World War II: Still Being Touted as the Quintessential Keynesian Miracle
By Robert Higgs • Tuesday June 28, 2011 5:14 PM PDT • 32 Comments
Someone must have imagined that my hopes for improved economic understanding might be excessively optimistic today and thus needed to be curbed to restore my normal emotional balance, because that person undertook to smash any such hopes to dust by e-mailing me a link to a Huffington Post article by Paul Abrams, “Economically, World War II Was Stimulus on Steroids.” This screed turns out to be an ostensible macroeconomics lesson composed in equal measure of economic foolishness, historical ignorance, and ideological tendentiousness – the veritable epitome of a worse-than-worthless contribution to public enlightenment.
The opening paragraphs indicate the direction of Abrams’s argument:
The next time someone argues that the New Deal failed, and only the Second World War ended the Depression, as ‘proof’ that government spending does not work, one can respond with the details of economic growth and unemployment reduction up to 1940, or one can ignore the claim and thank them for making your case for massive government spending in a deep, broad recession.
Right wing politicians are loathe to credit the New Deal with any success in hoisting the United States out of the Great Depression, but credit World War II for that achievement, believing that that somehow disproves Keynesian economic theory.
That claim, however, undermines their entire premise.
Abrams concludes that “massive government spending at a time of severe economic downturn and dislocation can indeed get an economy humming again,” as World War II shows; the New Deal was merely too timid. He seems unaware that his argument merely restates the fallacy-ridden hodge-podge of conventional wisdom about how World War II “got the economy out of the Depression” that has dominated the thinking of economists, historians, and the public ever since the war itself.
When I began to teach U.S. economic history at the University of Washington in the late 1960s, I quickly realized that this tale of the wartime “Keynesian miracle” could not withstand critical scrutiny once one went beyond the barest account of it in terms of the elementary Keynesian model and the standard government macro measures, such as GDP, the consumer price index, and the rate of civilian unemployment. Almost immediately I saw that unemployment had disappeared during the war not because of the beautiful workings of a Keynesian multiplier, but entirely because about 20 percent of the labor force was forced, directly or indirectly, into the armed forces and a comparable number of employees set to work in factories, shipyards, and other facilities turning out war-related ”goods” the government purchased only after forcing the public to pay for them sooner (via wartime taxes and inflation) or later (via repayment of wartime borrowing). Thus, the great wartime “boom” consisted entirely of (1) some people’s mass engagement in wreaking death and destruction and (2) other people’s employment in producing supplies for these warriors after the government’s military labor drain, turning out ”goods” never valued by consumers or private producers in voluntary transactions, but rather ordered by government functionaries and priced completely arbitrarily in a command-and-control economy. In no sense was the alleged ”wartime prosperity” comparable to real, normal prosperity. The pervasive regimentation, rationing, price controls, direct government resource allocations, and forbidden forms of production (e.g., civilian automobiles) should have served as a tip-off.
After teaching my own students along these lines for many years, I eventually began to write articles and books pulling together my various studies. The most coherent of these books is my Depression, War, and Cold War, published originally by Oxford University Press in 2006. For all of the good I’ve done in correcting people’s understanding of what happened to the U.S. economy during World War and what lessons one might justifiably draw from that experience about, say, the scientific validity of the Keynesian model or its related fiscal-policy implications, I might just as well have held my breath and turned blue. Here we are in June 2011, and millions of Americans are being presented with the purest potion of economic misinformation one can imagine, an account in no way superior to those the young Keynesians were peddling so confidently in 1944, when I was born. Perhaps my mother ought to have strangled me in my crib, to spare me the bitter disappointment of seeing the research and writing I’ve carried out over more than forty years prove to have been completely in vain.
For the Paul Abrams’s of this world, of course, none of this makes the slightest difference. They are at pains not to understand how the economy actually works or to endorse policies that promote its greater productivity, but only to concoct a plausible rationale for the government’s taxing “the rich” more heavily and spending oodles of money on a laundry list of leftist idols — government “infrastructure,” green energy-conservation programs, high-speed rail, and the rest of the wasteful and economically foolish purposes that progressive politicians espouse to feather their own nests and enrich their cronies and political dependents at public expense. If they haven’t learned any sound economics by this time, chances are slim to none that they will ever learn any, but I cannot believe that they care about such learning, in any event. Politics is the name, plunder’s the game.
