous replied on Tue, Oct 11 2011 4:36 PM

The video nicely explains that the economy began getting better but then took a turn for the worse, supposedly because of interventionist policies.

While I'd like this to be true, I wonder whether there isn't some point mainstream historians will make: was there another shock that may have caused the downturn of the economy? Is Sowell's explanation a case of causation or correlation?

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I think it was Robert Higgs who did the work in 1992 exposing WW2 for what it was. Until then, I am guessing, most everyone, including Rothbard, just accepted the standard statistics at face value.

 

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Wheylous:
While I'd like this to be true, I wonder whether there isn't some point mainstream historians will make: was there another shock that may have caused the downturn of the economy? Is Sowell's explanation a case of causation or correlation?

They wish there was, but don't seem to have been able to find one.  If you check these resources you'll find links that will tell you some of what was being said at the time.  The Great Depression by Lionel Robbins was published in the heat of the Depression in 1934, so that may help as well.  Also check this lecture...

 

 

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Wesker1982 replied on Wed, Oct 12 2011 10:12 AM

"Until then, I am guessing, most everyone, including Rothbard, just accepted the standard statistics at face value."

I wonder why he didn't assume by default that spending and destruction doesn't grow economies or end depressions. I don't understand why he wouldn't apply Austrian theory here. 

 

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We're getting into the world of speculation here, but perhaps he thought it's a temporary boost that works for a while, malinvesting in war.

If you look at the article by higgs, the stats are very impressive. Unemployment gone, GDP growth etc.

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MadMiser replied on Wed, Oct 12 2011 12:16 PM

Don't forget the obvious: the war left most of the other industrial economies in a pretty bad state, giving America - the only one left standing - a sizeable advantage in terms of market power; increased international purchasing power represented by strong terms of trade (which have steadily fallen since then). If the Federal Government decided to give some stimulus to General Motors by nuking Toyota, Honda, Daihatsu, Nissan, Suzuki, Mazda, Mitsubishi, Subaru, Isuzu, Kawasaki, Yamaha, and bombing Audi, BMW, Mercedes-Benz, Porsche and Volkswagen to rubble with artillery, then GM's sales would skyrocket. Its employees and owners would enjoy much higher profits, due to having a temporary near-monopoly on the international automobile market; they could charge monopoly prices in the same way as large oil-producers can. The welfare of the rest of the world would fall significantly, but the welfare of General Motors, its staff and owners, would increase. Imagine this effect on a national scale, and you see how America benefited from WW2, in a superficial sense. There are two ways to get a competitive advantage (market power): provide a better/cheaper product than your competitors, or use violence against them. If you look at nations as firms, then a 'successful' war (in the sense that none of the nation's wealth/capital is destroyed, only the "enemy's") is a way of gaining competitive advantage through violence. I'm aware that looking at nations as firms is a vast oversimplification, but it's useful for discussing international purchasing power.

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Wheylous replied on Wed, Oct 12 2011 2:39 PM

From this article:

http://www.npr.org/templates/story/story.php?storyId=100018973

"Like lots of fellow Keynesians, Blinder says Keynes' theory played out in the 1930s, with government spending pulling America out of the Depression. That's become the standard line in school textbooks. But Keynesians say it wasn't so simple as President Franklin Delano Roosevelt getting inspired by Keynes and spending his way out of the crisis.

Yes, Roosevelt expanded government spending, with an alphabet soup of programs. But he never spent as much money as Keynes said he should have. He also did all sorts of things that Keynes opposed, like raising taxes and trying to balance the budget. Keynes said those steps would cancel out any positive effect from spending. Roosevelt bothered Keynes so much that the economist sent him at least one scolding letter.

Then, finally, geopolitical events took over, and World War II forced Roosevelt to spend as much money as Keynes wanted."

Is this simply finding excuses or could it be correct?

 

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Wheylous replied on Wed, Oct 12 2011 2:40 PM

MadMiser, I like the idea you are posing.

This is just a detail, but be careful:

they could charge monopoly prices in the same way as large oil-producers can

This ties together fact and non-fact: while Standard Oil was at a point a very very large company, it hardly grew up in a free market, and there is solid evidence that it also did not engage in predatory pricing.

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Wheylous replied on Wed, Oct 12 2011 8:22 PM

Do you have any links showing that this is what Keynesians predicted? It would be really nice to cite them and then cite history.

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Wheylous replied on Wed, Oct 12 2011 8:42 PM

Whoopsies. It was on my list of things to read...

