The Mass Immigration Debate within the Socialist Party of America from 1910–1912, Part 2

In part 1 here, the debate within the Socialist Party of America on mass immigration at their national convention in Chicago from 15–21 May 1910 was examined.

In 1912, the Socialist Party of America held another national convention from 12–18 May in Indianapolis.

Once again, the issue of mass immigration was discussed, and once again the committee on the immigration question produced a majority report.

Remarkably, the majority report of 1912 was even more opposed to mass immigration than that of 1910. Furthermore, the authors were not afraid to examine the issue of how racial feelings and animosities were exacerbated by mass immigration and also exploited by capitalists.

The full text of the majority report is as follows:

MAJORITY REPORT OF COMMITTEE ON IMMIGRATION
At the national congress of the Socialist Party in 1910, the Committee on Immigration presented a majority report signed by Ernest Untermann, Joshua Wanhope and Victor L. Berger, and a minority report signed, by John Spargo.

The majority report declared that the interests of the labor unions and of the Socialist Party of America demanded the enforcement of the existing exclusion laws which keep out the mass immigration or importation of Asiatic laborers.

The minority report declared that the danger from Asiatic labor immigration or importation was more imaginary than real and that, therefore, the Socialist Party should content itself with an emphasis upon the international solidarity of all working people regardless of nationality or race. The minority report did not state whether the Socialist Party should demand the repeal of the existing exclusion laws. When asked during the debate whether he favored the repeal of these laws, Comrade Spargo declined to commit himself to a definite answer.

In the course of the discussion, Comrade Morris Hillquit introduced a substitute for both reports. This substitute evaded the question for or against the existing exclusion laws, merely demanding that the mass of importation of contract laborers from all countries should be combated by the Socialist Party.

An amendment to this substitute, demanding a special emphasis upon the fact that the bulk of the Asiatic immigration was stimulated by the capitalists and for this reason should be excluded, was offered by Comrade Algernon Lee.

After a debate lasting nearly two days, the congress adopted Hillquit’s substitute by a vote of 55 against 50.

This close vote induced the congress to recommit the question for further study to a new committee on immigration with instructions to report to the national convention of 1912.

In this new committee the same alignment immediately took place. After a fruitless effort of the chairman to get unanimous action, the majority decided to act by itself and let the minority do the same.

Continued study and the developments on the Pacific Coast during the last two years convinced the majority of this committee more than ever that the existing exclusion laws against Asiatic laborers should be enforced and be amended in such way that they can be more effectively enforced. The details of the necessary amendments should be worked out by our representatives, or by our future representatives, in Congress and submitted for ratification to the Committee on Immigration, which should be made permanent for this purpose.

It does not matter whether Asiatic immigration is voluntary or stimulated by capitalists. There is no room for doubt that the capitalists welcome this immigration, and that its effect upon the economic and political class organizations of the American workers is destructive.

It is true that all foreign labor immigration lowers the standard of living, increases the unemployed problem and supplies the capitalists with uninformed and willing tools of reaction. But of all foreign labor immigration, the Asiatic element, owing to its social and racial peculiarities, is the most difficult to assimilate and mold into a homogeneous and effective revolutionary body. It is all the more dangerous to the most advanced labor organizations of this nation, because it adds to and intensifies the race issue which is already a grave problem in large sections of this country.

In the European countries the labor unions and the Socialist Party are not confronted by the task of educating, organizing and uniting vast masses of alien nationalities and races with the main body of the native class-conscious workers. Where alien immigration enters into the European labor problem, it plays but an insignificant role compared to the overwhelming mass of native workers. America is the only country in which the labor unions and the Socialist Party are compelled to face the problem of educating, organizing and uniting not only the native workers but a continually increasing army of foreign nationalities and races who enter this country without any knowledge of the English language, of American traditions, of economic and political conditions. The disappearance of the Western frontier has intensified the difficulties of labor organizations and Socialist propaganda to such a degree that it has become an unavoidable task to decide whether restrictive measures shall or shall not be demanded in the interests of the labor unions and of the Socialist Party. Since the race issue enters most prominently into this problem and has for years been the central point of restrictive legislation, the Socialist Party has been compelled to take notice of it.

