One of the recent themes of this blog’s authors has been to challenge, and hopefully demolish, the “narrative” of how the current crisis proves the weaknesses of “unregulated capitalism” (I could be far ruder than that but I am not a swearblogger). Another, related theme that we try to plug away at is to show how previous acts of interventionism, with politicians playing the role of strong hero on a big white horse, have failed or if they have “worked”, been by-products of massive state mobilisation for war.
Prime exhibit: the New Deal of Franklin Delano Roosevelt. When I was a child doing my O-Level history course in the early 1980s, I got this broad version: the New Deal demonstrated the success of Keynesian pump-priiming economics, therby proving also that support for fuddy-duddy things like the Gold Standard, or balanced budgets, or “sound money” was silly, reactionary and wrong. And some of my impressionable teenage brain agreed. I did rather sense that there was something fishy about this, but it was not until I was a bit older, and started reading all those wicked reactionary Austrians and Chicago economists that the issues began to clarify.
Recently, there have been moves by some writers to challenge the Roosevelt-As-Great-Man story more explicitly. One of the most recent examples is Amity Shlaes’ book, The Forgotten Man (borrowing her title from a famous essay by Willam Henry Sumner). And Jonathan Chait, a leftist writer for the New Republic, is angry at Ms Shlaes’ analysis. Reading his review, there are some points where I think he is being quite fair, but his article fails to deal with what I think is the most damning thing about FDR’s record during the 1930s, namely, that unemployment, according to official US data, never fell below double percentage figures right up until the outbreak of WW2. However one slices and dices it, that is an appalling record. Chait tries to claim that unemployment roughly fell by half, in percentage terms, during FDR’s period of office in the 1930s but that does not seem to be born out by the official statistics. Chait even tries to claim that FDR was not much of a consistent Keynesian anyway.
We then get this:
“Moreover, the classic right-wing critique fails to explain how the economy recovered at all. In one of his columns touting Shlaes, George Will observed that “the war, not the New Deal, defeated the Depression.” Why, though, did the war defeat the Depression? Because it entailed a massive expansion of government spending. The Republicans who have been endlessly making the anti-stimulus case seem not to realize that, if you believe that the war ended the Depression, then you are a Keynesian.”
Well it is undoubtedly correct that unemployment did fall dramatically at this point. Well, for a start, it is not very difficult to achieve full employment if your country ends up, by a terrible turn of events, to be the sole economic power that has not been invaded or otherwise been bombed heavily. And Mr Chait completely ignores the rather important fact that a large chunk of the US male workforce was put into uniform. And yes, when the war was over, and with oil prices at rock bottom, the momentum the US had built during the war years continued. But remember, Mr Chait, that the US had a recession in the late 1950s and JFK, let it not be forgotten, cut taxes – they were implemented after his murder, in 1964. That was a supply-side measure, although not advertised as such, since the language adopted by Arthur Laffer and his school had not yet become common currency in US public affairs
But the broader point Mr Chait makes is troubling: is Mr Chait saying that what the world, or at least the US needs right now is the economic equivalent of a war, or of some massive, government-led direction of all economic activity, complete with rationing, forced service to the nation, etc? He needs to argue why it was that Britain, for instance, had managed arguably to recover quicker from the Great Crash than the US. By the late 1930s, Britain, at least in the south and east, was actually quite prosperous, although unemployment in the traditional industrialised regions was still bad.
Mr Chait makes a number of valid points about Shlaes’ book, which is not the most persuasive or rigorous demoltion job on Keyensianism that I have read. If you want to read such a book, this is a great place to start. And if one wants recent evidence of the problems with trying to reflate economies with cheap money, then the history of Japan over the last decade and a half is striking. Mr Chait will have a tough job trying to shrug that example off.
I see Robert Murphy is soon to bring out a new book on the New Deal and Great Depression from an Austrian perspective. Should give the Keynesians something to fume about. Then there’s Thomas E Woods’ Meltdown which is an excellent analysis of our current crisis including a reference to the New Deal and the supposed war prosperity. I believe Robert Higgs’ Depression, War and Cold War addresses the high GDP growth in WWII and related issues.
The only Keynesian argument that I have yet to see addressed by libertarians and free marketeers is the strong GDP growth in the 1930s under Roosevelt. Has this point actually been addressed yet?
