WEBVTT NOTE The Myth of War Prosperity 1 00:00:00.000 --> 00:00:05.240 You know, the mainstream economists pretend that they know how to forecast. 2 00:00:05.240 --> 00:00:12.000 A lot of mainstream economists actually call themselves forecasters and they purport to 3 00:00:12.000 --> 00:00:14.760 know what's going to happen in the future. 4 00:00:14.760 --> 00:00:23.400 But actually, the Mises Institute knows what's going to happen in the future. 5 00:00:23.400 --> 00:00:29.160 And I'm going to prove it to you because this morning, when I went to breakfast in the hotel 6 00:00:29.160 --> 00:00:57.160 I picked up USA Today, not because I regard this as the paper of record, but because it was there and I picked one up and the headline reads 150 billion dollar insurance policy aimed at shaky economy and the subheadline says stimulus seeks to prevent recession. 7 00:00:57.160 --> 00:01:27.160 and I'm sure if you've been following the news lately you've already heard about all of this discussion going on in Washington DC in which the government is figuring out how to stimulate the economy and we're used to this kind of talk so very few of us probably are startled to say stimulate the economy I've never heard of the government doing that before in fact 8 00:01:27.160 --> 00:01:36.160 If you're my age or younger, this is the kind of talk you've heard and seen in the news for your entire life. 9 00:01:36.160 --> 00:01:45.160 But there was a time, not so long before my generation, when people would have been brought up short by that idea. 10 00:01:45.160 --> 00:01:49.160 They would have said, what do you mean, government stimulate the economy? 11 00:01:49.160 --> 00:01:54.160 How can the government stimulate the economy? 12 00:01:54.160 --> 00:01:59.280 Wouldn't have made any sense to people once upon a time that that government had the 13 00:02:00.040 --> 00:02:02.520 Knowledge or the ability to do any such thing 14 00:02:03.960 --> 00:02:11.160 Of course whenever the government promises to hand out money a lot of people immediately favor the program 15 00:02:11.160 --> 00:02:18.240 And this time of course they purport to have a program that's going to give all of us or nearly all of us 16 00:02:19.560 --> 00:02:24.080 Some money so that promises to get a lot of support of course 17 00:02:24.160 --> 00:02:52.160 But a friend of mine a few days ago likened this stimulus program to the idea that you're going to dip water out of the deep end of the swimming pool and dump it in the shallow end and you do this with the expectation that the water level is going to rise. 18 00:02:52.160 --> 00:03:19.160 Now my old friend Walter Block has been defaming these Chicago economists and once upon a time I taught for years at the University of Washington with many colleagues from the University of Washington and so I want to say a kind word on their behalf. 19 00:03:19.160 --> 00:03:26.920 One of the things they used to always ask whenever we had a lecture or seminar on macroeconomics 20 00:03:26.920 --> 00:03:33.880 that would often boil down to this kind of stimulus proposal at the end, these Chicagoans 21 00:03:33.880 --> 00:03:42.000 would always say, where does the money come from? And it was an excellent question because 22 00:03:42.000 --> 00:03:48.860 if you ask about these stimulus proposals, where does the money come from, you immediately 23 00:03:48.860 --> 00:03:55.660 begin to see the fallacy of the idea that simply by spending money, even a large amount 24 00:03:55.660 --> 00:04:00.140 of money, the government can stimulate the economy. 25 00:04:00.140 --> 00:04:07.740 Now, some would say, of course, your old-fashioned Keynesian would say, well, it's not really 26 00:04:07.740 --> 00:04:14.900 like taking water out of the deep end of the pool and dumping it in the shallow, because 27 00:04:14.900 --> 00:04:29.900 In fact, the government is going to take any money out. It's just going to dump money in, because the government is going to not tax anybody anymore. 28 00:04:29.900 --> 00:04:36.900 It's going to pay for these stimulus payments by increasing the government deficit. 29 00:04:36.900 --> 00:04:46.500 So it's not going to take anything away from you and taxes, it's just going to borrow more money and that won't cost you a dime, will it? 30 00:04:46.500 --> 00:04:58.900 Well, that's the idea behind Keynesian economics that when the government runs a deficit, it can just create real income out of thin air just by spending the money, 31 00:04:58.900 --> 00:05:06.300 which otherwise presumably would have been put in mattresses or never come into existence in the first place. 32 00:05:06.300 --> 00:05:13.700 Now, if you ask yourself, how is it that we came to be in this country a people who, for 33 00:05:13.700 --> 00:05:22.060 several generations, have taken this stimulus talk for granted, you could say, well, it's 34 00:05:22.060 --> 00:05:28.660 Cain's fault. He wrote this book, The General Theory of Employment, Interest and Money, 35 00:05:28.660 --> 00:05:35.040 in 1936, and he had all these bad ideas, and economists picked them up and made them the 36 00:05:35.040 --> 00:05:53.040 and the focus of their study for decades thereafter and while they were doing that, they spilled over onto journalists and other opinion leaders and they became sort of the common lore by which politics is carried out in this country. 37 00:05:53.040 --> 00:05:56.040 But I don't think that's quite how it happened. 38 00:05:56.040 --> 00:05:59.040 Not that that didn't occur. 39 00:05:59.040 --> 00:06:09.040 Yes, the mainstream economists did absorb Keynesian ideas and for several decades, they were very influential in the economics profession. 