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Speaking of which, this may help.  (Although it may also hurt, by making listing things too easy)...

http://ReadItLaterList.com/

 

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MadMiser replied on Thu, Oct 13 2011 12:00 AM

Ah, sorry, I wasn't referring to large oil producing companies, rather oil producing countries; should have made that clearer. Also, by 'monopoly prices', I mean prices higher than would otherwise exist in a perfect market. In terms of conventional firm theory, in the long run it's impossible to make an economic profit without some form of monopoly (or at least market power), as if there is completely free entry into the market then competition will eventually push the price down to the cost of production (the cost of extraction and transport, in the case of natural resources). There isn't free entry into the oil market, because a nation must first have oil reserves to enter it, meaning that there is not enough competition to push the price down to the cost of extraction, and so oil producing nations can extract an economic profit. Like Saudia Arabia, for instance: effectively a planned economy, but much richer than an equivalent planned economy without oil would be. Or, look at Norway: GDP per capita there is something like $5k-$10k greater than in the neighbouring Scandinavian countries. Why? Norway is rich in natural resources.

Australia is another good example. At current exchange rates, it's GDP per capita is around $10k more than America's, and an Australian minimum wage worker makes as much as American earning the median wage (yet the unemployment rate is only 5.1%). Why? Because it's rich in natural resources that are currently in high demand from Asia, China in particular, and can charge 'monopoly prices' (prices higher than cost of production), since there's nowhere else China and India could shop to meet the entirety of their resource needs. Its neighbour New Zealand, on the other hand, whilst having a freer economy than Australia (second lowest overall tax burden in the OECD, flexible labour market, fully legalised prostitution, etc) has a GDP per capita $15k-$20k less than Australia's. Why? Because New Zealand lacks Australia's natural resources. So, I'm suggesting that America's industrial base after the WW2 gave it an advantage in the same way being rich in natural resources gives a country an advantage, but as the countries destroyed in the war gradually rebuilt their nations and industry, America's advantage in being the sole manufacturing power (and hence able to charge 'monopoly prices') was eroded.

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Aristippus replied on Thu, Oct 13 2011 12:07 AM

I must note, however, that Australia has a housing (and stock?) bubble similar to that of the USA in 2006.  This might distort the long-term reality somewhat.

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MadMiser replied on Thu, Oct 13 2011 12:24 AM

Very true. However, if you look at Australian interest rates http://rd.shoparound.com.au/files/images/Interest_Rates_History.jpg, the Reserve Bank has generally kept them much higher than Benanke/Greenspan's, so in the sense that a bubble is due to artificially low interest rates, Australia's bubble wouldn't be as severe as the USA's. Also, Australian house prices have been relatively stangnant over the past year or so, in some areas even falling in real terms, so the hope is that they'll remain stagnant while real incomes rise, until they no longer represent a bubble (a bit far fetched, admittedly, haha!).

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Aristippus replied on Thu, Oct 13 2011 12:35 AM

Yeah, the cause of the Australian bubble is different to the cause of the American bubble.  Primarily it is a result of the taxation system which incentivises speculation in housing (due to negative gearing) against other, potentially productive, investments.  Another factor in this is the government provided first home buyer grants and similar easy credit schemes for first home buyers.

I feel that house prices will fall dramatically before income can rise in real-terms to come anywhere close to actual supply/demand as it will appear - especially due to certain political interventions that are on the horizon (if you're Australian I'm sure you know what I'm referring to).  This would have a huge impact on the banks, which are, of course, guaranteed by government.  I think the government response would be very similar to that in the USA (namely, tax-payer funded bailouts), especially if there is a significant fall in house prices before the current government is thrown out.  Hopefully house prices fall slowly enough that the government cannot use a crisis as an excuse for further intervention - but I'm sure the governments both federal and state will try their hardest to keep the bubble going.

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MadMiser replied on Thu, Oct 13 2011 4:33 AM

 

Hmm. Maybe they'd open the housing market to Asian buyers again? They shut them out to keep the market from 'overheating', but if the bubble started to burst, then the easiest way for the state to preserve the bubble would be to fully open up the housing market. Then, Australia could import the Chinese property bubble, haha!
 
A good Mises Daily on (a the name suggests) why WW2 didn't end the great depression: http://mises.org/daily/5069/World-War-II-Did-Not-End-the-Great-Depression
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Don't forget the obvious: the war left most of the other industrial economies in a pretty bad state, giving America - the only one left standing - a sizeable advantage in terms of market power; increased international purchasing power represented by strong terms of trade (which have steadily fallen since then). If the Federal Government decided to give some stimulus to General Motors by nuking Toyota, Honda, Daihatsu, Nissan, Suzuki, Mazda, Mitsubishi, Subaru, Isuzu, Kawasaki, Yamaha, and bombing Audi, BMW, Mercedes-Benz, Porsche and Volkswagen to rubble with artillery, then GM's sales would skyrocket. Its employees and owners would enjoy much higher profits, due to having a temporary near-monopoly on the international automobile market; they could charge monopoly prices in the same way as large oil-producers can. The welfare of the rest of the world would fall significantly, but the welfare of General Motors, its staff and owners, would increase. Imagine this effect on a national scale, and you see how America benefited from WW2, in a superficial sense.

I've seen the question asked, "If their industries were destroyed, how could the rest of the world afford to buy American products at all?"

The little I've read of AE tells me that if Country A is wiped out by a nuke, Country B is also made poorer by that very event.