I’m curious as to your views about the ‘cross of gold’ argument, that leaving the gold standard and recovery after the Depression are very closely linked. Nations that abandoned the gold standard early recovered fastest.
What i think is most disturbing about how New Deal is seen is that it was the time that an authoritarian regime has been nearer to take USA and seldom anyone notices.
Without WW2 i think US would be bungling around. Maybe a bit less worse version of Latin America at most.
The war ended the depression because once everyone was out of uniform, the U.S. had many working factories while most of the U.S.’s former competitors had rubble. The widespread destruction in Europe gave the U.S. an insurmountable production advantage that set the stage for the U.S.’s dominance of the latter half of the twentieth century.
“Nations that abandoned the gold standard early recovered fastest.”
Possibly because they were overvalued. GB certainly was, hence the poor economic record in the 1920s. It’s also possible that going off the gold standard allowed for those countries to bring about an artificial recovery via inflation (although I don’t know enough about countries aside from GB, USA, Sweden and Germany to know if this is true in all cases).
Sure, the US can end the current recession with a massive wartime-like change in economic footing. Of course, to make it work we’ll have to bomb the rest of you flat. But building bombs should help our economy as well.
War did NOT end the great depression. War is not good for the economy. If you look at the US economy, sure, unemployment fell, but only because people were recruited into the war effort. Sure, output increased. But that was output in the public sector, building tanks and bombs. Private output fell. The economy recovered AFTER the war. And what’s more, far from the “right wing” not having an answer as to how it recovered, Keynesians like Samuelson were crapping bricks after the war, because they thought that the unemployment would return. In fact, it didn’t. What caused the recovery was a post war cut in spending by almost two thirds, and a scaling back of some of the New Deal.
On this see Robert Higgs here and here
Oh that’s easy, government spending is counted as part of GDP. Since government spending under Roosevelt was massive, GDP growth was also massive.
But none of this is actually about economics at all—it is totally and fundamentally about power.
Economic theories used to justify this policy or that arrangement are nothing more than rationalizations with only one true purpose in mind—making the case that a particular group of people should be “in charge”.
We are witnessing, and unfortunately engulfed in, the final stages of collapse of the artificial, state-centered, mixed political/economic system that was developed, like a tortured bonsai tree pruned and shaped by gardeners both blind and artistically bereft, during a century and more in which the role of the state was exalted, and the role of the private citizen was under constant attack.
Read the philosophies and economic/social/political theories of the great part of the 19th century. Repeatedly, the collective is praised, and the alleged depridations of uncontrolled individualism are decried as the source of all our troubles. The fruits of these bitter trees all ripened in the 20th century.
Whether it was the chaos of unplanned economic entities opposed by the more efficient planning of state corporatism under fascism, or the plots of the evil jewish capitalists and bolsheviks which could only be thwarted by the heroic volk and its leader, or the schemes of the aristocrats and kulaks which required the harsh response of the terror, or the glories of the rule of the god-emperor, which called for the total subservience of every citizen to the needs of the state, it was always the same tune, even if the language of the lyrics varied.
Throw in the various generalissimos, nationalists, revolutionaries, left over kings and emperors, and men on horseback chosen by panicked populaces who were repeatedly told the freedom thing had failed and now it was time for a community effort, and the lurch towards the current fiasco has been percolating and evolving for over a century.
Who was FDR? He was our soft version of all the other uniformed, martial, strutting bullies who had wrested control of their little pieces of the world and were joining together, or facing off, or both, getting ready for the next round of “do what you are told, I know how everything should be done, obey or I will kill you” that is the inevitable result of the glorification of power, and the diminution of the individual.
The 20th century was an ongoing laboratory experiment in how many different excuses and story lines could be devised to justify the glorification of the collective, and the repression of all those unruly individuals whose greed or indifference or pollution or (fill in the blank with ishy descriptive) were the cause of all our problems.
I can only vaguely imagine the possibilities of a society which was not warped and deformed and twisted by the endless onslaughts of marching automatons and rabid idealogues, shouting down and clubbing down any attempt by ordinary people to live their lives as they saw fit, without having to kowtow and contribute and march off themselves to defend what little of their private lives they were allowed to keep.