40 00:06:09.040 --> 00:06:19.040 But I don't think that's how the general public and the journalists and other opinion leaders really came to embrace this idea 41 00:06:19.040 --> 00:06:28.040 that the government can spend money, especially spend money while running a budget deficit and somehow stimulate the economy, 42 00:06:28.040 --> 00:06:34.600 me raise it from recession or prevent it from going into recession as they they 43 00:06:34.600 --> 00:06:39.760 now pretend they're doing I think actually the way people came to embrace 44 00:06:39.760 --> 00:06:48.080 this sort of thinking was as is normal based on an interpretation of history and 45 00:06:48.080 --> 00:06:54.840 that's what I'm going to talk to you about today there's a fallacy that war 46 00:06:54.840 --> 00:07:01.080 War creates prosperity, and the reason in this country so many people subscribe to that 47 00:07:01.080 --> 00:07:07.360 fallacy is not because they've thought it through and realized that war creates death 48 00:07:07.360 --> 00:07:14.800 and destruction and waste of resources rather than creation of wealth. The reason they think 49 00:07:14.800 --> 00:07:20.760 that is that they've all been told, or if they're old enough, they recall that for a 50 00:07:20.760 --> 00:07:27.240 A decade or more in the 1930s, this country wallowed in a deep depression, the worst in 51 00:07:27.240 --> 00:07:35.240 its history, and that eventually it came out of that. And what got it out? As the saying 52 00:07:35.240 --> 00:07:45.480 goes, the war got the economy out of the depression. And not only is that a belief that ordinary 53 00:07:45.480 --> 00:07:54.920 People subscribed to, but to this day, most economists subscribe to that. When I started 54 00:07:54.920 --> 00:08:03.340 writing seriously about this topic almost 20 years ago, I started out by looking at 55 00:08:03.340 --> 00:08:08.840 what economic historians had to say about this episode of our history. And I went back 56 00:08:08.840 --> 00:08:14.960 and I found in the first article I wrote on it, about 12 or 13 citations from leading 57 00:08:14.960 --> 00:08:24.960 The War Got the Economy Out of the Depression 58 00:08:44.960 --> 00:08:51.160 Profession, and the editor interviewed all these people and one of the things he asked 59 00:08:51.160 --> 00:08:59.120 them was what got the economy out of the depression and practically every one of them said the 60 00:08:59.120 --> 00:09:05.820 war got the economy out of the depression. These are people that included several Nobel 61 00:09:05.820 --> 00:09:13.480 Prize winners, including Paul Samuelson and a number of other people, including Milton 62 00:09:13.480 --> 00:09:20.940 Milton Friedman emphasized that it wasn't just government spending but it was also the 63 00:09:20.940 --> 00:09:26.780 big increase in money supply that the Federal Reserve brought about during the war but he 64 00:09:26.780 --> 00:09:34.380 basically with that proviso agreed that the war got the economy out of the depression. 65 00:09:34.380 --> 00:09:42.900 Now I've been actually teaching for 30 years or more that that's wrong. 66 00:09:42.900 --> 00:09:49.300 First of all, the war didn't get the economy out of the depression, certainly not in the way people think, 67 00:09:49.300 --> 00:09:55.100 because they think there was prosperity during the war. 68 00:09:55.100 --> 00:10:00.300 And what I've been trying to show people is that even if you accept all the standard forms of evidence 69 00:10:00.300 --> 00:10:06.900 that economists use to make their arguments, the evidence is not consistent with that idea. 70 00:10:06.900 --> 00:10:10.900 And there are many other problems, I'll touch upon some of them as I go along today, 71 00:10:10.900 --> 00:10:18.300 but I've actually pulled together some of my more important writings on this subject 72 00:10:18.300 --> 00:10:26.380 and those writings form the first half of a book Lou mentioned called Depression War and Cold War. 73 00:10:26.380 --> 00:10:28.980 It was published last year. 74 00:10:28.980 --> 00:10:35.180 So if you want to follow this and see some of the details and the historical evidence, 75 00:10:35.180 --> 00:10:48.180 I invite you to have a look at that book, and I hope it will convince you that I'm not a crank, as Walter said. 76 00:10:48.180 --> 00:11:01.180 You know, we libertarians or Austrian economists are constantly having to fight the indictment of being cranks and of not knowing what we're talking about. 77 00:11:01.180 --> 00:11:04.580 I didn't start out as an Austrian economist. 78 00:11:04.580 --> 00:11:11.060 I was trained in a mainstream university, a very good one in the usual way, and I only 79 00:11:11.060 --> 00:11:17.220 came to my beliefs over a long period of time of examining them and holding them up against 80 00:11:17.220 --> 00:11:23.900 what I learned from Austrians such as Mises and Hayek and others over the years. 81 00:11:23.900 --> 00:11:29.300 So I think I do know what I'm talking about, and I think my book will attest to that, so 82 00:11:29.300 --> 00:11:30.820 I invite you to have a look at it. 83 00:11:30.820 --> 00:11:39.820 Today I want to just go through some of the highlights of what happened to convince people at the time. 84 00:11:39.820 --> 00:11:50.820 Now, here in the chart that I've put up is a very long-term view of the growth of the U.S. economy. 85 00:11:50.820 --> 00:11:54.820 You can't see this very well, so I'll tell you what it shows. 86 00:11:54.820 --> 00:12:05.820 It really starts way back in 1869 and runs all the way up to the 1990s. 87 00:12:05.820 --> 00:12:11.820 Now, it shows the real gross domestic product for the United States. 88 00:12:11.820 --> 00:12:15.820 And the remarkable things I want to call to your attention are these. 89 00:12:15.820 --> 00:12:23.820 First of all, by and large, this chart just shows steady, long-run growth. 90 00:12:23.820 --> 00:12:32.820 The American economy has been growing fairly rapidly since actually the early part of the 19th century. 