Race feeling is not so much a result of social as of biological evolution. It does not change essentially with changes of economic systems. It is deeper than any class feeling and will outlast the capitalist system. It persists even after race prejudice has been outgrown. It exists, not because the capitalists nurse it for economic reasons, but the capitalists rather have an opportunity to nurse it for economic reasons because it exists as a product of biology. It is bound to play a role in the economics of the future society. If it should not assert itself in open warfare under a Socialist form of society, it will nevertheless lead to a rivalry of races for expansion over the globe as a result of the play of natural and sexual selection. We may temper this race feeling by education, but we can never hope to extinguish it altogether. Class-consciousness must be learned, but race-consciousness is inborn and cannot be wholly unlearned. A few individuals may indulge in the luxury of ignoring race and posing as utterly raceless humanitarians, but whole races never.

Where races struggle for the means of life, racial animosities cannot be avoided. Where working people struggle for jobs, self-preservation enforces its decrees. Economic and political considerations lead to racial fights and to legislation restricting the invasion of the white man’s domain by other races.

The Socialist Party cannot avoid this issue. The exclusion of definite races, not on account of race, but for economic and political reasons, has been forced upon the old party statesmen in spite of the bitter opposition of the great capitalists.

Every addition of incompatible race elements to the present societies of nations or races strengthens the hands of the great capitalists against the rising hosts of class-conscious workers. But the race feeling is so strong that even the majority of old party statesmen have not dared to ignore it.

From the point of view of the class-conscious workers it is irrational in the extreme to permit the capitalists to protect their profits by high tariffs against the competition of foreign capital, and at the same time connive at their attempts to extend free trade in the one commodity which the laborer should protect more than any other, his labor power.

It is still more irrational to excuse this self-destructive policy by the slogan of international working class solidarity, for this sentimental solidarity works wholly into the hands of the capitalist class and injures the revolutionary movement of the most advanced workers of this nation, out of ill-considered worship of an Asiatic working class which is as yet steeped in the ideas of a primitive state of undeveloped capitalism.

A proper consideration of working class interests, to which the Socialist Party is pledged by all traditions and by all historical precedent, demands that our representatives in the legislative bodies of this nation should reduce the tariff protection of the capitalists and introduce a tariff, or tax, upon unwholesome competitors of the working class, regardless of whether these competitors are voluntary or subsidized immigrants. Real protection of American labor requires a tariff on labor power and the reduction and gradual abolition of the tariff on capital. Such labor legislation already exists in British Columbia and has proved effective there.

The argument that the menace of Asiatic labor immigration is more imaginary than real overlooks the obvious fact that this menace has been minimized and kept within bounds by the existing exclusion laws, and that it can be eliminated altogether by a strict enforcement and more up-to-date amendment of these laws.

The majority of this committee realize of course, that the development of capitalism in China, India and Japan will necessarily tend to bring the American laborer into competition with the Asiatic laborer, even if the Asiatic does not come to the shore of this country. But the exclusion of the Asiatic from the shores of this country will at least give to the American laborer the advantage of fighting the Asiatic competition at long range and wholly through international commerce, instead of having struggle with the Asiatic laborer for jobs upon American soil. This will tend to abolish the labor of children and women in American factories, to maintain a rational standard of living and to reduce the unemployed problem for adult male workers.

International solidarity between the working people of Asia, Europe and America will be the outcome of international evolution, not of sentimental formulas. So long as the mind of the workers of nations and races are separated by long distances of industrial evolution, the desired solidarity cannot be completely realized, and while it is in process of realization, the demands of immediate self-preservation are more imperative than dreams of ideal solidarity.

