“If spending on munitions really makes a country wealthy, the United States and Japan should do the following: Each should seek to build the most spectacular naval fleet in history, an enormous armada of gigantic, powerful, technologically advanced ships. The two fleets should then meet in the Pacific. Naturally, since they would want to avoid loss of life that accompanies war, all naval personnel would be evacuated from the ships. At that point the US and Japan would sink each other’s fleets. Then they would celebrate how much richer they had made themselves by devoting labor, steel, and countless other inputs to the production of things that would wind up at the bottom of the ocean.”
– Thomas E. Woods Jnr, in Meltdown: A free market look at why the stock market collapsed, the economy tanked, and government bailouts will make things worse. (Page 105).
This is a marvellous, succinct and pretty devastating indictment of bailouts and an excellent little primer on the Austrian school’s analysis of the business cycle and the role of money. I thought I knew quite a lot about the subject but this book explains the idea of money, as a claim on resources, and the importance of understanding the balance of supply and demand for savings, quite beautifully. The book also highlights how the sharp recession of 1920-21 ended with no bailouts and is an episode that seems to baffle Keynesians.
Rather amusingly, this has been a New York Times best seller, much to the chagrin, no doubt, of NYT columnist Paul Krugman. Krugman, needless to say, believes that the sort of massive government spending seen during WW2 helped end depression. To think that he actually won a Nobel. Oh, wait a minute…
Surely these nations could make themselves even richer by scrapping the battleships in the shipyards. That way the steel and other materials could be re-used to make more battleships.
Battleships would then be destroyed much more quickly and so the nations would become colossally rich. And all that recycling would be good for the environment.
Since they’d also be disarming, there’d be Peace Prizes all round!
Krugman did some mighty fine economic analysis back in the day, before he was a political hack for the dems. Which is what he got the Nobel for.
Just to play Lucifer’s Lawyer here, it’s not the destruction of assets but the killing people that boosts the economy, by increasing the wages of those lucky enough not to be killed. A smaller, richer population is to be preferred to a larger, poorer one because it has more disposable income.
Just think what a difference it would make to the UK economy if all those career claimants disappeared overnight. Taxes would plummet, as would rents and probably crime, too.
Not advocating it, mind. Just saying.
Erm, no, RayD. For now, war does not quite have the surgical precision needed to target career claimants only. On the contrary, it tends to kill young men just at the point in their lives when they can be expected to become productive.
Even if war did kill a representative sample of the population, it wouldn’t boost the economy. Sure, the supply of labour goes down, but so does the demand, in equal proportions. If anything, it is going to hurt the economy as division of labour is reduced.
Thanks for your reply, lukas. What prompted my comment was the vague recollection that the Black Death was said to have boosted the European economy, though it’s quite possible I misunderstood.
I’m not quite convinced demand would fall in line with the decrease in population as there would be smashed things to replace and export orders to fill from countries not involved in the war.
I was, of course, being completely facetious about welfare claimants, God bless ’em.
RayD, your recollection is correct. In a Malthusian economy (i.e. pre-industrial revolution) any increases in output are eaten by increases in population, and, symmetrically, any decreases in population lead to a larger amount of per capita output for the remaining populace. I can provide links if you are interested.
We don’t live in a Malthusian economy any more, however, and killing off large numbers of your working population and seriously maiming the rest is unlikely, ceteris paribus, to do much for your economy.
If I recall, the Black Death did not boost the economy per se; however, it raised the wage of agricultural labor, forcing the elites to distribute the economic surplus a bit more evenly, and allowing a middle class to start coalescing. So goes the argument, anyway.
I suspect the real reason is that trade with Asia started to pick up, which stimulated the growth of the financial system. Back then, you could make incredible profits with long-distance trade.
£1 billion in 1941 pounds were transferred from Britain to the US in 1941 alone – not just in currency either, but things like firesales of British businesses at knockdown prices. Lend-Lease loans only happened after the British Empire had exhausted it’s ability to pay.
It was probably one of the biggest asset strips in world history – even someone as singlemindedly determined as Churchill complained about being ‘cut to the bone’.
That surely had something do with the US recovery…
The Black Death boosted the per capita share in economic output by reducing the number of people that output was divided between, thus increasing living standards for those remaining.
To put it another way, imagine that the economy is a pie, and that the maximum number of people that the pie can support is ten. If the Black Death kills half these people, the survivors have just doubled their share in economic output: twice as much pie for no extra effort! (This effect is ultimately temporary due to the logic of the “Malthusian trap”, since an increase living standards will lead to a reduction in mortality rates and eventually society will return to its previous equilibrium of ten people to one pie).
Well, yes, smashed things have to be replaced. But that comes back to the point made in the OP: Everyone would be better off if things hadn’t been smashed and they were free to use their surplus in other ways. Replacing smashed things, after all, has to be paid for, and it is evident that the rising post-war demand in, say, the construction sector will come at the expense of demand in the hookers’n’blow sector.
Countries not involved in the war affect both sides of the equation as well… they will import and export goods.
Destruction of capital (human or otherwise) is not the way to prosperity.
Which succinctly describes probably the most pernicious and persistent economic fallacy in human history. Economies are not pies. If you take a half of pie and I take half of the same pie, we both get a piece of pie… if you take a bigger piece, that means I get a smaller piece… i.e. it is a zero-sum game. It is also a piss poor economic analogy.
However me selling a pie to you in return for a groat creates a net increase in value for both of us, because you get a pie that you value more than a groat and I get a groat that I value more than a pie… it is a win-win, not a zero sum game.
Economies are not pies and the black death did not create more pie-per-person by killing half the population… in fact it halved the size of the pie buying market and halved the number of pie producers 😛
More seriously it made feudalism untenable by hugely increasing the price of now scarce labour, which had several long term benefits, but killing half of the population does not double the wealth of the survivors.