91 00:12:32.820 --> 00:12:43.820 And most of the time, it grows not perfectly regularly, but with slight ups and downs, it continues to grow year after year. 92 00:12:43.820 --> 00:13:01.820 There are reasons for that having to do with the institutions that became established, such as reasonably good private property rights, most of all, but at all events, that's the long run record. 93 00:13:01.820 --> 00:13:10.820 Now, you'll see that this is a record that extends right up to the present, basically, and in all of our history, there are only two large deviations. 94 00:13:10.820 --> 00:13:40.820 One is the big negative deviation that fills up the entire decade of the 1930s where the economy dips drastically below its trend line and then it recovers and in this chart it looks as if it's sometime in the early 40s it's back on its trend line and then it shoots way above its trend line and it has a big bulge during the World War II years and then it falls 95 00:13:40.820 --> 00:13:53.820 falls back at the end of the war and if you didn't know about the Great Depression in 1946, you've all heard of that, right, the Great Depression in 1946? 96 00:13:53.820 --> 00:14:05.820 Well, you should have because here it's plainly shown right here on the chart using the data that all mainstream economists rely on for their macroeconomic theorizing. 97 00:14:05.820 --> 00:14:17.020 That drop in real GDP from 1945 to 1946 was the largest single-year drop of income in American history. 98 00:14:17.020 --> 00:14:24.580 And that's why you've all heard about the great suffering of 1946 and the people who were dying in the streets. 99 00:14:24.580 --> 00:14:28.940 And, of course, that was all caused by capitalism. 100 00:14:28.940 --> 00:14:33.380 So there's something wrong here, I suggest. 101 00:14:33.380 --> 00:14:35.620 There's something badly wrong. 102 00:14:35.620 --> 00:14:57.620 Now, this is a chart that shows the rate of unemployment in the American economy from 1890 to 1990. 103 00:14:57.620 --> 00:14:59.300 Thank you, Walter. 104 00:14:59.300 --> 00:15:08.660 And as you can see, the unemployment rate tends to be about 5% in our economy, sometimes higher, sometimes lower. 105 00:15:08.660 --> 00:15:13.940 And there have only been two times in our history when it got substantially higher. 106 00:15:13.940 --> 00:15:22.420 One was in the 1890s when there was a period of several years of depression. 107 00:15:22.420 --> 00:15:52.420 but that ended by the 1897, 98 or thereabouts but the other, the one that really stands out in the chart is of course in the 1930s when the unemployment rate rose well above 20% and according to the standard figures it became as high as 25% in 1933 so unemployment rates were very high in the 1930s and that's the principal thing that everybody thinks about 108 00:15:52.420 --> 00:15:59.380 when they think of the Great Depression. Of course, real income fell drastically and many 109 00:15:59.380 --> 00:16:06.100 other measures of economic well-being deteriorated during the 1930s, but the thing that really 110 00:16:06.100 --> 00:16:13.660 struck hardest was this massive unemployment. And not only were nearly a quarter of the 111 00:16:13.660 --> 00:16:21.460 workers without jobs in the early 30s, but probably a third of those who still had jobs 112 00:16:21.460 --> 00:16:51.460 were working reduced hours and virtually everybody was living in fear of becoming unemployed even if he wasn't at the moment so it was a really horrifying episode in American history nothing had ever happened like that before and fortunately nothing like that has happened since but it made a huge impact on people at the time who lived through it and 113 00:16:51.460 --> 00:16:57.460 even carried forward to their children into the next generation and had many effects. 114 00:16:57.460 --> 00:17:05.460 I can't talk about all of them today, but it has an effect you can still see to this day. 115 00:17:05.460 --> 00:17:10.460 If you look at people who came to maturity during the Great Depression, 116 00:17:10.460 --> 00:17:15.460 those people were marked for life and they're very old people now, 117 00:17:15.460 --> 00:17:20.460 but you can see if you sample their attitudes about government involvement in the economy 118 00:17:20.460 --> 00:17:32.060 They are the cohort most favorable to government intervention, and this has much to do with their experience in the Great Depression. 119 00:17:32.060 --> 00:17:42.220 Now, before the 20th century, if you had said to somebody, war causes economic prosperity, they would have thought you were a lunatic. 120 00:17:42.220 --> 00:18:12.220 People knew perfectly well that even though there may be some suppliers to the armies that make money from war, and the undertakers do well, that war is a destructive thing, that it saps resources, that it wastes resources, that it's a horrifying thing economically as well as personally, there's nothing good to be said about it unless you are a very special bloodsucker 121 00:18:12.220 --> 00:18:23.220 If you are a merchant of death, okay, then death is good for your business. But otherwise, war is a bad thing. 