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
Student: Butwhat government policies are preventing wages from falling now?
Butwhat government policies are preventing wages from falling now?
Minimum wage laws.
Student: If you look at the sectors experiencing the most unemployment they are not ones dominated by unions. How many unions are there for financial analysts for example? investment bankers? residential construction workers? architects?
If you look at the sectors experiencing the most unemployment they are not ones dominated by unions. How many unions are there for financial analysts for example? investment bankers? residential construction workers? architects?
Since companies have a much tougher time lowering an employees wage, due to government regulations such as minimum wage laws, the employee is laid off instead.
Giant Joe,
Well, I finally read Vedder and Gallaway's article and I don't think it directly answers my quesiton. And on more careful viewing it looks like I misread the article when I first skimmed it. Thankfully, on page 5 the authors state that they conclude that were "NO depression in 1946 nor anything resembling one" and that aggregate data need to be viewed with a skeptical eye (that means you guys quoting stats on GNP dropping as evidence of a depression during this period, you need to read this article). I'm in total agreement with them there and this matches the points I was making earlier. http://mises.org/journals/rae/pdf/R52_1.pdf
But then I still wonder why the transition from war economy to consumer economy went so smoothly. It looks like they use similar arguments to DD5 and jmorris that labor market were allowed to function. I simply don't see how an Austrian could think that was the whole story.
1) Theoretically, there is nothing here mainstream economists would disagree with. If real wages are set above equilibrium in a competitive labor market, then unemployment will result. If real wages are allowed to fall, then unemployment will decrease. There is probably a discussion of this is in every micro and most macro textbooks. The only qualm some mainstream economists may have is whether this story matches our empirical understanding of the period (after all there were still minimum wage laws in place for example, something jmorris thinks is a roadblock to recovery, but apparently not in 1946). And even then, there will be some economists that think the authors are exactly right. Robert Lucas for example would probably find much to agree with here. This isn't Austrian, this is the University of Chicago.
2) This article says nothing about World War 2's impact on the capital structure. Like I've been saying, rather than investing in capital for making products people want the government invested in munitions no one wanted when the war was over. Just because the fighting stopped doesn't mean we can turn fighter plane factories into car factories in a day. Like Roger Garrison has said time and time, this restructuring process takes time.http://www.auburn.edu/~garriro/mainstreammacro.pdf
During the Great Depression, the process took *YEARS* and resulted in a severe economic recession. Why did it only take months in 1946???? Stranger says there are impediments to liquidation today that apparently didn't exist in the later 1940s. Like what? Specifics would be great.
This seems like a very interesting question and an important data point to explain. If anyone can find any other articles I would be most appreciative (peer reviewed articles are best please, videos are great but papers are easier for me to get through and I like having an authors list of references on hand).
Actually what is really absurd is to think that millions of people deciding to stop killing and bombing each other and destroy a huge amount of property would start a recession...
Vitor: Actually what is really absurd is to think that millions of people deciding to stop killing and bombing each other and destroy a huge amount of property would start a recession...
I don't think that is really it at all. I believe the OP is just wondering why there wasn't an obvious downturn in the economy because during WW2, the economy was heavily reliant on 1 thing and when that came to an end and the economy began to restructure, there wasn't some sort of downturn during the restructuring stage. Although I haven't read the articles posted in this thread yet, I believe someone already explained that there actually was a downturn but it was so fast that it was unnoticeable. I believe this is possible if the government doesn't do anything to prevent that correction from quickly happening.
Edit - I just want to note that I'm not very sure exactly what happened during this period of time, only that I think you misunderstood the OPs question.
Student: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)... 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.
The answer to this is quite simple. After the war and the recession of 46-47 (quite dramatic), capital was reallocated towards actual warranted economic activities and the influx of labor allowed for robust economic growth (savings rates were high as well). High taxes cut deficits and limited the crowding out effect (Austrians support taxes over inflationary financing). This is what happens when you allow the market to correct itself (see depression of 1920). The new deal turned what should have been a quick and orderly restructuring process into a 14 year depression with unemployment above 14% (in some years it was much higher, as I'm sure you know), but many malinvestments were eventually liquidated.