Malthus was wrong even when he wrote what he wrote, let alone later, because it ignores adaptation to circumstance, which is hardly confined to modern times. His views only make sense if there is a static state over a very wide range of variables (Easter Island for example).
As long as technology and techniques of trade and distribution are not prevented from adapting by political actions (and in cultures where several action is less stifled by collective impositions (i.e. politics in its various forms), generally the more adaptive innovation occurs per extra person, which is why not all cultures can cope with population increases as well as others)… but in crude terms, more people generally means a bigger and more varied market and more different several choices being made… and thus more brains struggling to optimise their conditions as they adapt to changing circumstances, producing an increased chance of discovering appropriate adaptive behaviour which others can mimic or improve on.
Vimothy, economy is not a pie that supports those 10 people, rather the 10 people both produce and consume the pie. In other words, there is no pie, it’s just 10 people producing and consuming each-other’s production. If half of them die, the remaining half will consume any existing surplus and get fatter, that’s all. There still will only be 5 people left to produce stuff. So the effect of war/plague, all other things being equal (they never are) is an economy that is smaller by half.
Perry, you have brutally misunderstood what I wrote. Prior to the industrial revolution, the economy was stagnant, and innovation free. Living standards were basically constant for the whole of history. Any increase in productivity simply lead to a decrease in mortality and the per capita share in output remained the same. This is pretty well documented in empirical studies. Have a look at the first chapter of Greg Clark’s Farewell to Alms.
Then we had the industrial revolution and this thing called “the great divergence”, where some economies escaped the Malthusian trap and became very wealthy, i.e. the pie got a great deal bigger, and some did not. Those countries that did not achieve the velocity needed to escape this trap, did not escape. However, this certainly wasn’t because they didn’t have a large enough population. The issue of population size and after-effects of schedule shifting events like the Black Death is not completely unrelated, but too complicated to go into here.
The single point to take away from this—and this is the reason for my “pie” metaphor—of course I do not think that the economy is literally a pie—is that, for primitive economies, if you hold the absolute level of output constant and reduce the population, per capita share in output must increase. It’s just basic maths: if the numerator stays the same and the denominator shrinks the quotient will be bigger in size.
Alisa: I’ll try to explain it as simply as possible. Let the population equal 10. Hold absolute output, Y, constant. Per capita share of output is therefore Y/10. Let half the population die from the Black death, such that population is now 5. The per capita share of output has therefore increased from Y/10 to Y/5. Nothing to do with how one conceives of the economy. Just basic division.
Now, the economy will return to its long run pre-industrial equilibrium (here Y/10), because the economy in its pre-industrial form (i.e. the factors of production are fixed, so output is limited) will always max out at whatever level of population it can sustain. An increase in living standards like this will be temporary as it leads to a reduction in mortality and the population size returns to its pre Black Death norm.
For your story to make sense there must have been no industrial revolution, no great divergence, just constant growth throughout history. Is this reasonable?
Regarding WW2, I think we can all agree that it was fantastically destructive in real terms, and it’s not exactly something to be wished for. But the thesis isn’t that devoting most of the world’s output for six years to killing each other produced economic benefit, it’s that it kicked everyone’s ass psychologically out of the rut of the Depression.
The one bit of Keynesianism that makes sense to me is that what people think matters to economics – it doesn’t matter if an investment will make you money if you don’t think it will, because you won’t make it. When you have an economy built on hoarding against things getting even worse, and taking minimal risks, you’re not going to get much improvement. A big war gets people out of that mindset, and convinces them to start doing stuff again, which can lead to economic recovery. It’s hardly the optimal solution – 16 wasted years, with 60 million dead bodies to show for it, is not my idea of a good time. We all know it would have been better if idiots like Hoover and FDR hadn’t been in charge and made the problem far worse than it ever needed to be. But it did end the Depression, and largely for the sort of reasons that a Keynesian would have predicted. Not because destruction is good, but because it gets people to think like workers and investors again.
And Perry, economies are not pies, but in the 1350s, it’s not half bad as an approximation. Sustained, meaningful economic growth in that era was virtually unheard of. And really, what the Black Death did(among other things, of course) was increase the amount of good land per capita, meaning less marginal land getting farmed, which means more food per farmer, which means that you actually have a growth in the amount of non-food production per capita. In other words, it didn’t redistribute the “pie” more widely, it redistributed natural resources, which are essentially fixed.
Hooray for Alsadius!
How much simpler and more direct is Frederic Bastiat in his essay Exchange . published in English in Economic Harmonies. Mine is the FEE edition of 1964; But you can Google or Bing it.
Larger bodies of people provide the potential (not always realized immediately – e.g., China) for expansions of exchange (varieties, volume & velocity).
This is seen in the factors of “Globalization” in our times, and was seen in the benefits of earlier “Free Trade” eras (1840-1914).
A principal effect of the decimation of populations in what are today advanced and “free” societies were the pressures upon the then “Elites” to provide greater open access to larger segments of the peoples, providing them with access to a “Rule of Law” that had been established and maintained exclusively for the elites, and allowing for greater opportunities for the formation of “perpetual” organizations by more kinds of people.
There is a recent (?) book about why the Industrial Revolution took hold in England vs. the Continent at the time. It is premised on the flow-through effects of population reduction (the immediate effects were subsistence living) and the greater value of labor; which begs the question of “labor for what, to what ends?” The answer is to exchange labor or service for other services.
What war did in the U.S. was to stop the floundering, retarding, damaging programs attempting further progressivism (see, The Forgotten Man by Amity Shlaes). It also broke the stagnation in exchanges (even though the replacement exchanges were not ultimately accretive in durable transferable assets [wealth]).
