I just started reading America's Great Depression and came across this:
Intro to the 4th edition ^
Am I missing something here? Why is Rothbard saying WW2 rescued us from the Depression?
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.
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?
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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It's easy to refute an argument if you first misrepresent it. William Keizer
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...
"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.
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.
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.
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."
"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?
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.
Do you have any links showing that this is what Keynesians predicted? It would be really nice to cite them and then cite history.
Scroll up 7 posts, my friend.
Whoopsies. It was on my list of things to read...
Speaking of which, this may help. (Although it may also hurt, by making listing things too easy)...
http://ReadItLaterList.com/
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.
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.
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!).
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.
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.
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.
Why are we talking about GDP?
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.)
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.
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?
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.
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.
"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?)
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.
Did you read any of those threads yet? Or at least watch the Woods lecture?
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.]
Dangit, JJ, I'm getting to them :P
I shall reserve judgment of the matter until then XD
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."
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.
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)
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.
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