There’s a lesson here, besides the obvious one that public discourse consists overwhelmingly of ideological sound and fury, signifying nothing solidly connected to reality. For me, the main lesson is: mommas, don’t let your babies grow up to become economic historians. If you do, you only put them in line to have their hearts broken.
Tags: American History, Budget and Tax Policy, Economics, Employment, Great Depression, Military, Politics, The State, War 
I put forth your argument on a free market libertarian site and this is what I got back:
“We are aware of the arguments. And we did not argue that the war had a stimulative effect. ... We made a statement on this thread that the POST-WAR period that saw the US dominate the world (as it had the only large, un-bombed economy) was probably conducive to prosperity. At one point, post war, the US’s world market share of goods and services was up in the area of 50 percent, or so we recall. Again, to maintain that running the world’s only post-war undamaged economy – with all the world’s resources to choose from – did not have a certain stimulative effect is naive from our humble point of view. This was when the dollar came into its own as well ...”
http://thedailybell.com/2478/Three-Macro-Trends-You-Need-to-Watch.html
I told told them, “It wasn’t being king of the hill or the amount of loot that made the difference. The U.S. could have had 100% of the world’s manufacturing capacity, but if it was regulated and taxed heavily enough, there would be no prosperity.” but I don’t think it had much of an effect.
clark | Jun 28, 2011 | Reply
“Perhaps my mother ought to have strangled me in my crib, to spare me the bitter disappointment of seeing the research and writing I’ve carried out over more than forty years prove to have been completely in vain.”
Dr. Higgs, it wasn’t completely in vain. It helped me (and many others) understand. I like Leonard Read’s line: “managing the shape of humanity is God’s problem, not mine.” In any case, like Nock said, you’re doing it for the remnant.
david nh | Jun 29, 2011 | Reply
@clark
I’m really confused by the relevance of your response to Dr. Higgs article. Was the “free market libertarian” site you asked called “The Huffington Post”, or the respondant called “Paul Abrams”?
BZ | Jun 29, 2011 | Reply
Great work in (constantly) setting the record straight.
Also,
Something is wrong with the “like” button.
Dave B | Jun 29, 2011 | Reply
Perhaps you could take heart from F.A. Hayek in the Road to Serfdom where he says “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”
Someone else (I wish I could remember who) also made the point that ideas advance by the steady or relentless push from multiple directions. We must keep pushing even if we feel disheartened so that the voice of reason wins otherwise we cede the battleground to those pushing from ignorance.
Jeffry Erickson | Jun 29, 2011 | Reply
Mr. Erickson,
The statement you quoted comes from John Maynard Keynes’s General Theory of Employment, Interest and Money (1936), p. 383.
Robert Higgs | Jun 29, 2011 | Reply
Dear Bob:
“A prophet is not without honor, but in his own country, and among his own kin, and in his own house.”
–With exceptions, of course, which some of us are delighted to count ourselves among.
With deepest admiration, respect, and gratitude
Mary
Mary Theroux | Jun 29, 2011 | Reply
Mr Higgs,
Sorry about the bad citation – I copied from Caldwell quoting Keynes in a preface to Hayek and muffed it!
Jeffry Erickson | Jun 29, 2011 | Reply
compounding the error with a typo...
Jeffry Erickson | Jun 29, 2011 | Reply
Dr. Bob,
‘... to spare me the bitter disappointment of seeing the research and writing I’ve carried out over more than forty years prove to have been completely in vain.”
Screw them.
The truly foolish and evil can’t be helped.
Carry on and use your knowledge and commitment to enlighten the many who will listen and can reason.
B Burgart | Jun 29, 2011 | Reply
Mr Erickson... pretty heinous to confuse Keynes with Hayek.