Also, just to be clear, monetary expansion during the 20s was quite dramatic, as the U.S tried to create a perpetual boom, and arbitrarily prop up the Pound.
Student:Not to say things in the post-WW2 era were perfect, but there is a suspicious lack of a monumental economic crash here.
The post world war two era is defined as a period of Keynesian inflationism which artificially and continuously lengthened the structure of production. Productivity gains concealed much of the price inflation, but the capital misallocations and disproportionalities grew from year to year. Mises and Hayek both warned about such policies, but by this period they weren't taken seriously. They of course attacked the logic behind the Philips curve, warned of inflation, and Mises actually predicted (as well as Rothbard) Nixon's price and wage controls. Of course, the Keynesian's were in trouble as early as 1963. They continuously delayed the necessary correction until their inflationist policies became utterly sterile (stagflation crises). Paul Volcker raised interest rates, forced the necessary correction/liquidation, and the economy recovered (lead to a robust boom). Unfortunately, the FED continued to suppress market rates blowing bubbles (especially true in the 90s), and the government continued to act belligerently.
Did Austrian economists predict a great depression after WW2? I thought that was only the Keynesian mainstream.
"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."
The answer to this is quite simple. After the war and the recession of 46-47 (quite dramatic), capital was reallocated towards actual warranted economic activities.
Right. But this reallocation typically takes TIME (as Garrison notes in the link posted above). As everyone on this board knows, capital is heterogeneous and it cannot seamlessly transition from one use to another. And this is supposedly why a boom driven by malinvestments is followed by a bust as the capital structure is realigned.
YET, in 1946 we were able to achieve this reallocation WITHOUT a bust. WHY?
This is what happens when you allow the market to correct itself (see depression of 1920). The new deal turned what should have been a quick and orderly restructuring process into a 14 year depression with unemployment above 14% (in some years it was much higher, as I'm sure you know), but many malinvestments were eventually liquidated.
This doesn't sound like the ABCT. As I understand it, the bust is supposed to be the result of the time consuming process of capital structure realignment. There is nothing particularly Austrian about saying the New Deal stalled recovery. It may indeed have prolonged the slump, but that doesn't explain why we experienced such a deep slump to begin with. And lets be clear that, contrary to your reckoning, that this was a severe slump before the New Deal. Indeed, unemployment was over 20% in 1932 before FDR was even ELECTED.http://en.wikipedia.org/wiki/Great_Depression
And the reason for this slump? It was the natural response to the inflationary boom. At least according to Austrians like Rothbard:http://mises.org/rothbard/agd.pdf
Student:Right. But this reallocation typically takes TIME (as Garrison notes in the link posted above). As everyone on this board knows, capital is heterogeneous and it cannot seamlessly transition from one use to another.
Yes, and growth doesn't occur instantaneously either. Capital was incrementally allocated towards various remote employments, increasing the productivity of labor, and therefore stimulating economic growth (growth, by definition, is an incremental process). Warranted investments begin, but need a steady flow of capital for their completion, which, of course, requires an adequate amount of savings and an accurate interest rate. The problem with inflation is that it begins investments which cannot be completed on time, at all, or will be completed at the expense of more warranted economic activities--which is why its early phases resemble and actual boom.
Student:This doesn't sound like the ABCT. As I understand it, the bust is supposed to be the result of the time consuming process of capital structure realignment. There is nothing particularly Austrian about saying the New Deal stalled recovery. It may indeed have prolonged the slump, but that doesn't explain why we experienced such a deep slump to begin with. And lets be clear that, contrary to your reckoning, that this was a severe slump regardless of the New Deal. Indeed, unemployment was over 20% in 1932 before FDR was even ELECTED (uh, just a bit higher than 14%).
