“Notwithstanding the initial availability of much unemployed labor and capital, the mobilization became a classic case of guns displacing both butter and churns. So why, apart from historians and economists misled by inappropriate and inaccurate statistical constructs, did people—evidently almost everyone—think that prosperity had returned during the war?First, the command economy put an end to unemployment, and not only that but many discouraged workers (or the “hidden unemployed”) were brought back into the labour force. We can see the reduction in unemployment in the graph below (in which the estimates are those of Darby (1976: 8), whose better method for calculating the figures is explained here).
The question has several answers. First, everybody with a desire to work was working. After more than 10 years of persistently high unemployment and the associated insecurities (even for those who were working), full employment relieved a lot of anxieties. Although economic well-being deteriorated after 1941, civilians were probably better off on the average during the war than they had been during the 1930s. Second, the national solidarity of the war effort, though decaying after the initial upsurge of December 7, 1941, helped to sustain the spirits of many who otherwise would have been angry about the shortages and other inconveniences. For some people the wartime experience was exhilarating even though, like many adventures, it entailed hardships. Third, some individuals (for instance, many of the black migrants form the rural South who found employment in northern and western industry) were better off, although the average person was not. Wartime reduction of the variance in personal income—and hence in personal consumption—along with rationing and price controls, meant that many people at the bottom of the consumption distribution could improve their absolute position despite a reduction of the mean. Fourth, even if people could not buy many of the things they wanted at the time, they were earning unprecedented amounts of money. Perhaps money illusion, fostered by price controls, made the earnings look bigger than they really were. In any event, people were building up bank accounts and bond holdings; while actually living worse than before, they were feeling wealthier. Which brings us to what may be the most important factor of all: the performance of the war economy, despite its command-and-control character, broke the back of the pessimistic expectations almost everybody had come to hold during the seemingly endless Depression. In the long decade of the 1930s, especially its latter half, many people had come to believe that the economic machine was irreparably broken. The frenetic activity of war production—never mind that it was just a lot of guns and ammunition—dispelled the hopelessness. People began to think: if we can produce all these planes, ships, and bombs, we can also turn out prodigious quantities of cars and refrigerators.”
Robert Higgs. 1992. “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s,” Independent Institute, March 1
The sheer absurdity of asserting that “no economic good” of any kind came out of the war is refuted by this point alone. Many people no longer had to experience the grinding poverty of unemployment, and obtained work on the home front when the war started. And they obviously chose that work over being unemployed.
For anyone who subscribes to a subjective theory of value, it is obvious that many individuals must have obtained subjective value (or an “economic good”) from the newly created civilian employment they received during the war, even if nobody would seriously doubt that the hours in many of these jobs were long and the work difficult.
Secondly, the war allowed the accumulation of savings and money income. The point overlooked by Higgs is that this also allowed both business and consumers to finally complete the process of deleveraging and paying down private debt to a low level. That is a fundamental point: the debt deflationary drag on the US economy was eliminated during the war, as we can see in this graph (in the “private debt” line).
Thirdly, the war fundamentally shifted business expectations from being highly pessimistic to a strong optimism that emerged after the conflict ended.
With the end of the war, when expectations had become optimistic, there was a private investment and consumption boom, which was in part fuelled by the drawing down of savings earned in the war. That outcome is a Keynesian story.
Darby, M. R. 1976. “Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84.1: 1–16.
Higgs, Robert. 1992. “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s,” Independent Institute, March 1
Higgs, Robert. 1992. “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s,” The Journal of Economic History 52.1: 41–60.
You misunderstand the fallacy.ReplyDelete
No one disputes that employment went up, infact, that is exactly what the fallacy is. The broken window fallacy is about what is seen and what is not seen. What is seen is an increase in employment and incomes for some people. What is not seen is the destruction of wealth and resources in the production of goods that the economy doesnt benefit from and does not increase the quality of life in society.
No economic good comes from putting real wealth and resources into the production of objects that will be destroyed and serve no real economic good even if left intact. No economic good comes from giving someone a paycheck to make something that no one benefits from and that has no real private sector demand whatsoever.
This ultimately hurts the economy and society as a whole as that wealth and those resources are no longer available for productive uses that actually do increase the quality of life and raise living standards.