But not to worry, this is what Hayek says: “Only a complete misapprehension of the process by which opinion progresses would lead one to argue that in the sphere of opinion he ought to submit to majority views. To treat existing majority opinion as the standard for what majority opinion ought to be would make the whole progress circular and stationary. There is, in fact, never so much reason for the political philosopher to suspect himself of failing in his task as when he finds that his opinions are very popular. It is by insisting on considerations which the majority do not wish to take into account, by holding up principles which they regard and inconvenient and irksome, that he has to prove his worth. For intellectuals to bow to a belief merely because it is held by the majority is a betrayal not only of their peculiar mission but of the values of democracy itself.” [Hayek, The Constitution of Liberty, ch. 7, sec. 8]
That said, I wasn’t particularly impressed with this blog entry [having been directed here by Cafe Hayek]. All it taught me was that Mr. Higgs disagrees with Mr. Abrams, and that if I really want to find out the reasons why I’ll have to buy his book. I would have preferred more elucidation and less histrionics.
Phil Old | Jun 30, 2011 | Reply
Any article, such as the one Paul Abrams has written, can best be described as having lowered the combined IQ of all those who have read the article. Paul Abrams has subtracted from the sum of all knowledge.
I know Krugman also will occasionally argue WW II ended the depression, but both he and Paul Abrams ignore pent up demand from the rationing during the war years and the return of the military to start families. Only a Keynesian can believe war provides an economic boost. War as an economic boost is just Bastiat’s “Broken Windows Fallacy” in different clothes.
Rick Caird | Jun 30, 2011 | Reply
Please publish an epub version of your book, Dr. Higgs. I like books that I can search electronically for things that I need to find.
Subhi Andrews | Jun 30, 2011 | Reply
@Phil...
Since you read blogs, it’s surprising you don’t know how to find what you’re looking for using Google. I’m a nice guy so I’ll help you out...
“Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s” (March 1, 1992; Robert Higgs; The Journal of Economic History)
“Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War” (Spring 1997; Robert Higgs, The Independent Review)
“Higgs on the Great Depression” (12/15/2008; EconTalk hosted by Russ Roberts)
No purchase necessary.
Frank | Jul 1, 2011 | Reply
I thought of this post while watching a local news story of a severely wounded Iraq war vet returning home after repeated surgeries and months of physical therapy. He emerged from his government-administered repairs almost completely blind, mostly deaf, and with the entire left side of his body paralyzed. The man’s mother and sister were grateful for his return to them, though their words to that affect were uttered as if rehearsed a hundred thousand times. They evinced a weary relief instead of joy. Economists who claim war has any capacity to stimulate real economic growth should be required to serve on the front lines.
Eric Hosemann | Jul 2, 2011 | Reply
Dear Dr. Higgs,
Your lament is certainly understandable, but unwarranted. The influence your writings and teachings have had on people the world over, including me, is probably so large it is now unmeasurable. It takes years, even decades, for the truth to emerge through the fog of smoke and mirrors promulgated by the government and their cohorts.
The Ludwig von Mises Institute started out more than twenty years ago. There are now Mises Institutes in twenty countries. Of course, you’ve been part of that growth.
Here in Brazil, a democratic republic that has had military dictators and socialist regiimes, the economy is so impeded by the government that the people have found numerous ways keep belo the government’s radar. There is a growing libertarian movement here, especially in the south of the country where I live.
Hélio Beltrão, of the Mises Institute Brasil, spoke at the Austrian Scholars Conference in March.
He suggested that a decentralized movement, consisting of small local centers of education in liberty and Austrian economics can be the fastest route to freedom for the people of a country.
Already, two study groups associated with Mises Brasii have sprung up, one in São Paulo the other in Brasilia. A Brazilian friend and I are planning now to start one here in the Serra Gaúcha region. We’ll start with a blog, then add some seminars. We’ll see where it all takes us.
I would urge your readers to consider doing the same wherever they happen to be. Imagine if every city had a voice for liberty. The well educated scholars like you could then be the coaches for the rest of us.
Thank you, Dr. Higgs, for you do for the cause of Liberty.
Bob H | Jul 2, 2011 | Reply
I think the Like button IS (still) broken. Anyway, *I* like this article (or Would).