The international solidarity of the working class can be most effectively demonstrated, not by mass immigration into each others’ countries, but by the international co-operation of strong labor unions and of the national sections of the International Socialist Party.

Socialism proves itself a science to the extent that it enables us to foretell the actual tendencies of future development.

This is the general principle that guided us in the struggle against the capitalist classes of the world. We work for the transformation of capitalist into Socialist society, not so much because sentiment, longing, dogma or argument drive us, but because we are convinced that the dominant tendencies of capitalism work in the direction of Socialism.

This point of view has been almost wholly overlooked in the discussion and practice of these ‘immediate’ policies which serve as our conscious steps in the direction of Socialism.

In our general propaganda and party organization, we work for the prophesied outcome of capitalist development and shape our actions in harmony with the foreseen probable course which the majority of the citizens will be compelled to adopt during the revolution of the human mind towards a Socialist consciousness.

Not so in discussing and acting upon, questions of immediate policy, such as the exclusion of Asiatic laborers from the United States. Instead of clearly foretelling the inevitable policy which the majority of the voters of this nation will be compelled to adopt in this particular instance, we are supposed to shape our actions in response to sentimental, Utopian or dogmatic arguments dictated by the personal likes or dislikes of a few individuals.

Instead of scientifically foretelling the inevitable logic of events, we are supposed to listen to a logic inspired by the sophistry of the advocates of unrestricted immigration.

Those who affirm the sentimental solidarity of the working classes the world over and at the same time demand a restriction of the stimulated mass importation of contract laborers admit unwillingly that this ideal solidarity is really impossible. And while they thus contradict their own sentimental assertion, they evade the real issue by an exaggerated reverence for a Utopian race solidarity.

The common sense Socialist policy under these circumstances is to build up strong national labor unions and strong national Socialist parties in the different countries and work toward more perfect solidarity by an international co-operation of these labor unions and parties. To this end the Socialist Party of America should consider above all the interests of those native and foreign working class citizens whose economic and political class organizations are destined to be the dominant elements in the social revolution of this country.

In the United States this means necessarily the enforcement of the existing exclusion laws against Asiatic laborers, and the amendment of these laws in such a way that the working class of America shall fortify its strategic position in the struggle against the capitalist class.

The majority of this committee are not opposed to the social mingling of races through travel, education and friendly association upon terms of equality. But we are convinced that the mass of the voters with the growth of social consciousness, will rather eliminate more and more those warring elements of social development which interfere with an orderly and systematic organization of industrial and political democracy. They will not be anxious to intensify the unemployed problem and the race issue, but will strive to transform the international working class solidarity from a Utopian shibboleth into a constructive policy. They will use their collective intelligence to reduce the evils growing out of unemployment and race feeling, until we shall be able to eliminate those evils altogether and strip race feeling at least of its brutalities.

This tendency is so plainly evident to the majority of this committee that we can afford to dispense with appeals to passion. This question will not be solved by a repetition of phrases, but by a conscious and instructive policy which will enforce itself as an inevitable step in the direction of working class solidarity and Socialism all world over.

ERNEST UNTERMANN, Chairman.
JOSHUA WANHOPE,
J. STITT WILSON,
ROBERT HUNTER.” (Spargo 1912: 209–211).

As we can see, the majority report of 1912 fully endorsed government legislation implementing large-scale mass immigration restriction into America.

Notably, they thought that preventing large-scale mass immigration of people with differing cultural and racial backgrounds into the United States would actually reduce racial tensions and racial prejudice. This view is rather similar to the progressive Liberal idea of that era of national self-determination as a way to reduce ethnic and national tensions.

The majority report view is stated again here:

“International solidarity between the working people of Asia, Europe and America will be the outcome of international evolution, not of sentimental formulas. So long as the mind of the workers of nations and races are separated by long distances of industrial evolution, the desired solidarity cannot be completely realized, and while it is in process of realization, the demands of immediate self-preservation are more imperative than dreams of ideal solidarity.