And, now, I believe we are approaching a moment of fundamental truth. The edifice of the state and the collective, glued together over decades of opportunism and fear mongering, is tottering at the edge of the cliff it has brought itself to by its own policies, lies, and depridations.
Of course, there is an hysterical chorus of pols and media and experts of one kind or another who are determined to shift the blame onto those evil capitalists and their greed, and away from the sculptors of public policy, and public thievery, who have actually been running things for their own enrichment for decades.
As Lincoln once said regarding slavery, if I may paraphrase, it may now be necessary to forfeit one unit of value for every one confiscated and wasted by the vanguard of the common good and public virtue, and to come to terms at last with the endless lies and corruption which has plagued humankind for so long.
The recent century will be, I am sure, known to future historians as the “Age of Slaughter”.
One can hope, and strive for, the current century being known as the “Age of Rectification”.
This latter can only occur of the collective is defeated, and the individual exalted. Nothing less will suffice.
I agree fully with the sentiment of this post, but a little history:
1932-1940: U.S. mired in the Great Depression, with appallingly high unemployment and flat growth in GDP and consumer spending.
1941-1947: Price and wage controls distort all macro data beyond recognition, and the shipping overseas to war of 12 million working-age males somehow lowers the unemployment rate.
1948 into the 1950s: U.S. MASSIVELY cuts federal spending, by about two-thirds. U.S. economy quickly grows and leads the world.
Don’t mean to stir the pot too much, but in response to Nick E:
1) The GD began prior to 1932.
2) GDP during the 1932-40 Period was not stagnant. In fact, GDP growth was 5.37% per year during that period (and 8 % per year for the whole of FDRs administration). Granted, what goes down must come up (we hope) and there was increases in Government spending and a war and all that, but its still true.
3) Sending 12 million men to war, plus millions more men and women to work, will naturally drop the unemployment rate. Soldiers, sailors and airman get paid, and they aren’t looking for jobs elsewhere. During the war the US produced twice as much war material as the rest of the fighting world combined (thats allies AND axis). These things increase employment.
4) Yes, Federal Spending was massively cut, mostly because we weren’t fighting the biggest war in the history of the world anymore. But marginal tax rates remained high, the New Deal was still mostly intact, and the idea that government went away is a myth. On the contrary, government sent veterans to school (GI bill) and encouraged the growth of the construction industry and the transition to suburban life by backing low cost loans for them. People finally had money, jobs and some security, and they spent (and reproduced) like mad.
Cargo Cult Economics
Government spenders and casual observers see personal and business spending, and the associated employment and prosperity. They come to the wrong conclusion: that the spending created the prosperity.
Sad to say, this is a type of Cargo Cult centered around money. John Maynard Keynes is the shaman of this cult.
Stimulus would be great, except the government which promises to spend money is also promising to take that money away from the people who are already spending and investing. No investment or asset is safe from the government, so people are not risking their effort and savings.
The economy is bad because no one can predict the future with a big government elephant stomping around. The elephant can’t solve the problem, and it scares away the elves who can solve the problem. The elves are small, but they are smart and there are a lot of them.
The spending and the saving of taxpayers is just as “stimulative” as when the government takes the money and spends it. Politicians make a shameful, distorted argument for raising taxes so that they and their supporters can benefit from the money. This is a crazy, economic defense of robbery.
While we’re discussing the war, it is worth noticing that Germany, which was completely flattened, had murdered a significant chunk of its own creative commercial class, lost millions of potentially productive young men to war casualties and captivity, and suffered widespread starvation in ’46-47, had already overtaken Britain in productivity again 10 years later.
The conventional explanations for that don’t work either: pseudo-Keynesian expansion in, er, ‘investment’ via the Marshall Plan? The UK got more of that, together with a thorough dose of socialist economic direction. And Greece, which got proportionately rather more Marshall money, would be Europe’s economic titan. (It did seem to acquire an amazing number of millionaires per capita, perhaps an example of Lord Bauer’s dictum that international aid is the transfer of money from poor people in rich countries to rich people in poor countries.)
Great comments and food for thought. I particularly like the “cargo cult” idea.
Guy is correct: West Germany – as it then was – made far better use of what “aid” the US gave it than the UK. The Germans had the fortune to be led by the likes of Konrad Adenauer and Ludwig Erhard, the latter being influenced by F.A. Hayek, no less. It remains one of the most amazing post-war recoveries that there has ever been. And it was carried out under the nose of a monetarist-leaning Bundebank, remember.