In fact, saying that impovereshing everyone else will make us rich is the mercantilistic way of seeing things; AE claims that if our neighbors produce more [given that we trade, of course] there is a bigger pie to be sliced, and our cut of it is bigger.

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MadMiser replied on Thu, Oct 13 2011 8:39 AM

Yes, that's perfectly true in real terms. But we're talking about GDP. Say there are only two car producers in the world, General Motors and Volkswagen. General Motors makes a car called The Brick, which costs $50k, is unwieldy, unsafe, uneconomical and ugly. Volkswagen produces the Wagon, which costs only $25k and is better than The Brick in every way. Everybody in the world is buying the Wagon, so General Motors hires the Government to destroy Volkswagen and all Wagons, alleging that Volkswagen is "price gouging". The government complies, meaning people are now all forced to buy The Brick if they want a car. Say previously, total car sales were 10,000 Wagons, zero Bricks (meaning the automotive industry made a contribution to GDP of $250 million). Demand for cars isn't perfectly elastic, so whilst the price of a car doubles (because people have to buy the expensive Brick), sales don't halve, as people really need cars, regardless of the price. Sales only fall by 3,000, meaning total car sales after the destruction of Volkswagen are 7,000 Bricks, zero Wagons. This means the automotive industry now makes a contribution to GDP of $350 million. The destruction of Volkswagen has therefore increased GDP by $100 million, despite significantly reducing people's welfare (they have to pay twice as much for inferior quality cars). The point is, even if Country B is made poorer by the destruction of Country A with a nuke, this wouldn't necessary reflect in Country A's GDP. Replace The Brick in the above example with a $50k horse and cart, and you'll see what I mean.

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Why are we talking about GDP?

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MadMiser replied on Thu, Oct 13 2011 11:11 AM

Well, the topic of the discussion is "World War 2 ended the Great Depression". Isn't a depression defined in terms of GDP? So the statement that WW2 ended the Great Depression is really a statement that WW2 did something positive to GDP. Unless you consider unemployment the defining factor of a depression, but then of course War 'fixes' unemployment; as the rap goes, "If every worker were staffed in the army and fleet, we'd have full employment and nothing to eat." 

"The little I've read of AE tells me that if Country A is wiped out by a nuke, Country B is also made poorer by that very event." What about if Country A and Country B are the only countries in the world with Industry X, and country B doesn't destroy country A, just country A's Industry X, giving Country B 'monopoly power' in its supply of Product X. The gain to Country B from being monopoly supplier could trump the loss from the destruction of Country A's Industry X. For instance, imagine Saudia Arabia created a superweapon that destroyed all proven oil reserves in the world other than its own. This would mean Saudi Arabia had a complete monopoly on oil supply, absolute market power, and the wealth it gained from this (international purchasing power) would trump any loss it might suffer from no other countries producing oil. (At least in the short term.)

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packman replied on Thu, Oct 13 2011 12:08 PM

Indeed - World War 2 did not end the Great Depression.   Winning World War 2 ended the Great Depression.

Thanks for the link - Higgs is spot on. 

The problem is that everyone  uses traditional measures - primarily unemployment and GDP - to guage the level of economic health.  However these traditional measures are meaningless in a wartime economy, because so much of our employment and so much of the GDP is being speng on things that don't improve our quality of life*.  This is why we very much need a new official measure of CivilIan GDP, and Civilian Unemployment - and those are the primary things that should be used to gauge econmic health.  These measures should, by the way, exclude DoD contract workers and products that are produced by civilians.

*Caveat - it's worth noting that war actually can be considered to improve quality of life, in that it provides security - much the same as other security-related things do - things ranging from police force to guys to security systems down to the lock in your car.  A pretty definitive line can be drawn though dividing national-defense-related "quality of life" expenditures/economy and other general security-related quality of life expenditures/economy.

 

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What about if Country A and Country B are the only countries in the world with Industry X, etc

Are you familiar with Say's Law? Can you see how it refutes your assertion?

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Yeah, I wasn't wondering whether or not WW2 ended the depression, I am convinced it did not. I was just curious as to why or how Rothbard came to an un-Austrian conclusion. 

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YW packman.

I don't thinking winning is what ended it. Had it ended in a tie, things would still be the same. Note that Germany and Japan lost WW2 and they did just fine, to this very day.

It was the drastic cut in govt spending after the war that did it.

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packman replied on Thu, Oct 13 2011 8:49 PM

"I don't thinking winning is what ended it. Had it ended in a tie, things would still be the same. Note that Germany and Japan lost WW2 and they did just fine, to this very day."

Actually no - Germany and Japan did fairly poorly the first couple of decades after the war, compared with the U.S.  Yes they grew very fast (e.g. the Wirtschaftswunder), but that was relatively to an extremely low base of a completely destroyed economy.  Just look for instance at the auto industry for instance - Germany and Japan of course sell tons of cars today, but that wasn't really true until the late 60's and 70's - before that the U.S. completely dominated the auto market; same for electronics etc.