122 00:18:23.220 --> 00:18:32.220 It's only in the 20th century, and particularly it's only since World War II that in any serious way, 123 00:18:32.220 --> 00:18:39.220 this notion of wartime prosperity has resonated with the American people 124 00:18:39.220 --> 00:18:44.820 People and to some extent with people in other countries too. And the reason is 125 00:18:44.820 --> 00:18:51.740 because of this idea that the war got the economy out of the depression and to 126 00:18:51.740 --> 00:18:55.320 some extent it got other economies in Europe and elsewhere out of the 127 00:18:55.320 --> 00:19:01.900 depression as well. So war has come to have this this aura of being at least 128 00:19:01.900 --> 00:19:08.340 perhaps a good thing and I've noticed in my life every time we're at the onset of 129 00:19:08.340 --> 00:19:14.300 of a War, there's always a rash of articles in the business press and elsewhere saying, 130 00:19:14.300 --> 00:19:20.780 you know, will this be good for business? You see that every time the U.S. goes to war, 131 00:19:20.780 --> 00:19:24.860 is this going to stimulate business? Is this going to help the economy? Is it going to 132 00:19:24.860 --> 00:19:32.580 drive down unemployment? And what we're seeing there is the grip that this fallacy has on 133 00:19:32.580 --> 00:19:47.580 for Some People. 134 00:19:47.580 --> 00:19:56.580 Now again, particularly for those of you in the back of the room, you may not be able to see very clearly what's going on in this chart. 135 00:19:56.580 --> 00:20:07.580 So I'm going to call to your attention the certain outstanding features of it. 136 00:20:07.580 --> 00:20:20.580 If you look at the civilian unemployment rate, which is in the fourth column, you see that in fiscal year 1940 it was 15.7 percent. 137 00:20:20.580 --> 00:20:42.580 So even after more than a decade of depression, the unemployment rate was very high, so obviously the New Deal had failed to get the economy out of the depression if after all of the improvement that it claimed to have brought about, we still had almost 16% unemployment according to the official measure of unemployment. 138 00:20:42.580 --> 00:21:12.580 Unemployment. Now, we'll note that the official way of measuring unemployment counted millions of people who were working in government emergency employment programs as unemployed. And if you didn't do that, if instead you counted them as employed, then the unemployment rate would have been about five points less. But nonetheless, unemployment as the decade of the 40s began, 139 00:21:12.580 --> 00:21:18.580 was in the neighborhood of ten percent. Now what happened is that after that it 140 00:21:18.580 --> 00:21:24.780 fell very rapidly and and you can see that that by 1943 it's only three 141 00:21:24.780 --> 00:21:29.300 percent and then for the next couple of years it's only about one percent and 142 00:21:29.300 --> 00:21:34.740 these are the lowest rates of unemployment ever measured in American 143 00:21:34.740 --> 00:21:40.660 economic history and anybody who knows about the labor market during World War 144 00:21:40.660 --> 00:21:45.900 Number two can tell you that in fact there was no unemployment during the war. 145 00:21:45.900 --> 00:21:51.860 Anybody who wanted to work could get a job almost immediately and the only reason anybody 146 00:21:51.860 --> 00:21:57.860 was out of a job was because he was moving from one job to a better one. 147 00:21:57.860 --> 00:22:03.820 So there's no doubt that unemployment disappeared as any kind of a problem whatsoever and in 148 00:22:03.820 --> 00:22:09.180 fact employment was ample during the war. 149 00:22:09.180 --> 00:22:18.180 Now, can we then conclude that it's true, the war got the economy out of the depression? 150 00:22:18.180 --> 00:22:28.180 Well, not exactly. That is, what we're seeing here is not the reduction of unemployment that we would normally see in a business expansion. 151 00:22:28.180 --> 00:22:35.180 And the way to see that is to look at another column, the third column, which is defense employment. 152 00:22:35.180 --> 00:22:54.180 And that shows the percent of the total labor force that was in defense related employment, either in the armed forces or civilian employees of the armed forces or working in arms supply industries. 153 00:22:54.180 --> 00:23:02.180 You'll see in fiscal 1940, less than two percent of the total labor force fell into that category. 154 00:23:02.180 --> 00:23:09.180 The armed forces were very small in 1940, only a few hundred thousand people in the Army and Navy together, 155 00:23:09.180 --> 00:23:17.180 a handful of people in the arms industries, a handful of people working for the War Department and the Navy Department, 156 00:23:17.180 --> 00:23:29.180 so they didn't amount to much, not even 2% of the total labor force, but that figure rose very quickly starting in 1941, 157 00:23:29.180 --> 00:23:52.180 1941, and you'll see that by the peak years of the war, for about four years, close to 40 percent of the American labor force was either in the armed forces, and that's about half of that category, or in the arms supply industries or civilians working for the armed forces. 158 00:23:52.180 --> 00:23:59.780 What we have is a huge drain of people into military related employment during the war. 159 00:23:59.780 --> 00:24:06.980 Now, one way they got them, of course, was simply to offer them jobs, and so people would 160 00:24:06.980 --> 00:24:14.260 go take a job at the Pentagon as a secretary or somewhere else in a regular job, working 161 00:24:14.260 --> 00:24:20.780 in war related activity, but what all these people were doing was working in some capacity 162 00:24:20.780 --> 00:24:26.980 to support the actual armed forces, and the actual armed forces went from the few hundred 163 00:24:26.980 --> 00:24:33.500 thousand I mentioned a minute ago to more than 12 million men and women, almost all 164 00:24:33.500 --> 00:24:43.640 men, by 1945. And how did that happen? It happened because more than 10 million men 165 00:24:43.640 --> 00:24:50.900 were drafted, and of the other six million who served at some time in the armed forces 166 00:24:50.900 --> 00:24:58.200 but had enlisted voluntarily, many of them actually joined because they wanted to join 167 00:24:58.200 --> 00:25:00.840 before they got drafted. 168 00:25:00.840 --> 00:25:06.060 If you waited to get drafted, you might well find yourself in the infantry where life was 169 00:25:06.060 --> 00:25:11.780 going to be unpleasant at best and fatal at worst. 