The austrian position is that if the economy isnt producing goods and allocating wealth and resources to real economic private sector demand than that wealth and resources have been destroyed.
It appears the economy is improving but what is not seen immediately is the destruction of wealth and resources and the economic damage.
Again, read through Hazlitt's Economics In One Lesson.
Also, you cherry picked Higg's essay, he ultimately made the case against all of this.
I still just don't think you fully understand the Fallacy as you arnt directly argueing against it's claims, you are argueing that there was employment and income rises, but not that the production and allocation of wealth and resources was beneficial to the economy...
(1) "What is not seen is the destruction of wealth and resources in the production of goods that the economy doesnt benefit from and does not increase the quality of life in society."Delete
Since I do not assert that America was a peacetime economy producing consumer goods from 1941-1945, this does not refute anything I have said above.
(2) "No economic good comes from putting real wealth and resources into the production of objects that will be destroyed and serve no real economic good even if left intact."
Oh? And how exactly do you define "economic good"? Unless you reject subjective theory of value/utility, then I have already shown above how wartime civilian employment that provided income for the previously unemployed would undoubtedly have been of economic value to them, i.e., an economic good.
(2) "The austrian position is that if the economy isnt producing goods and allocating wealth and resources to real economic private sector demand than that wealth and resources have been destroyed."
I do not deny that the wartime production was destructive, and this point has no force against my arguments.
You have not refuted my points about the economic benefits of the command economy:
(1) elimination of civilian unemployment;
(2) massive new income and saving
(3) reduction in the private debt overhang
(4) massive shift in expectations.
Moreover, the absurdity here is that the passage I have quoted from Higgs is his own conclusion.Delete
Whether libertarians like it or not that conclusion is perfectly compatible with a Keynesian interpretation of WWII and its immediate aftermath.
" Since I do not assert that America was a peacetime economy producing consumer goods from 1941-1945, this does not refute anything I have said above."Delete
You don't have to assert that it is a peacetime economy or not, the point remains the same. Even in a 'peacetime'economy government still allocates (with force) massive amounts of wealth and resources into the production of goods that would otherwise never be made and infact, raises the production costs of goods that the consumers actually are demanding or makes it impossible to make those goods altogether.
the wealth and living standard of society isnt raised by making tanks and warplanes, society has no use for these things and there is no demand for them. It's nothing more than a massive waste of wealth abd resources regardless if certain individuals income is raised in strictly monetary terms because of their production.
" Oh? And how exactly do you define "economic good"? Unless you reject subjective theory of value/utility, then I have already shown above how wartime civilian employment that provided income for the previously unemployed would undoubtedly have been of economic value to them, i.e., an economic good."
An economic good is defined, to me, is the production of goods and services that consumers voluntarily demand and trade for.
No one was demanding tanks and warplanes in the economy. If you're theory is correct, then creating money and writing the unemployed paychecks for building houses and then knocking them over and rebuilding them is an economic good and a productive use of wealth and resources and not the massive waste and destruction of both.
Of course, if you define an economic good as nothing more than an increase in employment then you would have to completely ignore the economic damage and unintended consequences of these programs.
Have you read that chapter from Hazlitt's book yet? the entire book is a great read.
" Moreover, the absurdity here is that the passage I have quoted from Higgs is his own conclusion.Delete
Whether libertarians like it or not that conclusion is perfectly compatible with a Keynesian interpretation of WWII and its immediate aftermath."
It's not his conclusion, he's answering the question he had asked himself at the end of the first paragraph you began the qoute with:
' So why, apart from historians and economists misled by inappropriate and inaccurate statistical constructs, did people—evidently almost everyone—think that prosperity had returned during the war?'
...Why did everyone THINK that prosperity had returned during the war... He then goes on to give the reasons why he believes that people thought there was prosperity during the war when in truth there was not.
I guess you overlooked that when you did your cherrypicking...
No, Daniel Jones, Higgs says quite clearly that there were *real* -- not imaginary -- economic factors that people saw as benefiting them during the war:Delete
(1) employment on the home front was reduced to less than 2%:
"First, everybody with a desire to work was working. After more than 10 years of persistently high unemployment and the associated insecurities (even for those who were working), full employment relieved a lot of anxieties."