The international solidarity of the working class can be most effectively demonstrated, not by mass immigration into each others’ countries, but by the international co-operation of strong labor unions and of the national sections of the International Socialist Party. ….

The common sense Socialist policy under these circumstances is to build up strong national labor unions and strong national Socialist parties in the different countries and work toward more perfect solidarity by an international co-operation of these labor unions and parties. To this end the Socialist Party of America should consider above all the interests of those native and foreign working class citizens whose economic and political class organizations are destined to be the dominant elements in the social revolution of this country.” (Spargo 1912: 210–211).

How times have changed in modern Marxism, socialism and Social Democracy, where the fanatical support for open borders and mass immigration is now a religion.

BIBLIOGRAPHY
Spargo, John (ed.). 1912. Proceedings. National Convention of the Socialist Party, held at Indianapolis, Ind., May 12 to 18, 1912. The Socialist Party, Chicago, Ill.
https://archive.org/details/nationalconvention00soci

The 1870s Economic Crisis in America: Reality versus Rothbard

It doesn’t matter how many times Rothbard’s view of the 1870s is refuted, Austrians and libertarians simply continue to shun reality and repeat Rothbard’s errors (such as here and here).

It can’t hurt to review the data.

First, industrial production. The best and most recent index of US industrial production in this era is Davis (2004) (see Hanes 2013: 121), which draws on many more industrial products and services than other, older indices.

The data from Davis shows that US industrial production contacted from 1873 to 1875, then had a modest recovery in 1876, but then stagnated in 1877:

US Industrial Index, 1870–1880
Index base is 1849–1850 = 100
Year | Index
1870 | 242.97
1871 | 255.29
1872 | 275.74
1873 | 302.17
1874 | 300.7
1875 | 284.2
1876 | 294.0
1877 | 297.8
1878 | 314.0
1879 | 356.4
1880 | 400.9
(Davis 2004: 1189).

Even in 1877 US industrial production remained below its 1873 peak. On the basis of this data, Davis argued that there was a recession in the US probably from 1873 to 1875. Strangely, the real GDP estimates in Balke and Gordon (1989) only show a recession in 1874 in this decade, but Davis’s data clearly are a much better guide to what was happening in the US industrial sector then Balke and Gordon’s work, and we should go with Davis.

The data on US industrial production are best seen in the graphs below.

As we can see in the graph above, the recession and stagnation in industrial production from 1873 to 1877 are clearly visible as compared with the ten years of growth both before and after this period.

We can also see that the serious take-off in the recovery of industrial production only happened from 1878.

It is evident, then, that something went badly wrong with US industrial production from 1873 to 1877, and this is confirmed by the unemployment estimates from this period from Vernon (1994).

As we see here, unemployment was rising from 1873 and kept on rising until 1878. That would strongly confirm that the US economy was in recession in these years or at the very least was stagnating (another point is that, on the basis of analysis of the 1890s and the likelihood that 19th century labour force participation rates were countercyclical in the sense of rising during recessions, there is at least a reasonable case that Vernon’s data seriously underestimates US unemployment in the 19th century, so that the real unemployment rate for the 1870s may have been considerably higher).

All in all, then, it is not possible to claim that the US economy was booming in these years.

Now compare the facts above with the ignorance of Murray Rothbard:

“Orthodox economic historians have long complained about the ‘great depression’ that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged ‘monetary contraction’ never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.

It should be clear, then, that the ‘great depression’ of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, free-market capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too) economic growth, and the spread of the increased living standard to all the consumers.” (Rothbard 2002: 154–155).

Rothbard makes the following claim about our relevant period:

“Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income.” (Rothbard 2002: 154–155).

Of course, if one wants to define “depression” as a fall in real GDP of 10% or more (a definition which I accept), then it is likely that the 1873 to 1879 period was not an era of depression. Rather, it was most likely a period of serious recession (where “recession” means a fall in real GDP of less than 10%) and then stagnation of industrial production and rising unemployment, and probably pessimistic business expectations leading to deficient investment.