170 00:25:11.780 --> 00:25:20.660 So many men decided to jump the gun, as it were, and join before they got drafted and 171 00:25:20.660 --> 00:25:22.500 stuck in the infantry. 172 00:25:22.500 --> 00:25:28.620 So basically the armed forces during World War II, despite all the patriotic sentiment 173 00:25:28.620 --> 00:25:35.300 that existed at the time, the armed forces were built up overwhelmingly by coercion, 174 00:25:35.300 --> 00:25:41.120 by forcing men into the armed forces, by giving them a choice of entering the armed forces 175 00:25:41.120 --> 00:25:44.760 or entering prison. 176 00:25:44.760 --> 00:25:51.560 Well, that's not normally how we reduce unemployment in this country. 177 00:25:51.560 --> 00:25:55.280 And if you think, well, this is a good deal to get rid of unemployment, 178 00:25:55.280 --> 00:25:58.960 I think you need to ask, well, doesn't it depend on how 179 00:25:58.960 --> 00:26:02.480 we get rid of unemployment? If we get rid of unemployment 180 00:26:02.480 --> 00:26:06.960 by taking a lot of innocent men and threatening them with violence 181 00:26:06.960 --> 00:26:10.040 and imprisonment if they don't do as they're told, 182 00:26:10.040 --> 00:26:13.400 That's not quite what we think of as a business cycle expansion. 183 00:26:20.960 --> 00:26:24.680 Now the remarkable thing you see when the war ends, 184 00:26:24.680 --> 00:26:28.320 the armed forces were disbanded very quickly. 185 00:26:28.320 --> 00:26:31.400 In the first year after the end of the war, 186 00:26:31.400 --> 00:26:35.480 about 10 million or so of the 12 million then in uniform 187 00:26:35.480 --> 00:26:38.800 were released from service, and then 188 00:26:38.800 --> 00:26:41.400 a few more in the following year. 189 00:26:41.400 --> 00:26:46.120 So the armed forces were drastically reduced in 1946. 190 00:26:46.120 --> 00:26:50.720 And you see that in the figures here. 191 00:26:50.720 --> 00:26:53.720 By 1947, that defense-related employment 192 00:26:53.720 --> 00:26:58.280 has fallen back to 5% from 40. 193 00:26:58.280 --> 00:27:05.480 So this was a drastic cutback in the thing 194 00:27:05.480 --> 00:27:07.360 that had reduced the unemployment. 195 00:27:07.360 --> 00:27:17.440 But look what happens to the official rate of unemployment in the next column, it only goes up to 3.8% maximum. 196 00:27:17.440 --> 00:27:22.600 Nowadays, 3.8% would be regarded as superheated economy, right? 197 00:27:22.600 --> 00:27:30.960 But in this Great Depression of 1946, unemployment never got above 4%. 198 00:27:30.960 --> 00:27:34.440 That's because, of course, there was no Great Depression. 199 00:27:34.440 --> 00:27:40.360 and what there was, was just a cut back in defense employment and production. 200 00:27:40.360 --> 00:27:43.360 So let's go next to that and have a look. 201 00:28:04.440 --> 00:28:21.440 In this chart, we have several different measures of military output as a percent of gross national product in the 1940s. 202 00:28:21.440 --> 00:28:28.440 And what you see is that military output was a trivial part of the American economy's production before the war. 203 00:28:28.440 --> 00:28:44.440 One percent or so, one to two percent, rose very rapidly during the early years of the war and then leveled up at approximately 40 percent or more of total output during the peak years of the war. 204 00:28:44.440 --> 00:28:53.440 So the economy was very, very heavily focused on military production during those years. 205 00:28:53.440 --> 00:29:04.440 And that's what produced that big bulge you saw in my first chart, what threw the economy so far above its trend line. 206 00:29:04.440 --> 00:29:12.440 The question we have to ask is what does it mean? What does this production mean? How do we evaluate it? 207 00:29:12.440 --> 00:29:21.440 When it was put into Gross National or Gross Domestic Product by the accountants, they thought it meant something straightforward. 208 00:29:21.440 --> 00:29:30.440 They thought they could put in the value of B-29s just the way they put in the value of breakfast cereal. 209 00:29:30.440 --> 00:29:38.440 But the value of breakfast cereal is basically the product of the number of boxes sold times the price per box, 210 00:29:38.440 --> 00:29:43.920 and that price is the result of demand and supply interacting in markets where 211 00:29:43.920 --> 00:29:49.960 people are free to buy breakfast cereal or not. The price of B-29s was arrived at 212 00:29:49.960 --> 00:29:58.280 in a completely different way. The B-29s were priced in negotiations between a 213 00:29:58.280 --> 00:30:04.920 War Department buyer and some guys from the Boeing Company who sat down and 214 00:30:04.920 --> 00:30:13.080 decided what price they would set on the airplanes, and when the payments were made for the airplanes, 215 00:30:13.080 --> 00:30:19.760 they were made with money which had been taken by force from the American people. 216 00:30:19.760 --> 00:30:22.400 So what are we to make of the price of a B-29? 217 00:30:22.400 --> 00:30:23.580 What does it mean? 218 00:30:23.580 --> 00:30:35.340 If we say a box of breakfast cereal cost $0.50 in 1944 and a B-29 cost $150,000, you know, 219 00:30:35.340 --> 00:30:40.220 prices were low then, what does that mean? 220 00:30:40.220 --> 00:30:45.220 Does that mean that one was worth 300,000 times more than the other? 221 00:30:45.220 --> 00:30:47.700 Well no, we have no way to know what it means. 