Regardless - the important thing wasn't how it ended, it was the path to get there - i.e. the fact that Germany, France, Italy, Britain, and Japan - the strongest non-U.S. economies - were largely physically destroyed by the war, while the U.S. was completely unscathed.   All the countries involved in the war expended huge amounts of our GDP to build war materials - but the big difference is that when all was said and done our factories weren't destroyed, and theirs were.  That gave us a huge competitive advantage in the post-war economy.  It's a *lot* easier to retool than to completely rebuild.  This is not to mention of course the homes and infrastructure that were also destroyed.

If it would have ended in a tie yes - the economy would have probably have improved some, but not nearly as much.  However a tie would have presumably meant no D'day, no nuking and firebombing of Japan, etc, and also much less of a psychological boost.   The threat of Naziism and Japanese imperialism would have still loomed (in addition to the new threat of the Soviets).   I would say that perhaps we might have emerged without being quite in the depression that we were pre-war, but we wouldn't have had anywhere close to the boom we did end up having in the 1950's and 1960's.

If we would have lost the war (what I was really considering as the primary alternative to winning) - well, all bets are off; we perhaps might not even still exist as a country (as Germany for all intents and purposes no longer existed after WW2).  We fought the war inorder to preserve the status quo.  Germany and Japan fought to change the status quo  - if they had won, then the world geopolitical landscape - boundaries and all - would be vastly different.   We would likely have ended up with something far worse than the 1930's depression, economy-wise.

"It was the drastic cut in govt spending after the war that did it." 

Certainly the drastic cut in spending "did it" in terms of improving the economy relative to the war-time economy itself, but not relative to the pre-war economy, at all.  Before the war the federal government was spending $10 billion per year.  After the war the federal government was spending $40 billion per year.  That's not a drastic cut at all of course - in fact that's quite a drastic increase.  So no - the cut in spending didn't bring us out of the Great Depression, because spending actually drastically increased relative to the depression years.

(Note that I'm not saying that the increase in spending helped the economy; not at all.  As I say - winning the war is what helped the economy, by probably a factor of 10 over all other factors, IMO.)

(P.S. I'm not sure what YW means; I'm new on the forums though - maybe that's a Mises forum thing?)

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Wheylous replied on Thu, Oct 13 2011 9:04 PM

Wasn't there a lot of malinvestment to get rid of after the war? (all of that war stuff)

Wouldn't this suggest a post-war recession? Imagine the government forces the economy to do the same thing today and then abandons all the equipment and says "as you were." We would have a bunch of malinvestment to clear up. But it appears the post-war economy did not stall that much.

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Did you read any of those threads yet?  Or at least watch the Woods lecture?

 

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YW= You're Welcome

Very interesting post. plenty of food for thought.

What troubles me is that if the worlds economy was destroyed, then they obviously are poor and cannot buy things. So what do we gain by having a monopoly over, say, the auto industry when no one can afford cars but Americans. [I am assuming that most cars sold in the US pre war were also American.]

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Wheylous replied on Thu, Oct 13 2011 9:17 PM

Dangit, JJ, I'm getting to them :P

I shall reserve judgment of the matter until then XD

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MadMiser replied on Thu, Oct 13 2011 10:05 PM

 

"Are you familiar with Say's Law? Can you see how it refutes your assertion?"
 
Say's Law is "products are paid for with products", no? So if Country B destroys Country A's Industry X, Country A could still pay for Country B's products by selling products from its Industries Y, Z, A, B, etc. Country B could also buy more of Countries C, D, E, F and G's products, since Country B would now be the only country in the world with Industry X, allowing it to demand more products in exchange for the Products X it sells. Are you familiar with the principle that, when two entities (individuals, countries, firms) trade, the side that benefits most (in numerical terms) is the side with less demand for the other's products? Of course, any voluntary exchange is beneficial to both parties, but the degree to which each benefits can vary. Imagine two people, Person A, who produces 10 apples per week, and Person B, who produces 10 oranges per week. Person A really wants an orange, whereas Person B doesn't want an apple as much. So, they engage in trade, and because Person A wants an orange much more than person B wants an apple, they trade 3 apples for one orange, meaning Person A now has 7 apples, 1 orange per week, and person B has 9 oranges, 3 apples. From an 'objective' standpoint, numerical measurement, person B did much better from this trade than person A. Even though they both benefited, B benefited more (in a numerical sense, which is the sense used in GDP measurements, etc). When speaking of countries, this measure of which side 'benefits' more from the trade is called the Terms of Trade, the quantity of imports bought by a unit of exports; the relative price of a country's exports to its imports. As far as I'm aware, America's terms of trade have fallen steadily over the past few decades. Could not this be due to other countries developing their industries, creating more competition and so reducing demand for US goods, thereby reducing terms of trade?
 