N. Joseph Potts | Jul 2, 2011 | Reply
WWII prosperity? My parents told me they couldn’t buy tires for the car or gas. Everything was in short supply and rationed. Couldn’t even change jobs without permission. Everyone was busy either being killed or producing war material. Not my idea of prosperity.
Martin | Jul 2, 2011 | Reply
Dr. Higgs,
Several years ago I was serving as Trustee in my town (councilman). Our meetings were not televised, and the local paper rarely, if ever published the happenings within the town hall. With nearly 4 years of 5-1 votes including anything from putting an additional tax on hotels that did not yet – and still don’t – exist, to creating a storm drainage commission and taxing authority for it, to socializing trash pick-up and increasing the mil-levy for a senior center, I became disgusted as you now sound. One day in verbalizing my disgust, and openly questioning why I put myself through this agony given that I was rarely, if ever victorious in my arguments and votes, my brother said to me something that changed my life. He said: “you may not think that anyone notices, and indeed from time to time no one does, but I support you because you are a candle in the window, and because you fight the good fight. Far too few of us are willing to do that” I know that his intention was to cheer me up, but it did far more than that.
A few weeks ago a town employee asked me to run for Mayor. “Why?” I asked, “I never accomplished anything while I was on the board, and having been off of the board for nearly 4 years, I’d have even less influence now.” To which she replied; “Your arguments in favor of your positions were the only that ever made any sense. I didn’t always agree with you, but you changed the way that I look at town politics. It’s been too long since we had anyone discuss reason at a meeting.” I must be honest, this has affected me deeply.
Jefferson, Franklin, Hayek, Mises, et. al. were not trying to influence my generation when they made the arguments that they did, they were fighting their fight in their time. Yet here I am deeply changed nonetheless.
Dr. Higgs, take heart, to quote my brother who is wise beyond his years, you sir are a candle in a window; a candle in a dark room in a black world. One day the life of a wayward stranger will be changed – perhaps saved – by what you do here today. The sad thing is not that you are not making progress today, but that you will not be present for the future progress made in your honor.
joe4liberty | Jul 6, 2011 | Reply
Beautifully and well said, JoeLiberty. Dr. Higgs is being overly pessimistic. Does he not realize how large the grassroots movement in favor of Liberty has become? In the ’60′s we were anti-war, pro civil rights but no one was talking political economics, Austrian Economics was virtually unheard of in our universities.
Today the growth of Liberal Economic ideas, Austrian School Economics is spreading all over the internet. Dr. Ron Paul is no longer considered an eccentric. Four years ago, he couldn’t get any air time at all. While it is still a struggle, Dr. Paul’s grass roots movement is so powerful that mainstream Republicans have attempted to steal his Taxed Enough Already party. They will not win that battle. Dr. Paul’s Campaign for Liberty and all of its offshoots cannot be stopped. The economic theory is solid and his integrity is unquestionable. Without the fundamental and philosphic foundation provided by Dr. Higgs, his contemporaries and his forerunners, Dr. Paul would not be able to command the following that he has today. His following is growing and all of this is based on the efforts of the Austrian School of which Dr. Higgs is an integral part.
Jerry Arnowitz | Jul 10, 2011 | Reply
Well that last paragraph in the article struck me head on; I plan on majoring in economics. It’s to be expected, debate has already shown me how futile my efforts to effect change can be.
Ben Adams | Aug 23, 2011 | Reply
Well I appreciate the Dr.’s work (if that counts for anything).
His work has not been in vain. Statists will never concede the point, even when they know it is true.
What is salient is whether they can get the public to believe the canard that war is the cure for an economic depression. This is pounded home time after time relentlessly, as they topple the economy into a depression and then offer their megalomaniac population control scheme as salvation.
But these memes are becoming ever more difficult for the Ministry Of Information to pull off. The Internet Reformation is spoiling their ability to hog the microphone, and the public credibility they once enjoyed is washing out from under their foundations. We are not a majority yet, but the swing is inevitable.
John Danforth | Mar 5, 2012 | Reply