222 00:30:47.700 --> 00:30:52.620 In fact, it doesn't mean anything because there's no economic process that generates 223 00:30:52.620 --> 00:31:22.620 It's the pricing of these war products. They're just arbitrary. And so if you put this kind of product pricing into the measure of gross national or gross domestic product, you're throwing noise in there. You don't know what it means. At least in the ordinary cases, you have some anchor. You have the anchor of market pricing to keep you from going totally astray in the valuation you attach to different forms of goods and services the economy 224 00:31:22.620 --> 00:31:27.100 Regenerates. In the case of these war products, you don't have anything like that. But the 225 00:31:27.100 --> 00:31:34.100 point here is that during the war, this so-called war prosperity consists entirely of war production. 226 00:31:52.620 --> 00:31:58.620 This is another way to view it. Here we've got the government purchases measured with 227 00:31:58.620 --> 00:32:09.260 the dark bars and the private investment measured in the light bars and runs from 1929 to 1950. 228 00:32:09.260 --> 00:32:14.660 And of course you can see here the big fall in private investment during the Great Depression 229 00:32:14.660 --> 00:32:20.780 and some recovery later. But notice there's another big fall in private investment during 230 00:32:20.780 --> 00:32:27.700 During the war, at the same time that government spending is skyrocketing, and in fact during 231 00:32:27.700 --> 00:32:34.380 the war, government spending was skyrocketing not only to pay the wages of men in the armed 232 00:32:34.380 --> 00:32:40.020 forces, but it was taking over investment. 233 00:32:40.020 --> 00:32:45.780 One of the chapters in my book is called The Socialization of Investment During World War 234 00:32:45.780 --> 00:32:56.780 and has to do with the fact that almost all the investment during the war was made either directly by the government or under some kind of government subsidy and arrangement. 235 00:32:56.780 --> 00:33:07.780 In fact, during the war, you couldn't really make any kind of investment at all without government's approval because just getting raw materials required an allocation of materials from the government. 236 00:33:07.780 --> 00:33:16.780 You couldn't build a new house for yourself, for example, because you wouldn't be allowed to purchase the lumber to do that during the war. 237 00:33:16.780 --> 00:33:23.780 So all the materials were being directed to war purposes for about four years at that time. 238 00:33:23.780 --> 00:33:32.780 So the government spending went up enormously for everything connected with the war, but private investment plummeted. 239 00:33:37.780 --> 00:34:07.780 This is one of my favorite charts I've ever drawn. It shows a lot of things. One is that it shows at the top with that solid line, that's the standard kind of measure of gross domestic product and you see the big drop during the depression and then the great bulge during the winter. 240 00:34:07.780 --> 00:34:15.380 War and I've fitted a trend line to that to connect the values for 1929 with the 241 00:34:15.380 --> 00:34:21.420 next year of comparable prosperity in 1948. So you can see the economy operating 242 00:34:21.420 --> 00:34:27.500 way below trend throughout the the 30s and into the beginning of the 40s and 243 00:34:27.500 --> 00:34:33.100 then operating way above trend. Now anybody who had looked at these data 244 00:34:33.100 --> 00:34:40.100 should have already smelled a rat because these trend lines constructed in this way 245 00:34:40.100 --> 00:34:46.740 where you connect the values of two prosperous years are like measures of the economy's 246 00:34:46.740 --> 00:34:53.740 capacity to produce. The economist says, well, the economy had the resources to have grown 247 00:34:53.740 --> 00:35:01.260 along that trend line. So instead of getting from 1929 to 48 by first dipping and then 248 00:35:01.260 --> 00:35:07.060 Jumping up and then falling back. It could have simply grown smoothly along that trend line. 249 00:35:07.060 --> 00:35:10.840 It had the labor and capital and other resources necessary to do that. 250 00:35:12.540 --> 00:35:19.900 And unfortunately, it suffered these deviations from trend. But if that's a capacity trend line, 251 00:35:19.900 --> 00:35:22.140 how do you produce more than your capacity? 252 00:35:23.260 --> 00:35:27.380 How do you go way above trend if that's a capacity line? 253 00:35:27.380 --> 00:35:37.380 And the answer is, well, it doesn't make sense. And the reason you do that on these charts is because of the accounting problems I was just describing. 254 00:35:37.380 --> 00:35:49.380 This war output wasn't real output. It was arbitrary numbers. It looks in the data as if it means something, but it doesn't. It's just nonsense. 255 00:35:49.380 --> 00:36:01.380 Now, an important thing is to look at the bars at the bottom, these black bars, because they measure the private part of gross domestic product. 256 00:36:01.380 --> 00:36:06.380 Now, during the 1930s, you see that it looks very much like the line above it. 257 00:36:06.380 --> 00:36:15.380 There's the big drop between 1929 and 1933, and there's some recovery, and then there's the depression of 37, 38, and some more recovery. 258 00:36:15.380 --> 00:36:23.420 more recovery but but what you see is that that even in 1940 41 when the 259 00:36:23.420 --> 00:36:30.100 economy has recovered quite a bit it's still far below its trend line the 260 00:36:30.100 --> 00:36:38.100 economy in 1941 it has not recovered fully at all if it had grown smoothly as 261 00:36:38.100 --> 00:36:43.140 it was capable of doing as we know from the trend I've connected between 29 and 262 00:36:43.140 --> 00:36:49.920 in 1948, it could have been much higher than it was in 1941. So private output had not 263 00:36:49.920 --> 00:36:58.920 recovered and then to make things worse, it began to fall. Many of the writers about World 264 00:36:58.920 --> 00:37:06.260 War II like to say that the great thing about it was we had guns and butter. We didn't 265 00:37:06.260 --> 00:37:13.260 We didn't have to bear any opportunity cost when we produced all these B-29s and Sherman tanks. 