People also underestimate that fact that Britain, the largest investor in the USA by far, bankrupted itself and its empire to pay for US wartime assistance (weapons and resources). That had more than a little to do with things.
Since you’re in book review/recommendation mode, have you any thoughts concerning
1. New Deal or Raw Deal?: How FDR’s Economic Legacy Has Damaged America by Burton W., Jr. Folsom
and more particularly
2. FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression by Jim Powell
Also, just as a general question.
The US joined the war rather late but were supplying the Allies from much earlier. That increase in demand must have had some impact. Yet that period between Sept 1939 and December 1941 is never isolated in the figures. Any comments.
TDK, I do not have any comments on those books you mention although they do look interesting. My reading list is getting longer by the week!
Well I’ve got FDR’s Folly but it sits in the “to be read” pile under Richard North’s latest.
It’s useful to get different perspectives.
Well, well, well. Bob Murphy has a blog post today about this very topic of GDP. How did he know the samizdata folks would be inquiring about it? (It’s a long post and somewhat technical).
The theory that war is good for “the economy” is usually a classic version of the broken window fallacy. It *IS* Keynesian, and it *IS* wrong. One cannot not increase one’s standard of living by building bombs and then blowing them up any more then one can increase their standard of living by digging holes and the filling them in again. Once blown up, a bomb is gone, gone, gone.
The reason that WWII is the exception to this is that we had a Socialist president in power who had picked the economy up in his teeth and was shaking it like a rabid dog would a rabbit. WWII, like a shiny object, distracted the crazed beast, and the economy was able to slink away, crawl into a hole, and begin to recover in (relative) peace.
Of course, WWII did increase per capita wealth by killing off lots of people, but death is hardly the preferred way of increasing your standard of living.
If you want to see the results of wasting 1Trillion on a war which does *not* distract the government (now grown too big to distract entirely) from the meddling in the economy, look out the window. That was one of the major causes of the mess we’re in now. You cannot dump your money down holes and increase your standard of living with it, too.
veryretired — splendid, sir. You do justice to the depth of the disaster.
If the history of the Endarkenment is ever written, it will require a crucial chapter explaining that Americans simply did not love freedom.
“Reality” — “People finally had money, jobs and some security, and they spent (and reproduced) like mad.”
Right. Consider that between early 1942 and summer 1945 — over three whole years — there were essentially no new cars in the American market. Consumer demand was rampant and it would have required an authentic Stalin to tamp the commensurate production, marketwide.
Books — “FDR’s Folly”: pretty good, definitely worth the read. On a par with Shlaes; modern looks back from cool eyes. The facts are what they are, and when they’re added up in the most general contexts (e.g. — world intellectual currents and undeniable western infatuations with socialism, etc.) the most basic conclusion is that we’re dealing with a morbidly anti-American strain of historic events.
Also recommended: John T. Flynn, “The Roosevelt Myth” (available online here). Writing in 1948, Flynn was way off the reservation and did a good job of it.
I would suggest that these books are well complimented with deeper technicals/analytics like: “Economics And The Public Welfare: A Financial And Economic History of The United States, 1914-1946” (1949, Benjamin M. Anderson), America’s Search For Economic Stability — Monetary And Fiscal Policy Since 1913″ (1992, Kenneth Weiher), and, always, Wm. H. Hutt. (Johnathan linked him at Amazon.)
People like Chait are simply not dealing in reality. They never have.
The best book to come out (so far) about the present collapse is that of my Austrian School comrade (yes our side can use that word also) Thomas Woods.
“Meltdown”.
As for World War II.
The real recovery was after WWII (the period of the so called “do nothing” Republican Congress elected in 1946).
However, there were some good things during WWII.
The inflation was not good for “stimulating demand” (or other such nonsense) but it was good for making the 1930’s minimum wage laws void.
People were “priced back into work” – exactly what leftists say can not happen.
Also remember the various worker occupations and other such of the 1930’s.
Of course some of them were rather amusing (such as when a key factory of General “Blue Eagle” collabrating Motors got occupied) – but the occupations and other disruption (and the FEAR of possible such antics) caused great economic harm.
None of that was tolerated during World War II.