Alsidius –
Though we have not yet disproved the matter can neither be created nor destroyed, we have learned that natural resources are NOT essentially fixed
Julian Simon vs. Paul Erlich
Vimothy, how can output stay constant when half the (supposedly mostly productive) population is gone? Even accounting for Alsadius’ point about newly-available land, you still need people to farm it, no? Unless you are saying that prior to the epidemic Europe was seriously overpopulated?
Yes of course the more primitive the system, the less reliably and (above all) quickly it can respond to changes (such as population increases or crop failures).
The improvements that support population growth are not purely technological. Banking, factoring, futures, limited liability companies, maritime insurance, improved crop rotation, etc etc… these are all things that have their roots in various forms well before the industrial revolution and why even long before the sophisticated extended order of modernity, Malthus was on shaky ground unless his views were applied in focused examples (i.e. it can indeed predict disaster meaningfully within a limited frame of variables, such as time). It is not that Malthus was ‘wrong’ so much as it tells you relatively little about a system the more open it is and the more technologically sophisticated it is, because societies tend not to be ‘static state’.
It lowered the price of ‘good’ land by lowering demand, for sure, but that is just about the only natural resource that is essentially fixed (i.e. un-substitutable). The next time the population reached the pre-Black Death levels, improved trade, technology and organisation completely changed the equation, as indeed it usually keeps doing.
But regardless other than changing who benefited from the better land, it is hard to see how much net benefit accrued from the mass die off.
Perry, why does the spambot hate me so much lately?
You folks really ought to sort out your smitebot. I’ve had several detailed replies eaten completely while a throw away single line comment gets through no problem. I’m not posting spam, so why can’t I take part in the debate?
Perry: I’m not talking about theory, I’m taking about what actually happened historically. Yes, markets are great, but how do we explain the phenomenon of economic growth, which was initially limited to a few states–do you believe that the industrial revolution took place? If so, what was the difference in economies before and after the fact?
If your story is correct, there would be no discontinuity, since growth would be unfettered throughout history and across states. But that is not the case. If we look at the data, they show us that living standards were relatively constant until the “great divergence”, when living standards in the industrial world started to increase, and have not stopped since.
This is, certainly in the main, because we developed the economic and political system that we have now, liberal, capitalist democracy. The two states, before and after the industrial revolution, are not the same.
The term “Malthusian economy” merely describes the state before the fact (of the IR). It does not imply any judegment, ideological or otherwise, about the efficacy of markets. In an agricultural, feudal economy, where almost all the population is growing food with a fixed set of assets (land and technology) and where there is almost no innovation (a guild system designed to prevent it, e.g.), total output is fixed, and so the per capita share of output is fixed. (The economy in such a state is not dynamic. Not all economies are dynamic modern capitalist economies). Any external shock to the population level is going to result in a temporary increase in living standards, as the the fixed amount of total output is shared between fewer people.
This effect cannot last in the long run because the improved living standards will result in lower mortality rates and thus the population will increase back to its equilibrium level. Until the industrial revolution.
I can post links to the relevant data if you’re smitebot will let me.
Ah, sorry, my comments seem to have actually appeared now. I will stop moaning.
Alisa: the effect of the Black Death was not permanent. Excess output (think of it as an inventory overhang) was consumed by the survivors and lower infant mortality rates returned the population to equilibrium levels, over time.
Europe was not overpopulated prior to the Great Depression. In an agricultural economy, total population is not determined by the number of people needed to farm a set amount of land, but by the number of people a set amount of land can support.
Oh and as we are getting progressively off-topic, please keep in mind what we *are* discussing, and it ain’t actually Malthus, it is the notion that war is “good” for the economy other than in the loot-the-loser sense.
Ok. Woods’ argument is a bit specious. No one is claiming that war makes you wealthy, or that is good for the economy. The claim is that increased government spending helped pull the economy out of the Great Depression. It seems to me that if you define nominal GDP as the monetary base multiplied by the velocity, any shortfalls in nominal GDP can be made up for through increases in the monetary base (currency depreciation after leaving the gold standard, e.g.) or increases in the velocity of money (stimulus spending for the war, e.g.).
I think that this is straighforward. The exact contribution of fiscal relative to monetray policy, that’s another matter, but I don’t understand why anyone would think either had and has an effect.
For “either”, above, read “neither”. Doh!
No one has ever claimed that? You’re joking, yes?
vimothy, I haven’t had any nominal GDP lately, but I heard it tastes great on chicken with baked potatoes and steamed green beans.
Woods’ argument is far from specious. It’s an example of the classic reductio ad absurdum technique, exposing the proposition under discussion for the fallacy that it is. It is really just a variant on Henry Hazlitt’s famous “Broken Window(Link)” fallacy.
Uhm…
At issue is whether or not fiscal stimulus can offset a fall from potential output. The fact that the cause of the stimulus was for munitions is of no consequnece. Of course, repeated fiscal stimulus programmes is probably not a good basis for sound economic management. But you needn’t suggest that it is to think that it might help to raise nominal GDP and reduce unemployment in a deflationary spiral and liquidity trap.
On the contrary, what it means is means is the quote was aimed directly at you. Blowing up ships or firing off a vast tonnage of ammo at nothing in particular (or even at something in particular) are functionally the same in economic terms because neither are economic goods which are being use to exchange value.
The money used to fund their creation is either taken out of the economy honestly by appropriative taxes or even more harmfully just printed without any basis in future economic production and this extracted indirectly from the economy by devaluing savings.
It’s not that hard to grasp. As a general rule, building munitions will not make your country “wealthy”, that’s true and as far as that goes, I agree with Woods. However, this doesn’t mean that Krugman is wrong. What we want to know is, in the Great Depression, did stimulus spending help the recovery. It does not matter what the money was spent on. It could be spent on anything. A bubble in housing, for instance, would have the same effect: raising nominal GDP and reducing unemployment.
