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.