So people priced back into work and union activism ended.
Does not sound like something a leftist should like to me.
Even regulations were nothing like what they were in Britain.
For example, the Ford Motor Company was basically told “just get on with it – win us the war”.
And the did.
Amen, amen and amen !
The economy recovered AFTER the war, the end of the war being a good pretext to dump all new deal nonsense. The economy recovered after FDR died. During the war unemploymnet was brushed under the carpet, hidden, by strict emergency regulations, but the standard of living did not improve during the war, only after it.
I’ve come across two ‘FDR was rubbish’ angles recently.
From UCLA:
And a lecture The Great Depressoin and The New Deal: lessons for today. (Based on the lecturer’s recent book New Deal or Raw Deal)
Billy Beck, thank you for the kind compliment.
Apparently there is an article by Janet Daley in one of the British papers saying something similar to what I wrote earlier, although I would imagine from a different perspective. I ran across a reference to it at Powerline.
I will dispute the idea, however, that Americans don’t want freedom. I think what has happened is that several generations of Americans, as well as the west in general, have been taught that morality, social utility, and the general welfare of the community at large are opposed to individual liberties in any but a very restricted sense.
This message is ubiquitous across the last two centuries, and becomes very pronounced in the progressive/socialist/collectivist theories that were all the rage in the early 20th century especially.
Repeatedly, young people have been told that choices by individuals making decisions for their own purposes are inherently dangerous and injurious to everyone, and need to be curtailed for the good of all. The adoption of this mantra by the ecology/climate change group is characteristic of this dual purpose argument.
One, it discredits individual liberty as being dangerous and immoral; and two, it justifies statist policies as moral and protective of the greater good.
As I have said here many times, the dismantling of the house of cards that collectivist theories have created will take an enormous effort and a great deal of time.
Part of the complexity of the task, and one of the most time consuming elements of the struggle, is and will be the need to fundamentally alter the educational philosophies and structures in western culture.
Fortunately, just as the dinosaur media is now clearly suffering from its 19th century structure in a 21st century world, so too will the “factory” model of present educational structures simply have to yield to the realities of a new electronic, open, non-fixed-locality, cafeteria model of educational opportunities which computerization makes possible.
The increasing power with decreasing size of the technology makes it inevitable that “going to school” will not mean the same thing in 2050 that it meant in 1950, or even 2000.
As the educational structure becomes more open and uncontrolled by any central authority, the possibility of reformed educational messages becomes more possible also.
Do not expect this to simply happen, however, or to see the academic power structures and their political patrons roll over and allow just anyone to have access to education without direction to “approved” theories and moral lessons.
When we see further desperate efforts to block any true reforms, and lock in the 19th century model as the only acceptable route to academic legitimacy, probably by restricting the use of non-traditional methods to acquire degrees and honors, then we will know the main battle for the hearts and minds of our youth has been truly engaged.
So far, the collectivist academic theorists have had little or no effective opposition. That opposition is what we, and our children, must become if we are to salvage a future for individual rights and liberties.
I know that you, Billy, express an admiration for Rand’s writings and ideas. We are, as she said several decades ago, in the midst of a moral crisis, and it is only with carefully reasoned and articulated moral arguments that liberty can first withstand, and then defeat the momentum of collectivist ideology.
The gospel says that it is better for a man to be thrown into the ocean with a millstone around his neck that to lead the minds and hearts of the young astray.
That is what collectivism has done. We must provide the millstone, and the push over the side.
I did not read Richard comment – the very first one on the list.
Good stuff.
However, “strong G.D.P. growth in the 1930’s under Roosevelt”.
Huh?
The economy was much SMALLER in 1939 than in 1929. That is not the case if you compare 1929 with 1919 – or indeed almost any other decade in American history.
Surely the statists are not still playing the price rise trick in their university text books?
“He He – if we pretend that prices did not go up we can……”.
I did not read Richard comment – the very first one on the list.
Good stuff.
However, “strong G.D.P. growth in the 1930’s under Roosevelt”.
Huh?
The economy was much SMALLER in 1939 than in 1929. That is not the case if you compare 1929 with 1919 – or indeed almost any other decade in American history.
Surely the statists are not still playing the price rise trick in their university text books?
“He He – if we pretend that prices did not go up we can……”.