In normal circumstances, this is, as we have seen, bad policy, but in a depression, with price deflation and some form of liquidity trap, raising nominal GDP and reducing unemployment should be the goal of all sane policy.
Ummm – at the risk of some simplification, WWII helped to get the planet out of the Great Depression by persuading governments (and populations) to focus on increasing available energy supplies and on increasing the production of valuable goods from more basic resources … immediately prior to WWII, the unemployed had more often been ‘soaked up’ in make-work projects …
The equivalent non-war efforts today would be to put resources into building more nuclear power sources (and doing less blocking of projects to build said nuclear power sources), employing more people in increasing domestic production of fuel for transportation (drilling jobs, refining jobs), and helping companies that produce salable tangible goods to prosper and employ more people productively …
Of course, this would mean that there would be less resources available to give to ‘community organisers’ – and “We Cannot Have That, Now, Can We ?” …
vimothy’s argument is classic Keynes: in a depression, just have the government spend money. Hey, presto: nominal GDP rises and unemployment falls. It’s magic!
Except that it’s not. What it is, is economic illiteracy. Keynes was no economist (he never claimed to be), and all he did was recycle long-discredited ideas into a ready-to-eat package ideally suited to the tastes of politicians whose only real goal is increased power. That fact that these ideas are swallowed whole by said politicians (and by such as vimothy) doesn’t make them any less discredited, or any more rational.
Government spending has to come from somewhere, since government produces no value. By definition, it comes from more productive uses, which therefore never happen (c.f. Hayek’s Broken Window fallacy above). It’s called “crowding out”. So even in a depression, the goal of “sane policy” should be minimizing barriers to economic growth (i.e., reducing taxes and governmental spending). Flushing money down a toilet, through make-work programs and illusory “stimulus” plans, is the polar opposite of a “sane policy”.
Wrong in every respect. The sharp recession of 1920-21 was ended without any such stimulus, which, as I pointed out in my original posting, baffles Keynesians. Other recessions have ended without such actions being taken. And yet the multi-decade stagnation in Japan has been accompanied by a host of stimulus packages, none of which seem to have worked.
If the war reduced unemployment, then it is not hard to do if you put a massive number of young work-age men into the army. And as Woods says, during wartime, when the government siezes control over an economy, GDP statistics are not really comparable to those of peacetime anyway, so I’d be careful about them.
It does, of course say rather a lot about the mindset of Keynesians and others, and their lust for power, that the “war ended the Depression” should be something they like to espouse. The idea that the animal spirits of entrepreneurs and consumers is stimulated by the prospect of war is bizarre, to say the least.
Nearly as bizarre as claiming that the Black Death was a great thing for the advance of Western civilisation. Please.
Laird: neither Hazlitt nor Hayek, but Bastiat.
The answer to all the above is much more simple. The War didn’t end the depression.
What ended the depression war the POST WAR production, when all the idiotic and interventionist policies of FDR were scrapped, and a freer economy was allowed to take off.
The War helped by providing a mental setting for scrapping all the old nonsense and making a new start.
Production levels returned to their pre1929 level only around 1955, a full 10 years after the war.
By the way, Germany, too, prospered after the war. No sane person, not even the usually insane economists, would credit the war with producing the German economic miracle. It wasn’t the war, it was the free market policies adopted by Ludwig Erhard, against the explicit advice he received from the American administrators, after the war.
The mere fact that most main-stream economist can, and do, hold a deep belief in the myth that the war ended the depression shows that they don’t have a clue, then or now.
As to the Black Plague – the reduction of the population can help the survivors improve their lot by getting a bigger share of the already existing goods, that were just produced, for a bigger population. This is a very short-term effect. Once these goods have been consumed, the lower population reduces economic activity and wellbeing.
In the USSR there was an acute shortage of housing; sending tens of millions to the gulag alleviated the housing problem for those who remained. Maybe also the unemployment problem.
Jacob: Yes, all those idiot academics with their PhDs and peer reviewed papers and Nobel Prizes–what the hell do they know about economics anyway? Haven’t they read Amity Shlaes?
Jonathan: Like Woods you wrestle with straw men. Once again, the issue is whether stimulus spending helped to bring the US economy out of the Great Depression. The episode is a useful data point because of the severity of the recession and the size of the stimulus. It is a kind of natural experiment. The fact of the war is irrelevant. There is no argument being made that war stimulates the “animal spirits” of consumers. Did the stimulus defence spending alone pull the US economy out of depression? No, I don’t think so, and I haven’t seen any research that suggests that it did. However, it is hard to see how it could have failed to help. Indeed, there is some pretty solid econometric work that suggests just that (Christie Romer’s work, e.g.).
You agree that it reduced unemployment. And you seem to agree that it raised nominal GDP, although you try to discount this via a claim about GDP measures during wartime. (As you may know, the GDP statistic was created to measure US WWII production). So perhaps it’s worth considering whether you think that the Great Depression actually happened, and if it did, whether the US economy ever recovered. If we agree that there was a depression, then a recovery, with a war in between, it’s also worth considering whether any factors resulting from the war (such as a fiscal stimulus in the form of defence spending) contributed to the recovery that might have taken place.
Does this mean that every recession requires a government bailout? No, of course not. Your 1920-21 recession, which so baffles this mysterious group of “Keynesian” bogey men, is what it is, but that’s far from any kind of coup de grace. (BTW: Precisely which school of Keynesians does it baffle, may I ask–New Keynesians? Neo Keynesians? Post Keynesians? When you say “Keynesians”, do you really mean an amorphous mass that is undefined beyond “people I don’t like”–kinda similar to the way some use the term “neoliberal”?) Plenty of other recessions have also ended without any kind of war or massive government spending programme taking place.