First of all, the bust is caused by an increase in the demand for consumer goods (current goods), which increases their prices relative to producer goods, causing an increase in the rate of interest which collapses the structure of production towards its natural position. Since the inflationary boom expanded the structure of production towards remoter productions, the correction will divert the means of production towards direct productions. The extent to which the economy was extended beyond its natural condition will determine the severity of the bust. This is not to say that prolonged inflationary booms lead to long corrections. The length of the correction is, by practical means, determined by government policy. Monetary and fiscal interventionism at first causes the boom, and then tries to maintain the malformed capital structure, and then slows down the correction (liquidation), but continues to direct the freed up resources towards unwarranted productions (what's going on now). The economy is trying to go back to its natural state, but interventionism distorts (and often prevents) this process.
Yes, FDR was elected in 1932, but Hoover was a proto-new-dealer. He created government programs which were supposed to "put people back to work," engaged in huge deficits (so much so that FDR's vice president, during the elections, actually called Hoover a socialist), and told business not to reduce wages because it would mean a lower demand for their products (proto-GT). The theories put forth by Keynes in the General Theory long predate this actual book (goes back to Mercantilist doctrine).
Esuric: Yes, and growth doesn't occur instantaneously either. Capital was allocated towards various remote employments, increasing the productivity of labor, and therefore stimulating economic growth, though incrementally so (growth, by definition, is an incremental process). Warranted investments begin, but need a steady flow of capital for their completion, which, of course, requires an adequate amount of savings and an accurate interest rate.
Yes, and growth doesn't occur instantaneously either. Capital was allocated towards various remote employments, increasing the productivity of labor, and therefore stimulating economic growth, though incrementally so (growth, by definition, is an incremental process). Warranted investments begin, but need a steady flow of capital for their completion, which, of course, requires an adequate amount of savings and an accurate interest rate.
This still does not directly answer my question. So I am not sure how to respond.
Esuric:First of all, the bust is caused by an increase in the demand for consumer goods (current goods), which increases their prices relative to producer goods, causing an increase in the rate of interest which collapses the structure of production towards its natural position. Since the inflationary boom expanded the structure of production towards remoter productions, the correction will divert the means of production towards direct productions. The extent to which the economy was extended beyond its natural condition will determine the severity of the bust. This is not to say that prolonged inflationary booms lead to long corrections. The length of the correction is, by practical means, determined by government policy.
"The extent to which the economy was extended beyond its natural condition will determine the severity of the bust." Right. Exactly what I'm saying. And I'm just having a hard time seeing how the economy of the 1920s was extended further past its natural condition than during WW2. I. just. dont. see. it.
And I have never heard anyone say that the length of recovery is determined by government policy. Not Garrison or Rothbard anyways. Now, certainly government policy can influence the length of recovery. But saying it is "determined by government policy" makes it sound like there is nothing else to consider. In fact, the opposite is true. Garrison explains the bust in ABCT quite well without relying on supposing that the government will erect obstacles to recovery. The primary obstacle to quick recovery in the ABCT is the heterogenity of capital.
Esuric:Yes, FDR was elected in 1932, but Hoover was a proto-new-dealer. He created government programs which were supposed to "put people back to work," engaged in huge deficits (so much so that FDR's vice president, during the elections, actually called Hoover a socialist), and told business not to reduce wages because it would mean a lower demand for their products (proto-GT).
Haha I never knew that the "New Deal" was short hand for all government policy from 1929 to 1941. ;) haha just joking, i kinda expected you to say this. And that may also be true, but it is simply not ABCT. Not to say that it isn't important, but ABCT predicts a slump because of the malinvestments made during the 1920s. Hoover's and FDR's policies at most make a bad recession worse. So it is isn't really important for my question of why there was such a smooth transition in the post war period.
PS* That may be it for me for the night. Have a good evening all!
Student:This still does not directly answer my question. So I am not sure how to respond.
Because, excuse me, your question is nonsensical. It is not the case that after WW2 the capital supply immediately fell into warranted productions and the economic expansion occurred instantaneously. There was a dramatic recession which freed up the factors of production for potential uses. Those resources began investments (plural), and absorbed the labor supply. If the boom is non inflationary, then growth will continue as long as there's an adequate capital stream towards investments which began at period "T0" (starts the boom). If the savings supply increases (additional capital), then more remoter productions begin (lengthen the structure of production), increasing the demand/productivity of labor, and therefore the growth rate. Essentially, the boom began in 1946--this is the time element of production (the marginal productivity of the remoteness of capitalist productions is determined by time preference, and is expressed in the loan market when the market rate equals the natural rate).