Say Person A finds a cheaper place to trade his apples for oranges, with somebody who really wants apples (Person C). Person B still wants an apple, and the only person he can buy it from is Person A. But, Person A is now no longer willing to trade Person B three apples for one orange, since he could get oranges cheaper from person C, and instead will offer just one apple per orange. So now, for Person B to get 3 apples, he has to trade away three oranges. This means that if, as before, Person B is producing 10 oranges per week, and trading one to Person A in exchange for apples, then each week he has 9 oranges and 1 apple, compared to before, when he had 9 oranges and 3 apples. This change in terms of trade has effectively reduced person B's standard of living by two apples per week. B still benefits from the trade, as if he didn't value 9 oranges and 1 apple more than 10 oranges then he wouldn't have made the trade. He just benefits less than he did before, when he could get 3 apples for one orange thanks to Person A not having any alternative suppliers of apples.
 
As to the war and malinvestments, wasn't much of the war industry made up of factories that had been converted to the production of tanks, bombs, etc? So, I imagine it would not have been too difficult for entrepreneurs and factory owners to convert the factories back to their original uses. Also, savings rates during the war were something like 25-30%, and when this all was invested, the new investment might have been enough to hide the effects of any malinvestments (meaning it wasn't as good as it could have been without the malinvestments, but still good enough that the ill effects of the malinvestments weren't noticed).
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John James replied on Thu, Oct 13 2011 10:19 PM

Wheylous:
I shall reserve judgment of the matter until then XD

That's all I'm sayin, bro.  When you ask for info on something, and a wealth of it is then provided, you gotta at least peruse it before trying to debate further. 

I'm not saying if you ask a specific question and someone says "go read X treatise and Y journal" that you should have to do that before continuing the conversation, but if someone offers resources (none of which are full treatises or journals), and they are specifically focused on the topic (and even the very question you're asking), ya gotta at least take a look at them.  As you'll see, the questions you continue asking are covered in the originally offered material.

I'm sure you've dealt with this before.  Someone asks a question about money being wealth.  And you're like "Oh yeah.  Check out this article.  It's all explained there."  And without even looking at it they come back and say: "I mean like, how can you say they're different things?  If I have more money, I'm wealthier!  It's seems simple to me."

At some point it's like "dude, if you don't want to learn the answer, why did you even ask the question."

 

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Say's Law is "products are paid for with products", no? So if Country B destroys Country A's Industry X, Country A could still pay for Country B's products by selling products from its Industries Y, Z, A, B, etc.
 
1. So only one industry was destroyed in Europe in WW2, and all the other industries remained intact? Which industry was the only one destroyed, and why were all the other ones spared?
 
2. But even if we grant the absurdity that only one industry was destroyed in WW2, since we understand that products are paid for with products, if Country A has one industry destroyed, it obviously has less products to offer. In other words, it is poorer. In other words, it can afford less of Country B's products than before. Since it can afford less, it will buy less. Not only that, country B now gets to enjoy less of Country A's stuff, since there is less of that stuff in existence. So how does Country B get richer from that?
 
Country B could also buy more of Countries C, D, E, F and G's products, since Country B would now be the only country in the world with Industry X, allowing it to demand more products in exchange for the Products X it sells.
 
3. Once again, Countries C, D E, and F had all of their industried destroyed, right? So how can country B buy anything from them? And how can those countries buy anything Country B? They are all broke. Their industries are all destroyed. They have no products with which to buy Country B's products. And all that French wine and Hungarian goulash will no longer grace the rtables of Country B, because those industries have been wiped out. Country B is poorer also, when all other countries get poorer. The stock of goodies to enjoy has been reduced world wide.
 
4. As for Ford Motor Company getting more business from the whole world, since they are the only producers, and indeed being able to demand more products in exchange for their cars, I don't get it. Are you saying the impoverished Europeans and Japanese will pay MORE for a car than the rich Americans will? Where do they have the money for that?
 
5. The simple question reduces to this. Imagine two worlds, one with every country producing everything they are good at to the max, and another with only one country producing everything, and the rest of the world impoverished, their factories reduced to rubble. Are you saying that anyone at all is better off living in that second world?
 
Are you familiar with the principle that, when two entities (individuals, countries, firms) trade, the side that benefits most (in numerical terms) is the side with less demand for the other's products?
 
6. Always thirsty for knowledge, I would appreciate some article [not 700 page book] that elaborates on this puzzling statement. In particular, what is a numerical benefit? And what do you mean by demand? Ability to pay? Desire for the object? Neither makes sense to me. If I can afford it less, why do I benefit more? If I want it less, how do I benefit more when I get it?
 
Of course, any voluntary exchange is beneficial to both parties, but the degree to which each benefits can vary. Imagine two people, Person A, who produces 10 apples per week, and Person B, who produces 10 oranges per week. Person A really wants an orange, whereas Person B doesn't want an apple as much. So, they engage in trade, and because Person A wants an orange much more than person B wants an apple, they trade 3 apples for one orange, meaning Person A now has 7 apples, 1 orange per week, and person B has 9 oranges, 3 apples. From an 'objective' standpoint, numerical measurement, person B did much better from this trade than person A. Even though they both benefited, B benefited more (in a numerical sense, which is the sense used in GDP measurements, etc).
7. We used to call this confused kind of thinking "mixing apples and oranges". Because I am sure you will agree that it is folly to assume that because an apple is a fruit and an orange is a fruit, that they are therefore in some way equal and that we can say that A has 8 fruits and B has 12, so B wins. Also I think you will agree that your example is of a barter economy, since no mention was made of a market price for these fruits [and if there was, the whole example would obviously fall apart]. GDP measures are of course impossible in a barter economy. One needs a money system for that.
 