But that doesn’t necessarily matter here. Can government intervention — fiscal or monetary — mitigate the effects of recessions? (Serious question). If so, there are bound to be costs and benefits that should be considered. Perhaps the costs are too high. Perhaps the stakes are so great that we may be willing to bear those costs (like today). But a position that states that government intervention cannot help is flat out wrong. Government’s can cause booms just as they can cause busts. I’m not saying that this is good policy, but it is clear that it is possible.
Let me sum it up: Governments can and frequently do cause booms and busts. In today’s world, this normally occurs via monetary policy, since fiscal policy fell out of favour with the neoclassical economists who advise and inform policy makers. Fiscal policy, so the thinking goes, has much higher costs than monetary policy. And, you know, I agree with that. However, from the perspective of returning nominal GDP to potential and reducing unemployment, either component of GDP (money supply or velocity) will do. This is not policy for the long-run. But if we really need to increase nominal GDP and reduce unemployment… Why not? It won’t make the country wealthy, but it might help to stave off a deflationary recession. Isn’t that a worthwhile goal for policy?
You know, I am not sure why this argument is causing problems. Frankly, I am baffled. The war did not end the depression. The depression was ended by currency devaluation and a change in expectations (the return of consumer and producer confidence). Neither of those things has anything to do with the war. Stimulus defence spending contributed to the recovery, but was probably not necessary and certainly wasn’t sufficient to end the depression. But it is hard to see how it could not help the recovery, since any substantial increase in the velocity of money will raise nominal GDP and reduce unemployment.
I never made that claim.
Somewhat amusing as the reason I became rather less interested in engaging you in the comments was when you started attributing views to me that I did not actually hold.
All I will say is I care less and less about nominal GDP to the extent the increase is caused by printing more money. It is a bit like saying people have grown taller because the government has reduced a centimetre to nine millimetres.
Also your quibble about the type of Keynesian is a bit like claiming a Atheist arguing against a god-centric view of the world needs to care about the difference between Protestants and Catholics.
Vimothy writes:
Probably not, is the answer to your last sentence. Pity. They might learn something.
As for my point about the line about the Black Death, you have mentioned the matter in previous comments.
Right, now let’s deal with this beaut of a paragraph:
So let me get this straight. You say that “there is no argument being made that war stimulates the “animal spirits” of consumers. You also say that there is no evidence you can see that defence spending alone puled the US economy out of the Great Depression. Er, so what point are you making then?
I did not concede anything on the point about recruitment in to the armed forces. The point here is that you can massage unemployment figures if you are in a war by simply recruiting folk into the army and pay them not much more than they got in state benefits or whatever. Such soldiers, sailors and the like are not creating any wealth, or engaging in the sort of economic transactions that equate to any meaningful idea of GDP. The purpose of work, remember, is to produce stuff for consumption. The idea that coercing millions of young men into the army/etc is somehow a meaningful reduction of unemployment in the economy is consequently a bad argument.
You also concede that governments produce booms and busts. Er, exactly. All the more reason for government’s share of GDP to fall and for them to cease meddling with various “levers” such as interest rates and taxes.
WW2 did not end the Great Depression. The UK economy, for instance, certainly in the south, was starting to recover quite a bit by the end of the 1930s. And the war left the UK with enormous debts, a devastated infrastructure, etc. Sure, it created work for the building trade. But wouldn’t it have been nicer had we not had to repair the damage of the Blitz in the first place.
Perry: If you don’t care about falls in nominal GDP, you don’t care about deflationary spirals, since that’s what deflation is. Do you care about deflation?
As for being interested in who exactly this group of Keynesians are who cannot understand the 1920-21 recession: fine. But I do not think they actually exist. It’s a pejorative, which is why you won’t define them meaningfully. Keynesians don’t understand that particular recession, presumably for some reason connected to the fact that they are Keynesians. But there are very different schools of Keynesians. The orthodox New Keynesians (which would include Milton Friedman style monetarists) are not remotely like the heterodox left wing Post Keynesians. Simply saying “Keynesians” doesn’t really tell us anything about who is baffled or why.
Furthermore, I have read modern analyses of that particular recession, so it doesn’t seem like the Keynesians actually are baffled. Can you be more specific: who exactly is baffled? Can you name some names?
Great. What does any of that have to do with economic recovery? As you well know, the economy is not driven by money (whether it be velocity or amount) but by production and consumption, supply and demand. Money is merely a proxy for the exchange of goods and services, a symptom and an indicator of economic activity.
Neither unemployment (think communism) nor NGDP (think hyperinflation) are a reliable measure of economic health.
Vimothy:
But you are obviously not a Keynesian, right?:-)
As for my point about the line about the Black Death, you have mentioned the matter in previous comments.
I mentioned the matter, but I didn’t claim that it was “good for western civilisation”. I think that particular statement is problematic: a value judgement about an abstract category. What do the terms “good” and “western civilisation mean”? There’s no way we could discuss this. We can’t even agree on the basics.
What I did claim was that the Black Death increased living standards for the survivors. This could be good or bad for western civilisation; I’m not sure. But regardless, it is there. The positive effect of the Black Death on real wages is well documented. See, e.g., M.M. Postan (1972), The Medieval Economy and Society: An Economic History of Britain, 1100-1500, or H. Phelps-Brown and S.V. Hopkins (1981), A Perspective of Wages and Prices, or Greg Clark’s “the Condition of the Working Class in England, 1209-2003”, Journal of Political Economy 113(6), 2005.
How do you explain this? Surely you would say that in a pre-industrial agricultural economy, with no shocks (i.e. at equilibrium), birth and death slopes will meet at the level of subsistence, because the amount of land is fixed. Any external shock that raises the death rate will shift the slope to the right and raise the average share in total production above subsistence. This new equilibrium allows higher birth rates, so over time the economy will return to the subsistence equilibrium.