Student:"The extent to which the economy was extended beyond its natural condition will determine the severity of the bust." Right. Exactly what I'm saying. And I'm just having a hard time seeing how the economy of the 1920s was extended further past its natural condition than during WW2. I. just. dont. see. it.
Maybe it did, maybe it didn't. The point is that the liquidation process was allowed to happen after WW2 (as opposed to the new deal policies after 1927). But then the boom was arbitrarily magnified by Keynesian inflationary policies. Likewise, the liquidation process was allowed to happen under Volcker.
Student:And I have never heard anyone say that the length of recovery is determined by government policy. Not Garrison or Rothbard anyways.
Sigh, making me quote mine ><:
What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of the depression? In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably bring the inflationary boom abruptly to an end, and commence the inevitable depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better. This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease...... The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on.The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. -Rothbard "Austrian Theory of the Trade Cycle, and Other Works."
Student: Now, certainly government policy can influence the length of recovery. But saying it is "determined by government policy" makes it sound like there is nothing else to consider. In fact, the opposite is true. Garrison explains the bust in ABCT quite well without relying on supposing that the government will erect obstacles to recovery. The primary obstacle to quick recovery in the ABCT is the heterogenity of capital.
Yes, in pure theory this is correct. But this is also why I said "practically," because extreme interventions must necessarily prevent (only to reemerge later) or delay this process.
Student:Haha I never knew that the "New Deal" was short hand for all government policy from 1929 to 1941.
That's one way to put it. Hoover, at that time, spent more than any other president during a period of peace.
Esuric: Because, excuse me, your question is nonsensical. It is not the case that after WW2 the capital supply immediately fell into warranted productions and the economic expansion occurred instantaneously. There was a dramatic recession which freed up the factors of production for potential uses. Those resources began investments (plural), and absorbed the labor supply. If the boom is non inflationary, then growth will continue as long as there's an adequate capital stream towards investments which began at period "T0" (starts the boom). If the savings supply increases (additional capital), then more remoter productions begin (lengthen the structure of production), increasing the demand/productivity of labor, and therefore the growth rate. Essentially, the boom began in 1946.
Actually, as the article Giant Joe posted earlier concluded there was not a dramatic recession after the war. Check it out.http://mises.org/journals/rae/pdf/R52_1.pdf
Esuric: Maybe it did, maybe it didn't. The point is that the liquidation process was allowed to happen after WW2 (as opposed to the new deal policies after 1927).
Ignoring my question doesn't answer it. According to ABCT, the obstacle to recovery is capital heterogeneity. Even if the government wasn't making matters worse, it doesn't mean corrections didn't need to be made. Look at the Rothbard quote *you* copy-and-pasted. Rothbard say government intervention can prolong the agony. He doesn't say that avoiding government intervention during the bust will allow you to avoid the agony all together.
Esuric:Sigh, making me quote mine ><:
Your quote is irrelevant. I think I explained myself pretty clearly. I said that policy can prolong the recession, but the way you phrased it made it sound like it was the only relevant factor. I said this is wrong because it is more importantly influenced by the heterogeneity of capital. And in fact your quote only supports my point. Again, Rothbard says the government policies will prolong the agony, he doesn't say that letting the market correct itself will eliminate the agony all together. Saying the length of the bust is determined by government policy is simply false. At most you can say it is determined by several factors. I am guessing you will say that's what you meant (and some how forgot to mention in your clarification).
Esuric:Correct.
Haha oh come on. You made a mistake. You said the New Deal made a 14% recession worse. In fact, unemployment was 23% before the New Deal was even introduced (and *no* noone calls Hoover's policies the New Deal). Its okay. ;) Everyone messes up from time to time. Hopefully you will just start Googling the statisitcs before you quote them.