(2) some lower income earners did see real increases in living standards:
"Third, some individuals (for instance, many of the black migrants form the rural South who found employment in northern and western industry) were better off"
(3) people's income and savings soared:
"Fourth, even if people could not buy many of the things they wanted at the time, they were earning unprecedented amounts of money"
(4) Expectations shifted:
"Which brings us to what may be the most important factor of all: the performance of the war economy, despite its command-and-control character, broke the back of the pessimistic expectations almost everybody had come to hold during the seemingly endless Depression."
It is clear that you are the one who is cherry picking, and also it's clear you are just another libertarian troll.
I'm not cheerypicking.Delete
I have stated since the beginning of this discussion that I acknowledge that people got jobs and experienced a rise in income.
However, you are incapable of seeing anything beyond the new jobs and increased income. You either can not, or will not, give reasons for why these 2 economic factors outweighed the negative factors that created them led to. Such as the misallocation of wealth and resources, wage and price controls, inflation, a decrease in private sector goods, a lower quality of life, etc...
You have the make the case that all that matters to have a sound economy is that people have jobs and an increase in income, that everything else is unimportant.
If you were really after economic truths and a sound economic theory, you need to be able to see the negatives not just the perceived positives in the economy, that is what the broken window fallacy is all about. You need to be able to say that 'while people had jobs and an increase in incomes, for these reasons its not actually a good thing for these reasons when its because of government created demand..'
Do you understand where i'm going with this?
I also want to add that i'm not trolling, i'm here to have a real discussion on economics. I have been reading your blog for awhile..
"Such as the misallocation of wealth and resources"Delete
There was no significant "misallocation of wealth and resources" because the US needed to win the war.
Its war output and increased capital stock devoted to producing war material was precisely what was needed to do that.
Your view bizarrely requires that the whole of WWII had no purpose or justification whatsoever other than to employ people.
We arnt having a discussion for whether the should have, or should not have, been fought. The only discussion right now is if the war economy was prosperous or not.Delete
All austrians recognize that it was not.
Austrians completely acknowledge that for some people in the economy it can be viewed as a prosperous time for them, they now have jobs and an increased income. But this is not true for the economy as a whole (or really even for the government employeed), as goods are rationed, banned, or price controlled. Producer goods became far more expensive if available at all. The quality of consumer goods plummeted. People couldnt buy houses or cars as their production was completely banned.
Some 40% of the labor force was employed by the war machine, which meant there was only 60% to provide for non war related demand with what little raw materials and wealth the government left to them, not only to provide for themselves, but they also had to pay for the war spending in taxes.
It was rough man.
I don't hear you making arguments for any of these things, just because people had jobs and an increased income (as Higgs states) doesnt mean there was prosperity. And making the argument that the war needed to be fought as youve repeated done is totally irrelevant and unrelated to the economic discussion.
It's almost ad if you just refuse to admit that there was negative results on the economu from the war.
"Austrians completely acknowledge that for some people in the economy it can be viewed as a prosperous time for them, they now have jobs and an increased income."Delete
(1) You've simply conceded two of my major points here.
(2) from the beginning of my discussion of this subject I have never asserted that WWII was a period of unparalleled "prosperity," nor that there were difficulties in life on the home front (rationing, reduced quality of consumption goods, etc.).
You continue to attack me with straw man arguments.
Also, Alot of that unemployment is likely a result of the draft, and certainly none of that unemployment was because of private sector demandReplyDelete
Presumably you mean "Alot of that *employment* is likely a result of the draft".Delete
The existence of the draft and military employment does not change the fact that vast numbers of civilian jobs were also created domestically in the US and that civilian unemployment was reduced to less than 2%.
Yes, i meant employment.Delete
The civilian jobs were created to meet government demand, not the demand of society.
I still don't think you're really getting the broken windoe fallacy. You continue to come back to this arguement that the economy was great simply because people were employed. The broken window fallacy doesnt refute that. If you want to make an arguement against the broken window fallacy you should be argueing that the wealth and resources allocated with force tothe production of certain government demanded goods grows an economy rather than harms one, that price and supply controls grow an economy... argue that giving people paychecks is what grows the economy and not what they are actually producing to get that paycheck, argue that the allocation of wealth and resources is unimportant and has no economic effect, the only thing that matters in an economy is the unemployment rate and if people have paychecks or not.
