Tuesday, August 20, 2013

Horwitz on the Post-WWII Boom

Horwitz gets it badly wrong on two of his major points.

First, the assertion that “most economists” who were influenced by Keynesian economics “were predicting a huge recession or depression” after WWII.

Horwitz has simply repeated a libertarian myth. First, if we want to gauge the opinion of Keynesian economists, the obvious starting point is Keynes himself.

Keynes was in fact optimistic about the post-war US economy:
“Keynes harshly rejected the risk of post-war stagnation, holding that because of Social security there would be a large reduction in private saving and so that would be no problem.” (Colander and Landreth 1996: 202).
Secondly, those who claim on the basis of Samuelson’s famous article of 1943 called “Full Employment after the War” that he and all Keynesians were predicting disaster have clearly never properly read that article or the book it was in.

Samuelson’s doom and gloom prediction was limited to a hypothetical scenario in 1943 in which “were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties – then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.” Needless to say, that is not the prediction ascribed to Samuelson by his critics, and, moreover, it is clear that Samuelson (1943: 37) was opposed by many of his fellow Keynesian economists who were optimistic about a post war boom, on the basis of “private demand alone.” Amongst these optimists were Alvin A. Hansen and also Richard M. Bissell.

There is further discussion of this issue here:
“Keynesianism in America in the 1940s and 1950s,” January 22, 2011.

“The Post-1945 Boom in America,” July 15, 2011.

“Thomas E. Woods on Keynesian Predictions vs. American History: A Critique,” May 29, 2012.

“What Did Paul Samuelson really say about the Post-WWII US Economy?,” May 31, 2012.

“Paul Samuelson on the Post-1945 Boom,” January 4, 2013.

“Alvin Hansen Predicted the Post-1945 US Boom,” January 4, 2013.

“More on Alvin A. Hansen’s Prediction of a Post-1945 Boom,” January 6, 2013.
Secondly, it is under the Austrian business cycle theory that we should have expected and predicted a disastrous and long depression after WWII in the sense of massive unemployment and the collapse of the capital structure.

Austrian capital theory sees the capital structure as incredibly fragile and that allegedly unsustainable distortions in its structure will lead to painful and protracted periods of recessions and unemployment. On any Austrian view, there must have been massive malinvestment in the US during the years from 1941 to 1945. If the Austrian theory of capital were true, there should have been a devastating US depression after WWII as malinvestments were liquidated and unemployment soared. But instead the economy adjusted rapidly and boomed: real GDP did indeed fall as war output was ended, but conversion occurred with remarkable speed and success.

In reality, the rapidity and comparative ease of the post-WWII US boom are devastating refutations of both Austrian capital theory and the Austrian business cycle theory.


  1. This post should put to rest the "empirical relevance" of ABCT. Published in the very Review of Austrian Economics, hehe. http://stickmanscorral.blogspot.no/2013/08/empirical-evidence-and-relevance-of-abct.html

    1. I've made a similar point to my Austrian acquaintances. Their response is to extend the Intertemporal effects of malinvestment, to argue there was in fact massive distortion which manifested decades later as the stagflation of the 1970's. It's the same moving of goal-posts they engage in every time a forecasted effect fails to occur.

  2. This is an extremely good point. The war economies were almost planned economies. So the malinvestment should have been enormous. And then for the Austrians to claim that the effects occurred in the 1970s -- during the oil price hikes -- is just completely absurd.

  3. In 1930 U.S. Government spendong was 3 billion.
    In 1940, 9 billion, in 1945 93 billion and in 1949 39 billion.
    There ware A large expansion of government spending during WWII and it continued after WWII. Even if it is right that the Great Depression ended in 1945, the large spending's after WWII shows a entire new economy there government spending boost the economy much more than before WWII.

  4. I'm not an Austrian, but the latter part of this post is totally unfair and reveals an ignorance of Austrian economics. (Austrian) malinvestment is an unsustainable increase in the money supply which distorts the capital structure. So what are you talking about when you imply there was Austrian-malinvestment during WW2? The war's high military spending? Americans buying war bonds? How would that be unsustainable according to Austrian theory?

    1. So you think the US money supply did not massively increase and interest rates were not reduced in WWII?

    2. The Austrian School doesn't argue that money supply expansion is necessarily bad, nor that low interest rates are necessarily bad, only if these changes are *unsustainable*. If the money supply goes up 100% and production goes up 100%, there wouldn't be malinvestment (all else being equal). The issue is whether or not the money supply and/or credit expands *unsustainably*, which would probably be the case if the money supply goes up much faster than overall production. As for interest rates, I'm guessing private sector investment (for non-military stuff) declined during WW2, so there wouldn't have been unsustainable private sector credit even with low interest rates. If there's not a lot of private sector investment, it would make sense that interest rates could accompany.

  5. *there not being a recession.