266 00:37:13.260 --> 00:37:19.260 But that isn't true. And you see that when you look at the private part of gross domestic product. 267 00:37:19.260 --> 00:37:25.260 It dropped substantially and it stayed down at a low level until the war was almost over. 268 00:37:25.260 --> 00:37:35.260 Even in 1945, the private part of gross domestic product was lower than it had been in 1941. 269 00:37:35.260 --> 00:37:45.260 at which time, as I said, it was still representative of a subpar economy, a depressed economy. 270 00:37:45.260 --> 00:37:49.260 So the economy hadn't fully recovered before the war started. 271 00:37:49.260 --> 00:37:53.260 Then the meaningful part of it sank even lower. 272 00:37:53.260 --> 00:38:02.260 And it was only during that glorious year, 1946, when the war ended, 273 00:38:02.260 --> 00:38:13.260 Most of the men were released from the armed forces. Most of the controls on raw materials, prices, and other aspects of the economy were removed. 274 00:38:13.260 --> 00:38:22.260 Only in that year did the private economy rebound, and it rebounded enormously. 275 00:38:22.260 --> 00:38:31.260 A minimum estimate of the growth in 1946 is 30% in one year. 30% in a single year. 276 00:38:31.260 --> 00:38:38.580 There's never a year like that in our history, ever. Not even half that good, ever. 30% in 277 00:38:38.580 --> 00:38:45.140 one year. And what that shows is real. And that's why that first chart I showed you that 278 00:38:45.140 --> 00:38:52.960 shows the Great Depression of 46 is not just spurious, not just nonsense, but it's nonsense 279 00:38:52.960 --> 00:38:58.740 in spades. What looks like the second worst year in American history from the standard 280 00:38:58.740 --> 00:39:08.540 GDP data was in reality the best year ever in year-to-year performance of all time. This 281 00:39:08.540 --> 00:39:16.020 was the real peace dividend, the real peace dividend. And after that the economy began 282 00:39:16.020 --> 00:39:20.800 to perform much better and it continued to perform much better from that time forward 283 00:39:20.800 --> 00:39:26.240 because it never had to endure this kind of wrenching deprivation that it occurred during 284 00:39:26.240 --> 00:39:33.240 during World War II, when the government sucked nearly half of the resources out of it for war purposes. 285 00:39:33.240 --> 00:40:02.240 Some of my fellow economists who've argued with me over the years about this argue most strongly with regard to what happened to consumption during the war. 286 00:40:02.240 --> 00:40:13.240 They say, yeah, it's true that the government did a lot of things, produced a lot of military output, but nonetheless, American consumers were better off during the war than they had been before. 287 00:40:13.240 --> 00:40:28.240 And if you look at, again, the standard data that economists use, I've made those into an index number in the second column there, they do look as if they get bigger during the war. 288 00:40:28.240 --> 00:40:41.180 War, looks as if personal consumption per capita actually is growing during the war. 289 00:40:41.180 --> 00:40:53.180 Not much, but okay, they seem to have a case there. Unfortunately, that case is bogus too. 290 00:40:53.180 --> 00:41:03.180 Unfortunately for them, and unfortunately for me, I didn't bring the chart that wraps this up, so let me tell you what is going on here. 291 00:41:03.180 --> 00:41:11.180 During the war, there were price controls over nearly everything in the civilian economy. 292 00:41:11.180 --> 00:41:18.180 You didn't need price controls over the military output, because that was already being set by the military authorities, as I explained. 293 00:41:18.180 --> 00:41:28.180 But nearly all civilian goods and services were subject to price controls, whether it was rents or the price of shirts or shoes or beef steaks, you name it. 294 00:41:28.180 --> 00:41:35.180 Practically everything had a maximum price that you could charge by law. 295 00:41:35.180 --> 00:41:43.180 A number of important goods, because when their prices were controlled, they became very scarce, were rationed. 296 00:41:43.180 --> 00:42:00.180 So that if you went to buy a pair of shoes, or you went to buy a gallon of gasoline, you had to not only pay the official price, but you also had to have a ration coupons of a stipulated amount, so there was a kind of two-price system. 297 00:42:00.180 --> 00:42:09.780 System. I've actually brought a ration book with me today because I intend to be prepared 298 00:42:09.780 --> 00:42:20.400 in case our masters decide once again to reimpose the system on us. But this made life even 299 00:42:20.400 --> 00:42:26.220 more difficult for consumers because it meant that because the goods were priced below market 300 00:42:26.220 --> 00:42:32.020 Values. Sellers are not eager to sell them in great abundance and so people 301 00:42:32.020 --> 00:42:35.740 would have to troop around looking for somebody willing to sell them the goods 302 00:42:35.740 --> 00:42:42.700 they wanted at the controlled price with their coupons, which the government, you 303 00:42:42.700 --> 00:42:48.180 know, said it was unlawful to sell. Naturally, of course, there was a thriving 304 00:42:48.180 --> 00:42:52.340 black market and people commonly gave these things to their friends and 305 00:42:52.340 --> 00:42:55.960 relatives when they didn't need them at the moment because it every month you 306 00:42:55.960 --> 00:42:58.960 had to go to the Ration Board and get a fresh supply. 307 00:42:58.960 --> 00:43:02.600 And every living human being had to have a booklet. 308 00:43:02.600 --> 00:43:06.800 The one I hold in my hand was issued to a two-year-old child. 