Moreover, Rothbard is wrong on the following points:

(1) there was no large expansion of industry in this period: our best data shows industrial production was in recession from 1873 and then stagnated until 1877. Indeed for the 1870s as a whole there were 4 years in 1873, 1874, 1875 and 1877 when industrial production was in recession or essentially stagnating.

(2) if industrial production was in crisis, then it is very difficult to see how there could have been a “large expansion” of “physical output” or “net national product” in these years, despite the real GDP estimates of Balke and Gordon (1989: 84): they estimate that average real GDP growth from 1873 to 1877 was 2.8% (which in any case is far lower than Rothbard’s estimate). If real GDP was experiencing such growth rates, one must ask: which sectors were growing? Clearly the industrial sector was not.

(3) there was no “extraordinarily large expansion of … real per capita income” in the relevant period. Even if one accepts the estimates of Balke and Gordon (in Maddison 2006: 87–89) the average real per capita GDP growth rate from 1873–1879 and even from 1871–1880 was just 1.64%: one of the lowest growth rates of all time in relevant periods of economic and historical significance in US history.

(4) finally Rothbard never considered unemployment, which by one influential modern estimate by Vernon (1994) began rising from 1873 and kept on rising until 1878.

Our inescapable conclusion is that the Austrian claim – derived from Rothbard – that the 1870s were an uninterrupted era of “prosperity …[,] economic growth, and the spread of the increased living standards” is an outright historical travesty.

And while Rothbard might claim that he did the best with the data he had at the time (e.g., older and now discredited data from Friedman and Schwartz 1963), that is no excuse for modern Austrians repeating his false and flawed analysis today.

Further Links
“Rothbard on the US Economy in the 1870s: A Critique,” September 24, 2012.

“US Unemployment Graph, 1869–1899,” February 27, 2013.

“Huerta de Soto gets it Wrong on the Gold Standard,” December 20, 2014.

“Libertarian Gold Standard Myths Never Die,” January 13, 2015.

“Real US GDP 1870–2001,” January 13, 2015.

“US Real Per Capita GDP from 1870–2001,” September 24, 2012.

BIBLIOGRAPHY
Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790-1915,” The Quarterly Journal of Economics 119.4: 1177–1215.

Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Friedman, M. and A. J. Schwartz, 1963. A Monetary History of the United States, 1867–1960. Princeton University Press, Princeton.

Hanes, Christopher. 2013. “Business Cycles,” in Robert Whaples and Randall E. Parker (eds.), Routledge Handbook of Modern Economic History. Routledge, Abingdon, Oxon and New York. 116–135.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.

Newman, Patrick. 2014. “The Depression of 1873–1879: An Austrian Perspective,” Quarterly Journal of Austrian Economics17.4: 474–509.
https://mises.org/library/depression-1873%E2%80%931879-austrian-perspective

Rothbard, Murray N. 2002. A History of Money and Banking in the United States. Ludwig von Mises Institute, Auburn, Ala.

Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.

Were Nominal Wages Flexible in 1890s and Early 1900s America?

There is some empirical evidence that they were not.

Sundstrom (1990) looks at industrial wage data from the Ohio State Bureau of Labor Statistics (BLS) during the recessions of 1893 and 1908 and finds considerable wage rigidity even at that time.

In 1893, Cincinnati manufacturing employment contracted by over 16% and factories reduced working days by 9.2% between 1892 and 1893, but Sundstrom found that 77.1% of manufacturing workers experienced no change in nominal wages, and what evidence that exists for 1894 and 1895 also indicates that wage cuts were small in these years too (Sundstrom 1990: 312–313).

Given that deflation occurred in 1893 until 1898, this would suggest that many workers’ real wages probably rose.