In any case, you are moving the goalposts yet again. In your story, B has oranges to offer. After the war, the rest of the world had nothing to offer.
 
When speaking of countries, this measure of which side 'benefits' more from the trade is called the Terms of Trade, the quantity of imports bought by a unit of exports; the relative price of a country's exports to its imports.
 
8. Terms of Trade does not measure which country 'benefits' more in any sense of the word. Say China exports ten tons of horse manure in exchange for every one ounce of Iphones. Are you telling me that the country that got the horse manure benefited many millions of times more than the Chinese? Please.
 
Of course we cannot discuss China trading ten tons of horse manure for five tons of someone elses horse manure, because in the real world that doesn't happen, right? 
 
Terms of trade can only tell us something if it changes. If the Chinese after a while only have to give five tons of manure for an iphone, they are better off than before. But it is absurd to say that a single measurement of terms of trade tells us who benefited more.
As far as I'm aware, America's terms of trade have fallen steadily over the past few decades. Could not this be due to other countries developing their industries, creating more competition and so reducing demand for US goods, thereby reducing terms of trade?
9. I guess you have never heard of something called division of labor and it's good friend, comparative advantage. The reduction in terms of trade has come about because US industries have been crippled from within, meaning govt and union meddling. Check out wikipedia on the rust belt for more about this.
 
Say Person A finds a cheaper place to trade his apples for oranges, with somebody who really wants apples (Person C). Person B still wants an apple, and the only person he can buy it from is Person A. But, Person A is now no longer willing to trade Person B three apples for one orange, since he could get oranges cheaper from person C, and instead will offer just one apple per orange. So now, for Person B to get 3 apples, he has to trade away three oranges. This means that if, as before, Person B is producing 10 oranges per week, and trading one to Person A in exchange for apples, then each week he has 9 oranges and 1 apple, compared to before, when he had 9 oranges and 3 apples. This change in terms of trade has effectively reduced person B's standard of living by two apples per week. B still benefits from the trade, as if he didn't value 9 oranges and 1 apple more than 10 oranges then he wouldn't have made the trade. He just benefits less than he did before, when he could get 3 apples for one orange thanks to Person A not having any alternative suppliers of apples.
10. Person C is bringing oranges to the table. The supply of oranges has increased, lowering their price. So we have A bringing 10 apples to market, B bringing 10 oranges, and C bringing 10 oranges. Of course a will benefit, because apples have become scarcer and oranges more plentiful. The price of oranges will of course drop. On the other hand, A now has a surplus of apples on his hands. He will have to offer them on the market for less, too. So the price of apples will drop. Thus increased prduction by any one participant benefits them all. this will certainly be the case if C can consistently out bid B on the orange market, forcing B to start growing marijuana, say.  

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MadMiser replied on Fri, Oct 14 2011 7:21 AM

 

First, try looking at a nation as a firm. Imagine you're a chocolatier. You essentially trade chocolate for all the other goods and services you require. You go out and destroy all the other chocolatiers in the world. You now have a monopoly on chocolate supply. This means you're able to demand much more goods in exchange for the chocolate you supply. Since you suffer only minimally from there being no other chocolatiers in the world, the benefit you get from destroying them (more market power, being able to demand more in exchange for your chocolate) far outweighs the cost. Of course, society loses, but the individual firm benefits. Equally, is it not possible that with WW2, whilst the world as a whole lost in welfare, America benefited, in the same way a chocolatier benefits from destroying all other chocolatiers?
 
Second, an important thing to remember is that destroying somebody's industry only represents a loss to you if you were trading with them in the first place. If say America had zero trade with Germany, due to embargoes, tarrifs etc, then the destruction of German industry would represent no material loss to America, as they weren't buying from or selling to Germany in the first place. Of course, their welfare is less than it would be if they had been trading with Germany to begin with, but since they weren't, no significant loss would register on GDP statistics.
 
1. Heavy/technological industry was destroyed, in the sense that it takes the most capital to build, and so the most capital to rebuild. Lighter industries (farming, textiles etc) were less 'destroyed', in the sense that they take less capital to set up, and so wouldn't take as long to rebuild. So, they were 'spared', compared to heavy industry. Also, they were only really destroyed in a few countries, where the bulk of the fighting took place. These countries, Germany in particular, just happened to be industrial powers; America's 'competition' in the supply of industrial goods.
 