The American industry being intact you should have had the same effect we had in Sweden after the war also. A massive boost in export and trade to re-build Europe. America send money for it as well which we didn't, but I am not sure the Marshall-plan was big enough to create much artificial stimulation of the American economy.
The destruction of Europe would also have increased the demand for capital goods a whole bunch, and that is usually where the malinvestments are made so there would be suddenly be actual demand to meet the expectations ...
Escaping Leviathan - regardless of public opinion
"Democracy is the road to socialism." - Karl Marx
Student:Ignoring my question doesn't answer it.
You're asking the wrong questions. As you've already acknowledged, government intervention plays a big role in this adjustment process. The introduction of this variable makes it impossible to hold the ceterus paribus condition, that is, we can't isolate and identify all of the various factors (and inflation is frequently concealed by productivity gains, and the various indices are spurious at best). We use logic and theory, and then add certain exogenous variables--come on, you should know this
Student:Look at the Rothbard quote *you* copy-and-pasted.
I didn't copy and paste it. I had to open the book, and write the whole thing out ><.
Student:Rothbard say government intervention can prolong the agony. He doesn't say that avoiding government intervention during the bust will allow you to avoid the agony all together.
No, of course not. Here's the first part of the quote: "In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably bring the inflationary boom abruptly to an end, and commence the inevitable depression."
There must be a liquidation--that is, a depression/recession (as the quote clearly says). And we had one.
Student:phrased it made it sound like it was the only relevant factor.
I said, "the length of the correction is, by practical means, determined by government policy." This is vague, so I understand the confusion. In pure theory the length of the correction depends on the heterogeneity and complementarity of the capital goods, and the remoteness of their productions. But in the real world, governments interfere, a lot.
Student:Haha oh come on. You made a mistake. You said the New Deal made a 14% recession worse. In fact, unemployment was 23% before the New Deal was even introduced (and *no* noone calls Hoover's policies the New Deal). Its okay. ;) Everyone messes up from time to time.
And I explained why. People also say that FDR got us out of the recession, does that make that statement correct? Hoover and FDR were both interventionists (which is why the Roosevelt administration called him a socialist). Are you here to talk about theory or meaningless technicalities?
Esuric: Student:Look at the Rothbard quote *you* copy-and-pasted. I didn't copy and paste it. I had to open the book, and write the whole thing out ><.
Sheesh, and where were the I.P. Thought Police when this was happening? The Federal Division of Intellectual Pre-Crime clearly needs more funding.
I feel like I need to make one thing clear: You don't need to purge the economy of all malinvestments for a boom. This is especially true if the government tries to magnify the boom with inflation. You can have a persistent malformed capital structure. A boom can be created at will, and the bust can be delayed for a significant period of time.
You're asking the wrong questions. As you've already acknowledged, government intervention plays a big role in this adjustment process. The introduction of this variable makes it impossible to hold the ceterus paribus condition, that is, we can't isolate and identify all the factors (and inflation is frequently concealed by productivity gains, and the various indices are spurious at best).
But the question is why we didn't have a severe recession after the war (and again, we didn't, read the article posted from mises.org). Everyone, including you, keeps saying (for some reason) that the government allowed the market to correct itself so capital restructuring happened quickly.
If this is the case, then this tells me that a lot of people on this board don't think capital heterogeneity is actually that great of a consideration in understanding business cycles. At least no so great that it isn't trumped by government policy reaction to the down turn.
Effectively, there is no need to read Roger Garrison. I can get the story you're telling me about how the New Deal prolonged the recession from Amity Shales. I can make the same arguments everyone else is making without even referencing ABCT.
Now, of course, I don't think anyone here actually believes that, but it is surprising how few specifically Austrian arguments I'm seeing in this thread.
Anyways, that's really it for me for tonight (for real this time!!!). I may just let the thread die because I am definately not getting what I expected. I had hoped I would get a list of articles directly addressing the issue of how the Post-WW2 economy handled capital restructuring. Instead, I have only gotten one article (that dealt with a seperate but related question) and a lot of people that seem convinced that capital structuring simply wasn't a major problem, or at least not a problem that couldn't be fixed in a few months. Yep, not what I expected.
Night all!