I don't think you can make that arguement though, because i don't think there is an arguement to support such claims, all claims you need to be making to refute the broken window fallacy.
"You continue to come back to this arguement that the economy was great simply because people were employed. "Delete
No, you are simply inventing positions and attributing them to me.
I did not say that the economy was "great" during WWII. I said that the war did have certain positive economic benefits as noted by Higgs.
You didn't argue against anything I said above other than my use of the word 'great'. As I said above Higgs was giving examples for why people thought that the economy was improving, not for why it was actually improving because in his opinion it was not.Delete
If you want to argue against the broken window fallacy you have to argue against the idea that there is negative effects on the economy from government created demand for war machines. You have to argue, as I said above, that there is either a) no misallocation of wealth and resources or b) that there is misallocation of wealth and resources but that it is not damaging in way to the economy. You have to make the argument the wage and price controls have no negative effects. You have to make the case that the only thing important in the economy is that people have a job and an increase in income, that nothing else matters. Y
If you can make those arguments than maybe you are on to something here. But if not, you need to retract your statement that the economy had certain positive economic benefits only because people had jobs and increase in income, you have to acknowledge the negative economy effects of both, and as Higgs as done, see more than just those two economic factors.
The broken window fallacy is about what is seen vs what is unseen.
"As I said above Higgs was giving examples for why people thought that the economy was improving, not for why it was actually improving because in his opinion it was not."Delete
No, as is perfectly apparent, Higgs says quite clearly that there were a number of *real* -- not imaginary -- economic factors that people saw as benefiting them during the war. See above.
This discussion is at an end.
Would you make this same arguement for when FDR employed people to burn fields of crops and slaughter cattle and pigs in the 30's, would you make the claim that this was an 'economic good' because people were employed and earning a paycheck? I doubt it, but it's literally no different than giving someone a job and a paycheck to build bombs to destroy things, theres no difference at all between the two.ReplyDelete
(1) I do not, nor would not, advocate those acts of destroying goods at any time or circumstance.Delete
(2) even that ridiculous policy under Roosevelt is totally different from the war. The war was fought to defeat fascism.
The destruction of crops etc. under Roosevelt was done because of a deluded corporatist/cartelist ideology that thought that this would raise prices and demand.
But even John Maynard Keynes condemned that policy. But I expect you're so ignorant you are unaware of this.
but it gave someone a paycheck and a job, isn't that what is important here since you're ignoring every negative effect on the economy? so just to be certain, are you really suggesting that the economy benefits from the creation of jobs and a rising income due to the destruction of steel and clothing, but not from the destruction of crops?Delete
From the perspective of the whole society, digging useless ditches or burning crops is a net social and economic loss.Delete
But from the perspective of the starving man who is unemployed, he will most probably derive subjective utility -- economic good -- from a job even digging useless ditches or burning crops as long as the job pays him money so that he can live and buy what he wants.
However, WWII was not the equivalent of "digging useless ditches or burning crops" because its overriding and fundamental aim to was defeat fascism.
The analogy you want to draw does not work.
That simple fact that a starving/unemployed man would most probably derive subjective utility even from a useless job does not, however, mean that I advocate any such thing, nor does it mean Keynesians do.
On the contrary, the whole point of Keynesian stimulus -- say, public works spending -- is precisely that both economically and socially useful things should be provided.
I'd go further. The war generated the income that led to the Post-War consumption boom. This was not merely a reincarnation of animal spirits, it was a creation of net income for the private sector.ReplyDelete
The war probably also had the effect of retraining people who hadn't worked in a long time: They had to show up to work groomed, rested, sober and punctually. They also had to pay attention to safety and detail on the job, especially if they worked with explosives. These habits served them well when they sought civilian employment after the war.ReplyDelete
Here is my answer:ReplyDelete
Ok LK, let’s dance ;)
Your post is based on misinterpretation and my arguments.Delete
(1) You say
""[sc. LK's] ... “one-point refutation” is only valid in the case that there was no other alternative to give jobs to unemployed people than war.. "
I do not deny that there alternatives to the war, e.g., not fighting it and implementation of a Keynesian stimulus.