2. In terms of severe destruction, only one nation was destroyed: Germany. Scandinavia wasn't affected (and Sweden was one of the wealthiest countries in the world around then), leaving a large market for American goods there, and I'm fairly sure there was no fighting in Benelux either. Spain wasn't involved, and I don't think there was that much destruction in Italy. Also, the destruction in England was relatively minor compared to that in Germany. I'm not sure about France, I think they were heavily affected too. South America was completely unaffected, and some SA countries back then were relatively wealthy (Argentina was one of the top 10 wealthiest in the world sometime around then for instance, although that may have been earlier on in the century). Neutral, wealthy Switzerland wasn't affected. As far as I'm aware, Germany and Japan were the biggest Industrial powers apart from America (maybe also Britain), and they were the significant nations that suffered the most destruction. So, assuming there were previously 4 sellers of Heavy Industry for the world to choose from, Japan, Germany, England and America, after the war there was only one, America (or maybe Britain too, if its heavy industry wasn't too damaged), giving these two suppliers more market power, and allowing them to command more goods in exchange for their exports.
 
3. C, D, E and F haven't had their industries destroyed at all. No fighting took place on their soil, none of their physical capital was destroyed. Yes, "the stock of goodies to enjoy has been reduced worldwide", but we're not talking about world welfare, we're talking American welfare. It is possible that by the increased market power America gained from destroying its competitors in the sale of heavy industry and technology, it was able to increase the amount of goods its experts purchased by enough to offset the loss it suffered as part of the global loss of goodies. Say for instance Saudia Arabia destroyed all the oil in the world apart from its own, but at the same time destroyed France. Now, Saudia Arabia would suffer a loss in welfare due to the destruction of France reducing the global stock of goodies, but it would also suffer a massive gain in welfare for being able to charge almost whatever it wants for oil, due to having absolutely no competitors, and this gain in welfare would likely offset the loss from France's destruction. And again, if Saudia Arabia wasn't trading with France at all, then its loss from France's destruction would be minimal. In the same was as if America wasn't trading much with Japan or Germany to begin with, than its loss from their destruction would be minimal.
 
4. No, I'm not saying impoverished Europeans and Japanese will pay more for a car than rich Americans. I'm saying relatively undamaged places such as Scandinavia, South America, Australia, Britain (undamaged compared to Japan and Germany), Spain, undamaged parts of France, etc, will buy more Fords than before, because they can no longer buy cars from Germany or Japan, and so are forced to buy from America. Also, as I said above, if America wasn't trading with Japan and Germany previously (due to war, sanctions, tariffs, whatever) then they wouldn't notice any significant loss if Japan and Germany were destroyed. They'd no longer be able to trade for German/Japanese products, but they weren't trading for them in the first place, so no loss.
 
5. I think you're overestimating the devastation of WW2. It was devastating, sure, but the only things that got completely destroyed were a few cities in Germany (such as Dresden), maybe some in France (France surrendered to Germany, remember, so there wasn't much actual heavy warfare there), Hiroshima and Nagasaki, and possibly large swathes of Eastern Europe/Russia, and other places with economies that were relatively insignificant at the time. Heavy industry was hardest hit, because factories etc were converted to making bombs, tanks and such, so during the war would have been prime targets for bombardment and destruction. If there were for instance only four significant industrial powers in the world, then the destruction of two of them would have significantly increased the market power of the remaining two (no other countries need be damaged).
 
6. By numerical benefit I'm speaking in terms of cardinal utility, such that if Person B gets X utility from 3 apples, he must get less than X utility from only one apple. Austrian economics may not accept cardinal utility, only ordinal, but since we're talking in terms of econometrics (since a Depression can only be defined in terms of econometrics) I think it's reasonable to invoke cardinal utility. In that context, what do I mean by demand? http://en.wikipedia.org/wiki/Supply_and_demand Demand, in mainstream economics, refers to the quantity of a good demanded at a given price. An increase in demand means an increase in the amount of goods demanded at any given price; the demand curve shifts to the right. In an individual context, by demand I mean the amount you are willing to pay for a good. Say, it is a perfectly sunny day, and you are willing to pay $2 for an umbrella (or, to keep it in terms of products, you produce apples, and are willing to trade 2 apples for an umbrella). Then, there's a sudden thunderstorm, and you're willing to pay 20 apples for an umbrella: your demand has increased for the umbrella; the amount of money/production you are willing to trade for it has increased. Now, imagine you're the sole farmer in a village. People have high demand for your goods, meaning they are willing to exchange many of their goods for the food your produce, as they can't get food elsewhere. Then, some other farmers come along. Now, they can get their food elsewhere, so are no longer willing to exchange so much of what they produce for the food you produce (competition drives down price). The village people benefit, but you as an individual don't: your standard of living is reduced since you are not able to trade the food you produce for as many products as you could when you had a monopoly on food supply.
As to how can one side 'benefit more' from trade? In terms of cardinal utility. Get a supply and demand graph, draw a horizontal line at the equilibrium price. Everything between that horizontal line and the supply curve is the producer surplus; the difference between the price producers would be willing to sell their produce for and the price they actually sell it at. Everything between the horizontal line and the demand curve is the consumer surplus; the difference between what the consumers are willing to pay and what they actually pay. If the consumer surplus is bigger, the consumer benefits more. If the producer surplus is bigger, the producer benefits more. Both sides benefit, but one side benefits more, in terms of cardinal utility (which is used in welfare economics, but generally not Austrian economics).
 