309 00:43:06.800 --> 00:43:12.400 So this was how a wonderful life was during the war. 310 00:43:12.400 --> 00:43:15.240 And these price controls completely 311 00:43:15.240 --> 00:43:17.600 distort the official data. 312 00:43:17.600 --> 00:43:20.160 We don't really know what the values of goods 313 00:43:20.160 --> 00:43:22.180 were because of these controls. 314 00:43:22.180 --> 00:43:26.580 The official prices are obviously not meaningful ones. 315 00:43:26.580 --> 00:43:31.980 We can try to estimate, and a number of economists have tried to estimate, 316 00:43:31.980 --> 00:43:37.380 how much higher actual prices were than the control prices, 317 00:43:37.380 --> 00:43:42.780 and to make adjustments for the measured rate of inflation. 318 00:43:42.780 --> 00:43:49.180 Probably the best estimate, and I still think it's insufficient for various reasons explained in my book, 319 00:43:49.180 --> 00:44:02.180 was one that Milton Friedman and Anna Schwartz made in the 1980s based on very careful statistical work, but nonetheless, it has deficiencies, which I know they will own up to. 320 00:44:02.180 --> 00:44:12.580 I know that because Anna has endorsed my work, so Milton, I can't get his endorsement today, 321 00:44:12.580 --> 00:44:21.580 But I think Milton was starting to come around too, actually, from what people have told me before he died, and I know Anna has. 322 00:44:21.580 --> 00:44:36.580 So if you adjust for the mismeasurement of the rate of inflation during the war, what you find is that the real value of consumer output was much lower than the official numbers would have you believe. 323 00:44:36.580 --> 00:44:39.580 That is, consumers were not better off during the war. 324 00:44:39.580 --> 00:44:45.820 War, they were not holding their own during the war, they were in fact getting worse off. 325 00:44:45.820 --> 00:44:50.940 Many goods of course weren't available at all, at any price. In the beginning months 326 00:44:50.940 --> 00:44:56.460 of 1942, the government simply ordered the automobile industry to shut down production 327 00:44:56.460 --> 00:45:03.740 of civilian automobiles, and it did, so they weren't available again in substantial numbers 328 00:45:03.740 --> 00:45:33.740 from the beginning of the 1940s until starting in 1946, so no new cars, used cars of course were hard to come by because everybody was trying to get hold of one, there being no new ones available, consumer appliances, things like stoves for your kitchen, practically any appliance made with steel was either not available at all or available in very, very limited quantities, as I said, people had to spend a lot of money 329 00:45:33.740 --> 00:45:39.900 A lot more time and effort just finding the goods they wanted to buy and these jobs they 330 00:45:39.900 --> 00:45:46.020 held in order to buy goods during the war often required that they move long distances 331 00:45:46.020 --> 00:45:50.820 to centers of defense production where they could get these jobs and when they got there 332 00:45:50.820 --> 00:45:53.700 they found that the housing was very hard to get. 333 00:45:53.700 --> 00:46:00.060 They often ended up doubling or tripling up with other people living in very cramped quarters, 334 00:46:00.060 --> 00:46:08.380 Living in tents or shanties or some such housing in places where defense production was concentrated. 335 00:46:08.380 --> 00:46:11.660 So housing really deteriorated during the war. 336 00:46:11.660 --> 00:46:16.700 Rent controls removed the incentive for landlords to maintain properties and so they almost 337 00:46:16.700 --> 00:46:22.940 gave up maintenance, which meant that the housing deteriorated steadily during the war, 338 00:46:22.940 --> 00:46:28.420 which by the way, the entire capital stock of the American economy did as well. 339 00:46:28.420 --> 00:46:36.420 There's one reason for this miracle of production in the sense that they did produce a lot of guns and ammunition without doubt. 340 00:46:36.420 --> 00:46:41.420 One reason is that they did it by using up capital. 341 00:46:41.420 --> 00:46:46.420 They did not do the usual maintenance and repairs on factories and other equipment. 342 00:46:46.420 --> 00:46:54.420 They ran shifts two and three a day instead of one, and so they simply ate up the capital stock, 343 00:46:54.420 --> 00:47:02.420 This is one of the great lessons that Ludwig von Mises taught about war economy, that it results in the destruction of capital. 344 00:47:02.420 --> 00:47:11.420 They gloried in the fact that the government was building new additions to capital, new factories, shipyards, airplane plants and so forth. 345 00:47:11.420 --> 00:47:20.420 But if you look at what was built and look at what it was worth after the war was over, you find that it had very little value in most cases. 346 00:47:20.420 --> 00:47:32.420 So this offset that many economists think the government was making to offset using up the old capital stock is mostly bogus as well. 347 00:47:32.420 --> 00:47:39.420 This doesn't say that the factories didn't produce tanks and airplanes and so forth. They did. 348 00:47:39.420 --> 00:47:47.420 But if you ask what was that worth to consumers, the answer in a sense is nothing. 349 00:47:47.420 --> 00:47:51.460 It was valuable because it helped the country win the war. 350 00:47:51.460 --> 00:47:54.760 That was its only value in most cases. 351 00:47:54.760 --> 00:48:00.060 So even World War II, the classic case that convinced all Americans 352 00:48:00.060 --> 00:48:03.780 that the war got the economy out of the depression, 353 00:48:03.780 --> 00:48:08.580 that government can use huge deficits to stimulate the economy, 354 00:48:08.580 --> 00:48:10.700 the whole episode is bogus. 355 00:48:10.700 --> 00:48:12.220 It's historically bogus. 356 00:48:12.220 --> 00:48:16.900 It's economically bogus and it's been a terribly destructive myth 357 00:48:16.900 --> 00:48:23.900 and Fallacy, to this very day. Thank you very much.