What is being asserted is that *given* the conditions of the war, one can still identify a number of positive economic benefits. You do not refute my point about employment. In fact, you tacitly concede it, by absurdly shifting the issue to the war.
(2) "The only possible answer I think LK can use, is that he is defending a particular end: War against Nazism. However this does not solve the problem, because that is just an arbitrary end."
There was nothing arbitrary about the war against Hitler.
The Western democratic world was justified in waging war against Hitler in self defense. Hitler was an immoral and illegitimate tyrant and none of his wars of aggression had any legitimacy.
(3) I do not deny that there evidence that the war lowered average per capita consumption, so your "refutation" refutes nothing.
Also, even Higgs says:
" some individuals (for instance, many of the black migrants form the rural South who found employment in northern and western industry) were better off, although the average person was not. Wartime reduction of the variance in personal income—and hence in personal consumption—along with rationing and price controls, meant that many people at the bottom of the consumption distribution could improve their absolute position despite a reduction of the mean. "
(4) if Austrians really think deleveraging was an economic good, you have conceded my point.
Also in invoking forced saving you confuse "real saving" with "monetary saving."
(5) the shift in expectations does not entail accepting Higgs’ regime uncertainty at all. In fact, the shock of the depression, business failures, output loss, and debt deflationary crisis was enough to create deep pessimism in the 1930s.
(6) Vedder and Gallaway's (1991) claim that the recovery was not explicable in terms of Keynesianism is absurd.
They are thinking of aggregate demand only as consumption spending, when it includes investment spending.
"LK accuses others on “citing ad nauseam” Higgs, and maybe he is right. However by using his own criterion for example I can accuse him of citing ad nauseam Sraffa on every single discussion about ABCT in every place. "Delete
No, you can't. Because Sraffa's work in all respects is a devastating refutation of Austrianism, and I have not ignored any relevant aspect of Sraffa's work that supports Austrianism -- because there is none.
By contrast, hordes of Austrians selectively ignore certain aspects of Higgs' work that are not only consistent with Keynesianism but also a confirmation of Keynesian arguments.
Finally, say youDelete
"Lord Keynes" (LK) has two posts, and some others, trying to show something good on World War II. I must say however that I found his attempt highly unconvincing"
This implies that you think all points I have made are wrong, and that you think that no good of *any^ economic kind occurred during the war.
Yet you then concede point blank two of my points: that (1) deleveraging and (2) the shift in expectations that occurred during the war were good things.
You have now refuted your own initial argument and if you were honest you would be forced to admit that I have already correctly proven that some economic good did come out of the war.
1) I have said that if the objective was to employ people, the alternative chosen was the worst. The fact that there was a possible much better solution (something that you accepted, even when you advocated another bad solution like gov. stimulus), demonstrates that it was a bad selection. And even “given” that bad alternative, you still have enormous costs to deal with and made no net benefit at all. Nobody denies employment, what I have demonstrated (and you didn’t refute) was that you are wrong in trying to find “goodness” on that only because people had a job.Delete
2) Hitler was elected democratically. If, by legitimacy, you don’t mean a leader elected by voters and you mean respecting constitution, then there were a lot of illegitimate regimes on WWII’s years. You could have declared war to anyone of them *under your own criterion*. If selfdefense, inmorality and illegitimacy is your criteria, there were others that also fit in that description. Western democratic world was justified in waging war against Stalin in self defense. Stalin was an immoral and illegitimate tyrant just like Hitler and also menaced US many times, you could have chosen him if war was the objective. Of course this is not a defense of dictatorship in any respect, neither am I denying the facts of history. This is a critique to your arbitrary criterion of selection in order to find something “good”.
3) I explicitly did not deny that for example a very few privileged people beneficted from maximun price against the loss of a great majority. There was no net benefit at all.
4) No. I have said that even accepting it, your point does not refute Austrians. The savings in WWII were forced in the sense that state enforced people to restrict their consumption. Austrians however are talking about *voluntary* deleveraging saving.
5) Even if we accept the debt deflationary story as an important cause of the GD, Fisher wrote: “The over-indebtedness hitherto presupposed must have had its starters… Easy money is the great cause of overborrowing.” So the cause of overdebtness in 1929 was the easy money policy of precending years. The monetary expansion of 20s is one element of Asutrian explanation.