7. I was assuming an objective system of value (which is admittedly impossible to prove), but as far as I'm aware GDP measures rely on some kind of assumption of objective value too? Look at it this way: if B had traded 1 orange for 9 apples, leaving B with 9 oranges and 9 apples, and A with just one apple and one orange, the 'man on the street' would say B benefited far more from this exchange than A (and probably claim it was 'unfair', have the government lobby to intervene, etc, etc.). If A and B were countries, B's GDP would benefit far more from this exchange than A's, no? So that's how B 'wins'. Now, Austrian economics embraces the subjective theory of value, so it can't be said that B 'wins' from an Austrian framework, but then it also can't be said that GDP is a valid measure of welfare from an Austrian framework, so since we're speaking in terms of GDP (depression), I think it reasonable to bring in an objective theory of value, as GDP assumes one. But that aside, the main point I was making is that originally Person A had 8 fruits per week and B had 12, then later Person B only had 10 fruits per week, meaning Person B's welfare was reduced. "This change in terms of trade has effectively reduced Person B's standard of living by two Apples per week." If whatever theory you operate under assumes that having one apple is inherently inferior to having three apples, then reduction in terms of trade has reduced Person B's welfare; reduced the degree to which he benefits from trade with A.
No, the rest of the world doesn't 'have nothing to offer', the rest of the world has plenty to offer, since the most severe effects of the War were limited to parts of Europe and a couple of Japanese cities (and various other places whose economies weren't particularly significant at the time) .
 
8. Terms of Trade measures which country 'benefits' more if you assume an objective theory of value, as discussed above. However, even without that assumption, as you say: "Terms of trade can only tell us something if it changes" - exactly! Hence why I said "As far as I'm aware, America's terms of trade have fallen steadily over the past few decades. Could not this be due to other countries developing their industries, creating more competition and so reducing demand for US goods, thereby reducing terms of trade?" My whole point was about increased competition from other nations developing heavy industry that reduced American terms of trade. If China changed from exporting ten tons of horse manure for every one ounce of Iphones to exporting five tons of horse manure in exchange for every one ounce of Iphones, they've doubled what they can get for every unit of horse manure, increasing their terms of trade and therefore their overall welfare.
 
9. I don't deny that US industries have been crippled by union and government mending. But, if there had been no industries developed in other countries, the effects of this crippling would have been much less pronounced. Sure, GM sucks now, but if it was the only car manufacturer in the world, people would be forced to buy its products since they'd have no alternatives. Hence, greater demand for GM would mean America's terms of trade were higher than they are now, if no other countries had car industries to compete with GM. 
 
10. This is true, increased production by any one participant benefits them all. However, the question is whether this benefit from increased production is enough to offset the loss from reduced market power. If you're the only chocolatier in the land, the benefit you receive from increased production of chocolate by other market participants is unlikely to offset the loss you suffer from reduced market power (no longer being able to sell at 'monopoly prices'). At least, not in the short term, anyway.
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packman replied on Fri, Oct 14 2011 7:46 AM

A complete side note -

I'm new on the forum.  It appears this forum doesn't have nested replies?   As a result this thread (and others) is very hard to read - when someone posts a reply often it's hard to say who or what they're replying to.

(Edit: I posted a query on the support forum to this effect)

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packman replied on Fri, Oct 14 2011 8:03 AM

Wasn't there a lot of malinvestment to get rid of after the war? (all of that war stuff)

Wouldn't this suggest a post-war recession? Imagine the government forces the economy to do the same thing today and then abandons all the equipment and says "as you were." We would have a bunch of malinvestment to clear up. But it appears the post-war economy did not stall that much.

Yes, but again keep in mind the relativities here.  We did actually officially have a post-war adjustment-period recession in 1946 but it was a mild one.  All this was measured by the very gross and obfuscating macro measures of "employment rate" and "GDP", which don't given the true underlying picure of economic health, because they don't differentiate war-driven employment and war-driven GDP vs the rest (for the most part; there is a "civilian unemployment rate" measure now, but that didn't start until 1948).

My point made above was that in reality during the war the economy still stunk.  We were actually worse off during the war than during the 1930's, but that was hidden by the high employment rate and high GDP; 40% of which was war spending.   So then when coming out of the war - indeed we had a "painful" adjustment period, but this was an adjustment out of this horrible wartime economy and into a much better peacetime economy.  As such it was a period of adjustment from maximum pain to minimum pain; and the bit of extra "adjustment pain" was just noise in the overall positive adjustment.

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packman:

didn't mean to hijack the thread.

you can know who is being replied to by clicking on the blue phrase "replied on"

welcome to the forum

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