In the data for the severe recession of 1908, Sundstrom (1990: 314) finds that, throughout Ohio, 6.37% of industrial workers experienced wage increases, while only 7.36% experienced wage cuts. This suggests that most workers experienced no nominal wage cuts.

Overall, Sundstrom (1990: 314) finds that nominal average hourly earnings only fell by about 1% between 1907 and 1908.

Sundstrom (1990: 310) concludes that as “early as the 1890s, Ohio employers were much more likely to respond to downward demand fluctuations by reducing employment, days worked, and hours than by reducing wage rates.”

To put this into a broader historical context, we can turn to Hanes (1993). Hanes concludes that 19th century American nominal wages had already become relatively inflexible by the 1890s (Hanes 1993: 733–734).

His explanation for this is as follows:

“The years between the … [sc. American Civil War] and World War I saw little or no increase in the fraction of workers belonging to unions. Countercyclical macro policy did not exist; wage contracts were extremely rare, and unenforcible. On the other hand, the period was one of enormous change in the structure of product and labor markets, associated with the spread of large-scale industrial production. Production workers in the new industrial establishments, whether or not they were formally unionized, were likely to strike against nominal wage cuts in downturns. I argue that firms learned to avoid, or at least delay, nominal wage cuts in downturns. I present evidence that firms in industries that had suffered especially large numbers of strikes in the 1880’s were less likely to cut nominal wages in the depression of 1893.” (Hanes 1993: 733–734).

The crucial point here is that this development cannot be blamed on trade unions because they were weak in the late 19th century in terms of numbers and membership, they faced hostility from the courts and government, and even when they existed they could not generally create binding legal employment contracts with employers, because the courts did not recognise them (Hanes 1993: 750–751).

Hanes (1993: 751) contends that strikes were a widespread phenomenon amongst non-unionised workers, and that it was the spread of large-scale manufacturing firms with numerous workers that was itself that main factor that caused labour strife and the increasing wage rigidity accepted by private firms.

What is the lesson? It is that people, generally speaking, have shown a strong propensity to oppose nominal wages cuts since at least the late 19th century, and private businesses themselves – even with the incredible amount of violence against labour in those days – were coming to shun nominal wage cuts to avoid troublesome labour difficulties.

Nor can trade unions or governments be blamed for this phenomenon.

BIBLIOGRAPHY
Sundstrom, William A. 1990. “Was There a Golden Age of Flexible Wages? Evidence from Ohio Manufacturing, 1892–1910,” The Journal of Economic History 50.2: 309–320.

Hanes, Christopher. 1993. “The Development of Nominal Wage Rigidity in the Late 19th Century,” The American Economic Review 83.4: 732–756.

The Success of America’s Command Economy in WWII

Here is an astute author on America’s command economy during the Second World War:

“In 1940 and 1941 the economy was recovering smartly from the Depression, but in the latter year the recovery was becoming ambiguous, as substantial resources were diverted to war production. From 1942 to 1944 war production increased rapidly. Although there is no defensible way to place a value on the outpouring of munitions, its physical dimensions are awesome. From mid-1940 to mid-1945 munitions makers produced 86,338 tanks; 297,000 airplanes; 17,400,000 rifles, carbines, and sidearms; 315,000 pieces of field artillery and mortars; 4,200,000 tons of artillery shells; 41,400,000,000 rounds of small arms ammunition; 64,500 landing vessels; 6,500 other navy ships; 5,400 cargo ships and transports; and vast amounts of other munitions. Despite countless administrative mistakes, frustrations, and turf battles, the command economy worked. But, as always, a command economy can be said to work only in the sense that it turns out what the authorities demand. The U.S. economy did so in quantities sufficient to overwhelm enemy forces.” (Higgs 1992).

That is correct.

But who is the author of this passage? Some “statist”?

It is none other than the libertarian Robert Higgs, who is cited ad nauseam by other libertarians, but I doubt whether many bother to cite this passage. (As an aside, I have a sneaking admiration for Higgs for reasons which I will perhaps explain in another post.)