This is the basic Malthusian model. One needn’t make any ideological commitments to use it to explain why incomes and living standards remained stagnant prior to the industrial revolution. Equally, it doesn’t explain growth after the industrial revolution (and FWIW I agree with Simon Julian). But we’re not trying to do that.
WW2 reduced or terminated unemployment, no doubt about that. So it solved the most acute social problem. It did it by recruiting millions into the army and employing the rest in the armament industry, which is exactly like employing them in make-work schemes – i.e. economically and socially useless work.
Living standards stagnated or decreased during WW2, no new cars, no new homes – everything was frozen.
If you define “ending a depression” by the resuming of improvements in wellbeing and living standards – that did not happen until after the war.
By the way: this is a basic item of Marxist dogma: Marxism says that capitalism causes depressions, and to end the depressions – capitalists need to start wars.
Like many other items of Marxist dogma, it is utter nonsense, but nevertheless widely believed and accepted by people who are not Marxists, and probably are unaware that they adopted a Marxist axiom.
“Surely you would say that in a pre-industrial agricultural economy, with no shocks (i.e. at equilibrium), birth and death slopes will meet at the level of subsistence, because the amount of land is fixed. Any external shock that raises the death rate will shift the slope to the right and raise the average share in total production above subsistence.”
No, I would not say that, at least not the second sentence. The implicit assumption there is that total production is somehow fixed, so that if the number of persons is reduced then mathematically each gets a larger share. That may be partially (but only partially) true in an industrialized society, but it is absolutely false in an agricultural one. In a pre-industrial, agricultural society (i.e, medieval Europe) the relationship between population size and aggregate production is strictly linear. Fewer people means correspondingly lower production. Reduce the size of the population and production goes down, too; both sides of the equation are reduced proportionately. So the average share of the survivors does not increase; it remains basically constant.
What–it remains at subsistance even though land/labour ratios are now radically different? Don’t be ridiculous. It’s basic supply and demand. To say nothing of empircal fact: if living standards shouldn’t improve due to an increase in the death rate, how do you explain the fact that they did?
That it is not unreasonable to think that it helped to pull the US economy out of the Great Depression. Woods suggests that if defence spending is good for the economy, then we should do it all the time. Since we don’t, and since it would be ridiculous if we did as all can see, defence spending doesn’t make you wealthy. This, you suggest, just goes to show you how silly Paul Krugman is for believing that stimulus spending helped end the Great Depression. War did not “solve” the Great Depression. But Woods’ thought experiment is a non sequitur. We are not trying to answer the question of whether constant defence spending makes a country wealthy. We are trying to answer the question of whether government spending helped to pull the US out of the Great Depression. Not “solve” the Great Depression. No one is arguing that war is good for a country. We just want to know if stimulus spending can be effective in a deflationary environment or at the zero lower bound of monetary policy.
I think that it did help, though not as much as other important factors. How can it not help? An economy in deflation is one in which people are not spending money. If there is no spending then ultimately there will be no production and no economic activity beyond subsistence. This would be bad. Monetary and fiscal policy can help. More money means lower real wages and prices. More government spending means more aggregate demand. This is good. But too much expansive policy can cause big problems. This is bad. That said, we’ve got a lot better at this over time. This is good. On the other hand, we’re still making mistakes. This is bad.
Goods, bads–there’s so many, who knows what to think!
any substantial increase in the velocity of money will raise nominal GDP and reduce unemployment
vimothy, velocity of money is CANNOT be independently targeted by monetary policy. It is not directly observable; it is derived indirectly, as V=PQ/M. What exactly do you propose nominal GDP is good for? What good did it do for Zimbabwe? Taken to its logical conclusion, your argument should endorse the Gideon Gono approach to monetary policy. Please, do yourself a favor, and check the assumptions that underlie the MV=PQ model. You cannot ignore money supply as the source of inflation. Also, read up on Ricardian equivalence. In short, if you cannot just jack up MV and thus by magic PQ. You can jack up M, which leads to a combination of higher P and/or (but not causally) lower V. And higher P, aka inflation, leads to economic misallocation (lower Q) and destruction of savings. The bottom line remains that every dollar the government spends is MORE than a dollar (deadweight loss of taxation) not spent by someone else.
In short, Plamus, you should not take the MV=PQ identity literally. It’s just a way of thinking about the economy. V, velocity, is the amount that people are spending M, money. Output is the product of those two terms, i.e. output is the amount of money in the economy multiplied by the number of times it is spent. If consumers and firms are not spending, V is low, and so is output. If government steps in and spends money, V, increases, because the amount of spending happening in the economy has increased. This is called fiscal policy. Fiscal, not monetary, policy targets velocity, V. Monetary policy targets the supply of money, M.
It is not reasonable. And I am getting tired of this discussion. You haven’t explained – in fact you just shrugged off – the examples of how some recessions were ended without any sort of Keynesian “stimulus” packages. These exmples – 1920-21 – just don’t fit the “government must do something” narrative.
As I said, WW2 only ended mass unemployment in the sense that governments forced vast numbers of people to join the armed forces. Well I guess if whatever government you approve of created a sort of army and got everyone to join it, then hey presto!, unemployment is “solved”.
But as I said, the UK economy, for instance, was already on the mend in some areas before the outbreak of the Second World War and I hardly think that the massive disruption to trade, for instance, was a good thing. In fact, the massive dislocation of world trade, with all the problems associated with it, and the vast costs, is not really taken into account as part of the negative side of the balance sheet when considering the economic effects of war.#
That is why Woods’ argument, far from being a non-sequitur, in fact very nicely sums up the silliness of the Keynesian argument. The idea that the outbreak of a war that led to such horrors “solved” a depression is so self-evidently, moronically fatuous that it is hardly surprising that anyone like Krugman gets plenty of abuse for saying so.
You made the point that Keynesian is often used as a term of abuse on this blog. You got that right, for sure. His reputation needs to be given a fresh working over.