6)“Sraffa's work in all respects is a devastating refutation of Austrianism...”
No, it is not at all. Short demonstration here
Full discussion here
Yes I can accuse you. Can you deny that you cited Sraffa in every single discussion of ABCT in every place (Murphy’s blog, Selgin’s blog, Catalan’s blog, Glasner’s blog, Kuehn’s blog, Anderson’s blog, Mises community, and many more) almost every time? The reiteration is there, the same argument is there.
And of course there is no aspect of Sraffa’s work that supports Austrianism, because he was completely wrong!
Not even in keynesian terms he was right. According to Skidelsky, he “assumed full employment”: “Admittedly, Sraffa’s argument [against Hayek -GS] is incomplete, since, like Keynes at the time, he assumed full employment…”
I have not conceded the point of shifting expectations in my post. I have said that if you claim that upward expectations get US out of the Depression, then you must accept that government-driven uncertainty on expectations made the Depression last longer than what it should. Higgs has a very strong case to prove his point against other explanations.
(1) "I have said that if the objective was to employ people, the alternative chosen was the worst. "Delete
The objective of WWII was *not* to employ people: the objective was to defeat fascism. Reduction of unemployment was, however, a consequence. You're recycling the same rubbish.
(2) Whether Hitler was or was not democratically elected is irrelevant to my argument.
The "immoral and illegitimate tyrant" phrase applies to the facts of Hitler's dismantling of Weimar democracy and imposition of authoritarianism on Germany, and, above all, his international acts of aggression.
(3) You concede my point, further destroying your own argument.
(5) you are engaging in a goal shifting fallacy. You are effectively conceding my point about the economic good that came from deleveraging during WWII.
(6) your comments don't refute my argument. And shifting the debate to the rightness/wrongness of Sraffa's work is just more goal shifting fallacy.
(7) you are evidently ignorant of the fact that Post Keynesian economics and Keynes have their own subjective expectations theory.
Higgs' grossly oversimplified "regime uncertainty" one simply ignores the pessimism caused by the economic collapse of 1929-1933, to focus on the greatly exaggerated pessimism from Roosevelt's anti-business rhetoric.
In fact, Roosevelt had a great deal of business support, and opposition was limited to certain areas:
"“While encouraging the growth of big labor and ministering to the needs of the elderly and the poor, the New Deal also provided substantial benefits to American capitalists. Business opposition to Roosevelt was intense, but it was narrowly based in labor-intensive corporations in textiles, automobiles, and steel, which had the most to lose from collective bargaining. The New Deal found many business allies among firms in the growing service industries of banking, insurance, and stock brokerage where government regulations promised to reduce cutthroat competition and to weed out marginal operators. Because of its aggressive policies to expand American exports and investment opportunities abroad, the New Deal also drew support from high-technology firms and from the large oil companies who were eager to penetrate the British monopoly in the Middle East.” (Levy, L. W. et al. (eds). 1986. Encyclopedia of the American Constitution (vol. 1), Macmillan, New York. 447-448).
Most commentators agree people believe they got better during WWII. In a neoclassic analysis these means they shift their utility curve to the rigth, and got better of.ReplyDelete
If people after 15 years fell they got better, this must imply the recession was over. Denying these peoples belive/feeling is paternalism and if you accept this paternalism you must also accept that the government intervened in peoples consumptions.
Great article, and great choice of article! This was one of my favorite articles when I followed the Austrian school of thought, and even though I've tossed nearly all that away I agree this article is still good, and can help prove the Post-Keynesian point.ReplyDelete
WWII ended the great depression after all, maybe not in the way older/standard Keynesians understood it...but the massive private sector debt was paid off. This of course helped provide the "clean slate" for the post war boom: low debt, lots of savings!
Also I'm not an expert on banking/finance but I have heard Wray speak about the huge gov debt after the war also was used as leverage, I guess same as private sector leverage except gov debt is much safer/stable.
I suppose the issue is once this spot was reached, much of this was removed...thus unemployment started to creep up over time, and aggregate demand would slowly fall over time. I was not sure if the Post Keynesian Job Guarantee idea was necessary, but I now see that without a permanent job program, things basically start over.