Now once it is understood that command economies were mostly run on the basis of “planners’ sovereignty” and not “consumer sovereignty,” the debate about whether command economies “work” either in a theoretical and empirical sense becomes much more interesting than the tired and grossly exaggerated themes of Mises’s Socialist Calculation Debate.

Some command economies failed. Others have succeeded. The former communist states like the Soviet Union did not operate their economies on the principle of “consumer sovereignty.” These were command economies with production decisions by planners. If one assumes that the output of the command economy is planned by administrators by their own designs, then one will have to measure the success of their planning by whether the output produced did actually match their plans.

The Western command economies during WWII in America, Canada, the UK, Australia and New Zealand were very successful indeed: they more or less produced what was planned and won the war for Western democratic civilisation.

BIBLIOGRAPHY
Higgs, Robert. 1992. “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s,” Independent Institute, March 1
http://www.independent.org/newsroom/article.asp?id=138

Michael Pettis on the History of the Chinese Growth Model

Michael Pettis has a fascinating post here on the nature and history of the growth model adopted by China over about the past 30 years:

Michael Pettis, “A Brief History of the Chinese Growth Model,” Michael Pettis’ China Financial Markets, February 21, 2013.

It should be read with the comments of Matias Vernengo here.

In short, Pettis points out the similarity of the Chinese growth model to that of America in the 18th and 19th centuries: the protectionist and interventionist model of Alexander Hamilton, Friedrich List, Henry Clay, Henry and Matthew Cary, and John Calhoun, what was at that time called the “American System.” It emphasised:

(1) infant industry protectionism and tariffs;

(2) internal development or what we now call public infrastructure, often through government investment, and

(3) a modern financial system.

I would depart from Pettis on point (3), in the sense that the US banking system in the 19th century was much more unstable and crisis-prone than other systems, and its more laissez faire nature imposed significant costs such as a bias towards debt deflationary dynamics in the 1870s and 1890s.

A very significant point is that 19th century Meiji regime in Japan used the services of the E. Pechine Smith and a stream of others – all the second generation proponents of the “American System” – as advisers in their industrial policy that sent Meiji Japan on the road to industrialisation.

The astute Japanese followed the successful model of state-led growth pioneered by the US (and to some extent late-19th-century Germany and other nations). That model was refined and developed after 1945 by Japan, South Korea, and Taiwan in the import-substitution industrialization (ISI) model, and now in a new form it has been continued by China.

Nor is China proof of the success of the orthodox policies of globalisation, because China simply did not, and does not, follow those orthodox policies. How can a country with capital controls, state-owned banks, a pegged, undervalued currency (as a mercantilist policy to boost exports), a large state-owned industrial sector, subsidies to key domestic industries, huge non-tariff barriers, and an activist industrial policy be an example of the success of globalisation? Nobody doubts that liberalised foreign direct investment and international trade have been major factors in the success of China, but one cannot look at these policies in isolation. One only needs to look at the use of industrial policy in China as noted, for example, by Clyde Prestowitz many years ago in some insightful work.

In general, a crucial difference between East Asian nations and the US is that East Asia turned towards export-led growth (outward-oriented ISI) as a fundamental driver of development. The downside is that this often leads to not enough domestic consumption and social services.

As far as I can see the United States pursued more balanced development, because by the late 19th and early 20th centuries it had turned away from the export-led growth model to much greater reliance on internal markets and domestic demand.


More Reading

Matias Vernengo, “Is China Buying the World?,” Naked Keynesianism, October 20, 2012.

Matias Vernengo, “On 'Free' and Managed Trade, Naked Keynesianism,” October 8, 2011.

Clyde Prestowitz, “China as No. 1,” American Prospect, February 21, 2005.