1920-21 doesn’t need to be explained. Some recessions end for one reason, other recessions end for different reasons. What we want to know is, during an episode of deflation, or at the zero lower bound (i.e. when the central bank has already brought interest rates to zero), can fiscal policy help to stimulate a recovery and bring the economy back to its potential or trend level of output.
No one has claimed that war is “good” for your economy. You’re still swatting at this straw man. Paul Krugman, and various other “freshwater” types, thinks that at the zero lower bound, and/or during an episode of deflation, fiscal policy can help to return output to trend. War has nothing to do with this argument. War was merely the proximate cause of the massive, discontinuous, fiscal stimulus to the economy.
Krugman did not say that the war’s “horrors “solved” a depression”. Abuse him for that if you must, but it doesn’t mean that it actually happened. If you weren’t so busy being smug about the “moronically fatuous” nature of the opposition you might notice that some of them actually know what they are talking about. Why not engage with their real arguments?
BTW, only about 10-15% of the US population served in the armed forces during WWII. 16 million, give or take. This is another straw man. Wartime production increased aggregate demand and total output, which reduced unemployment.
1920-21 doesn’t need to be explained.
Oooooh but it bloody well does. How are we going to learn about the right approach to economic policy if we cannot figure out how some recessions end and why some go on for years, despite various government programs (such as the New Deal in the US, Japan in the 1990s, etc)? We need to identify certain patterns if we are not to adopt a seat-of-the-pants attitude and try to make things up as we go along.
As I repeat, the reason why these episodes such as the UK recovery in the 80s or the US recovery of 1921 get brushed off is that they are not likely to be popular with those who want to massively increase public spending.
For sure, I am not claiming that Prof. Krugman and his ilk are bloodthirsty maniacs (although for what it is worth I find it troubling how so many folk treat war as a sort of almost benign force in some way) but I am claiming that their argument that what America needed was the sort of colossal fiscal/government activity associated with WW2 is wrong. The 1930s witnessed a whole slew of big measures by Hoover and FDR, such as farm set-aside, public works, and much to the annoyance of those who paint a rosy-eyed view of the New Deal, unemployment never fell into single figures during the entire decade. Explain that.
But that is still a huge figure – 16 million people, enough to show why wartime conscription massively reduced the official unemployment figures. “Aggregate demand” may have been risen by such military spending, but the spending was not on consumer goods, in the main (and there was rationing, remember). And there is the issue of the enormous increase in government debt that came with this.
I’ll engage with them and do so. Actually, the only person I see being “smug” on this thread is yourself. Motes and beams.
The Black Death did mean there was more (and better) land available – and that helped people in terms of food production for themselves.
However, as M.M. Poston pointed out almost 40 years ago, even in the Middle Ages peasant farmers were part of cash economy in England – and depended on sales (they did not just grow stuff and eat it). Of course people can adapt to dead customers (for example by making stuff they used to buy), but that does undermine the advantages that division of labour brings. For example if you have to make your own shoes (because you can not sell your crop for the price you used to – and so do not have the money to pay the shoe maker, assuming he is still alive) you are likely to have worse shoes – and you are using up time you could have better used improving the farm. Opportunity cost.
As for World War II.
One does not have to be a Rothbardian on the rightness or wrongness of World War II (I am NOT a Rothbardian) to accept that the war was an economic cost (not an economic benefit).
If someone, such as Paul Krugman, holds that World War II was “good for the economy” then they are not an economist (it is a brutal as that).
Robert Higgs (Depression, War and Cold War – Oxford University Press 2006) carefully refutes “arguments” that are not worthy of the name, for the absurdity of saying “war is good for the economy” is as bad as holding that an earthquake or tidel wave is “good for the economy”.
I repeat that one can utterly reject the POLITICAL position of the Rothbardians on both World War II and the Cold War (and I do utterly reject it) whilst still accepting their economic arguments.
In fact one has to accept their economic arguments – because they are true.
One must just reply – yes there was a cost for defeating Hitler and then holding back the Communists, but it was less than the cost of either Hitler or the Communists winning.
Oh, by the way, the Robert Higgs book that Paul Marks cites said 29% of the working-age population of the US, not 11-15% as Vimothy says, were conscripted in the forces or forced to work in military areas. So my point is reinforced.
As Woods says:
vimothy, this is where you are terribly wrong. The consumers and firms are never “not spending”; they are temporarily spending less than they used to. If the government steps in to spend, firms and consumers spend even less because one or more of these has happened:
1) The gov’t has printed money, thus making consumers and firms poorer by devaluing their savings.
2) The gov’t has taxed them, thus making them poorer.
3) The gov’t has borrowed money, thus ensuring future increases in taxes and/or inflation (which is just a tax, and a highly regressive one at that). This particular offsetting behavior is Ricardian equivalence.
Again, despite what Krugman will have you believe, you cannot ratchet up velocity of money through gov’t spending. You can indeed ratchet up inflationary expectations, but what good is that? Economies can grow just fine under deflation – see USA 1860-1900. The Keynesians’ fetishistic fear of deflation is based on several data points – Great Depression, Japan 1990-present – which are characterized also by huge government interventions that only made things worse.
As for WW2 ending the recession, how about this for an explanation (from this article):
Thanks for the link Plamus – excellent.
Actually, when you see me describe the pronouncements of Nobel winning physicists in their chosen profession as “moronically fatuous”, you will have a point. Why not play the odds and assume that the man with a Nobel and tenure at Princeton knows what he’s talking about when he talks about economics? I don’t know what definition of hubris you’re working with, but…
The 1920-21 recession is one data point among many. Let’s say we all agree–you, me, Krugman and Woods–that the 1920-21 recession ended as the market corrected itself without any government intervention at all. But that doesn’t mean that fiscal stimulus didn’t help pull the US out of the Great Depression. How could it mean that? That’s terrible begging-the-question social science reasoning: 1, to pull the economy out of recession in 1920-21, no government intervention was necessary. Therefore, 2, government intervention is never helpful in pulling economies out of recessions or depressions.
The recession itself doesn’t need to be explained. All we want to know is if fiscal policy is useful, not if some recessions end without fiscal stimulus. Of course recessions end without large scale government spending programmes. And for the most part, monetary policy is extremely effective. However, we may need to take additional measures to support the economy. If we were to undergo a similar contraction to the Great Depression, if we found ourselves in a liquidity trap (i.e. at the zero lower bound), could fiscal policy help?
The problem is, the standard narrative (and not just on the loony left) is that government spending solved the problem.
For example here’s Johann Hari in the Independent {a newspaper that your older readers might remember}.
Brian Josephson got the Physics Nobel for his work on superconductors in 1973. He says moronically fatuous things about the physics of the mind all the time.
Krugman got the Economics Nobel for his work on international trade. Which is perfectly consistent with him saying moronically fatuous things about the economics of war, even if we should trust the Nobel committee blindly.
Can we please go back to arguments now?
That is not the point I was making, and you know it. I was saying that the recovery after the recession of that date, achieved without government spending, needs to be explained. Why is it that some recessions end without stimulus? There must be a reason here. It is not just a random thing.
Excellent points, Plamus
You are most welcome, Alisa.
And thanks, Jonathan, glad to have contributed something from my archive of readings on the Depression.
Indeed, and it was precisely this point that I was addressing. It does not need to be explained, unlesds we are having the same recession. If we flip this around and I say, “fiscal stimulus ended the GD” (which is not my position, but I am assuming it arguendo), would it then be the case that every recession requires fiscal stimulus?
Why should every recession end in the same way? Why should we be slaves to the idea that all government intervention is bad? And even if all recessions end without government stimulus, we might still want some because merely ending the recession is not necessarily our only goal.
Are you spending now? There is no such thing as a reduction in consumer spending? Doesn’t make sense.
Er, so they do stop spending then. If consumers stop spending, and prices start falling, and firms stop hiring, and everyone moves their forecasts of growth to negative, it is very hard to see how the situation will right itself without a lot of pain. If consumers are hording money, don’t want to spend it and only want to lend it to the government (i.e. buy its bonds or gilts), this money is not going to get spent unless it is by the government.
Spending *is* the velocity of money.
Vimothy, this is getting pretty lame from you, really. I mean, to say that why a country bounced back from a bad recession within a year does not need to be explained is simply evading the issue.
Think of what economists try to do: they try to find patterns of behaviour, even to formulate laws about things like money, demand, supply, etc. Otherwise, one might as well make it up as one goes along, as I said before. If we just look at the recovery from a recession that occured without massive govt. spending, and roll our eyes, and say: “Dunno how that happened”, then I think most fair-minded folk, even the odd Nobel Prize winner and NYT columnist, might regard such a reaction as a bit pathetic.
Anyway, I am done here.
FFS, it is not evading the issue. Christ. What about the recession of 1807? 1853? 1913? Do any of these speak to the efficacy of fiscal stimulus with regard to pulling economies out of a depression?
Vimothy, FFS to you. The other recessions you mention ended without massive, WW2-level spending. Fact.
Aaargh.
*Bangs head on desk*
Pearce adds: might work some sense into you, old chap. You lose.
Even if all recessions end without government spending, it still does not follow that government spending is not helpful. Do you see? Whether or not government spending is helpful is a separate issue. This argument does not seem particularly difficult to me; I do not know why it is causing such problems. The best work that I know of on fiscal stimulus during the Great Depression (Christie Romer’s paper—I posted a link to it on my blog) does not even find that it contributed much to the recovery (it was mostly monetary loosening via currency devaluation).
As pointed out before, changing a centimetre to be nine millimetres does not *actually* make everyone taller.
Moreover by the mixture of creating fantasy money and appropriating money from other productive people who would otherwise be able to make decisions how it would be used (which they cannot when the state takes it), the value of real money accumulated with recourse to the actual economy is devalued. But as Bastiat pointed out, that is not seen, whereas the ‘stuff’ done by the state is seen, as if that which is not measured cannot exist. The entire thing is an exercise in arcane but ultimately self serving circular logic.
But that analogy is somewhat misleading. Contracts and prices are generally given in nominal, not real, values. If nominal prices are falling quickly, the effects on economic activity are pernicious. For instance, real interest rates can be driven up to extremely high levels. Costs to producers from nominal wage rigidities are prohibitive. Add falling prices and it is easy to see why production shrinks during an episode of deflation. Real debt burdens increase. Contracts are made with the expectation of stable low inflation. If those expectations are not met, the value of the contracts will change. Which is why we want to avoid falls in NGDP even though we realise that nominal GDP is not real GDP. You cannot simply discount the nominal.
BTW, it is not my position that all deflation is bad. Mild deflationary episodes associated with increases in productive capacity are to be welcomed. But large drops in NGDP are not.
I don’t discount the nominal… to the extent that is has *some* relationship to the actual… and the more intervention that occurs, the less that is the case.
Do you mean the government spending which is funded by printing new money and thereby devaluing my savings and reducing my buying power? Or do you mean the government spending which is funded by taking the money away from me so that I can’t even spend it at its reduced actual value?
Or, is some highway paving project contracted out to a politically-connected contractor a better use of my money than letting me buy groceries and ammo and dog shampoo?
I found this very illuminating. Embracing the concept of freedom for all, in the market or otherwise, seems to me to imply a degree of humility and acceptance that if the world changes under your feet you should just accept the consequences of your previous choices, positive or negative. Freedom and responsibilty go hand in hand, those that don’t want to be responsible will accept not being free.