The Post-1945 Boom in America

Russ Roberts drags up the mistaken prediction that Paul Samuelson made during World War II and complains:

“I don’t know what private aggregate demand means, or the phrase “pent-up” demand. The usual way that Keynesians explain the post-war expansion despite the huge cut in government spending is to say, well of course the economy boomed, there was a lot of pent-up demand. What does that mean? There is always pent-up demand in the sense there is a stuff I wish I could have but can’t. But the standard story is that people couldn’t buy washing machines or cars during the war–they were rationed or simply unavailable or unaffordable. So when the war ended, and rationing and price controls ended, people were eager to buy these things. But the reason these consumer goods were rationed or unavailable is because all the steel went into the tanks and planes during the war. So when the war ended, there was steel available to the private sector. That’s why cutting government activity can stimulate the private sector.”

Russ Roberts, “Keynes vs. Reality-2,” July 14, 2011

To which the response should be: and how is this inconsistent with Keynesian economics?

Americans had accumulated vast savings during the war: some $100 billion by 1944 including $43 billion in savings and money.

But American consumers could not spend the money on consumption during the war, owing to shortages, rationing and the fall in production of consumer goods. Unless you seriously believe that the desire to consume — to satisfy your subjective utility preferences by buying commodities — does not rise with income, then the meaning of “pent up” should be obvious: it means the desire to purchase consumer goods but being unable to buy them, even though you have the money.

When the war ended and the wartime command economy was dismantled, resources were freed up for reconversion to a peacetime consumer economy, and there was a totally atypical downturn in 1945 were GDP fell by 12.5% between February and October:

“The decline in government spending at the end of World War II led to an enormous drop in gross domestic product making this technically a recession. This was the result of demobilization and the shift from a wartime to peacetime economy. The post-war years were unusual in a number of ways (unemployment was never high) and this era may be considered a ‘sui generis end-of-the-war recession’.”
http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

Samuelson feared that there might be a return to long-term depression after this conversion: he was wrong. There was the massive surge in consumption after 1945 using accumulated savings, and income rose even more after the 1945 tax cut of $6 billion, passed in November. The post-war growth to 1948 was an entirely predictable development consistent with Keynesian economics.

In 1943 — the same year Samuelson got it wrong — Keynes was giving a lecture at the Federal Reserve and was asked by Abba Lerner about the possible economic problems of the post-war period. Keynes’s reply is significant:

“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.”
D. C. Colander and H. Landreth (eds), The Coming of Keynesianism to America, E. Elgar, Cheltenham. 1996. p. 202.

In other words, Americans now had the security of welfare programs that allowed them to free up more of their income in spending.

What kind of analysis of the post-war boom ignores what Keynes — the founder of Keynesian economics — thought about this question? Samuelson was simply wrong; Keynes was right.

Another problem for Austrians is this: there was a very sharp rise in government spending from 1948 to a 1953? Why?

The second post-WWII recession extended from November 1948 to October 1949. Truman’s budget surplus of 4.6% of GDP in fiscal year 1948 fell to 0.2% in fiscal year 1949, as spending went from $29.8 billion in 1948 to $38.8 billion in 1949, as automatic stabilizers kicked in. In fiscal year 1950 (July 1, 1949 to June 30 1950), the budget went into an actual deficit of 1.1% of GDP. Moreover, Congress had pushed through a tax cut in 1948, which boosted private spending in 1949. What we have here is classic Keynesian countercyclical fiscal policy.

Some of the increases from 1950–1953 were, of course, related to the Korean war, but also to new social, welfare and military programs enacted under Truman. Government spending in both absolute terms and as a percentage of GDP surged from 1948 to 1953, fell slightly from 1953–1954 as the Korean war ended, but remained between about 25% and 30% of GDP throughout the classic era of Keynesian economics (1945–1973), as can be seen here:

US Government Spending as Percent of GDP: 1903–2010.

Yet the economy continued to boom despite the historically unprecedented levels of government spending in absolute terms and as a percentage of GDP.