Right. But this reallocation typically takes TIME (as Garrison notes in the link posted above). As everyone on this board knows, capital is heterogeneous and it cannot seamlessly transition from one use to another. And this is supposedly why a boom driven by malinvestments is followed by a bust as the capital structure is realigned.
YET, in 1946 we were able to achieve this reallocation WITHOUT a bust. WHY?
This doesn’t sound like the ABCT. As I understand it, the bust is supposed to be the result of the time consuming process of capital structure realignment. There is nothing particularly Austrian about saying the New Deal stalled recovery. It may indeed have prolonged the slump, but that doesn’t explain why we experienced such a deep slump to begin with. And lets be clear that, contrary to your reckoning, that this was a severe slump before the New Deal. Indeed, unemployment was over 20% in 1932 before FDR was even ELECTED. http://en.wikipedia.org/wiki/Great_Depression
And the reason for this slump? It was the natural response to the inflationary boom. At least according to Austrians like Rothbard:
Yes, and growth doesn’t occur instantaneously either. Capital was incrementally allocated towards various remote employments, increasing the productivity of labor, and therefore stimulating economic growth (growth, by definition, is an incremental process). Warranted investments begin, but need a steady flow of capital for their completion, which, of course, requires an adequate amount of savings and an accurate interest rate. The problem with inflation is that it begins investments which cannot be completed on time, at all, or will be completed at the expense of more warranted economic activities–which is why its early phases resemble and actual boom.
First of all, the bust is caused by an increase in the demand for consumer goods (current goods), which increases their prices relative to producer goods, causing an increase in the rate of interest which collapses the structure of production towards its natural position. Since the inflationary boom expanded the structure of production towards remoter productions, the correction will divert the means of production towards direct productions. The extent to which the economy was extended beyond its natural condition will determine the severity of the bust. This is not to say that prolonged inflationary booms lead to long corrections. The length of the correction is, by practical means, determined by government policy. Monetary and fiscal interventionism at first causes the boom, and then tries to maintain the malformed capital structure, and then slows down the correction (liquidation), but continues to direct the freed up resources towards unwarranted productions (what’s going on now). The economy is trying to go back to its natural state, but interventionism distorts (and often prevents) this process.
Yes, FDR was elected in 1932, but Hoover was a proto-new-dealer. He created government programs which were supposed to “put people back to work,” engaged in huge deficits (so much so that FDR’s vice president, during the elections, actually called Hoover a socialist), and told business not to reduce wages because it would mean a lower demand for their products (proto-GT). The theories put forth by Keynes in the General Theory long predate this actual book (goes back to Mercantilist doctrine).
This still does not directly answer my question. So I am not sure how to respond.
“The extent to which the economy was extended beyond its natural condition will determine the severity of the bust.” Right. Exactly what I’m saying. And I’m just having a hard time seeing how the economy of the 1920s was extended further past its natural condition than during WW2. I. just. dont. see. it.
And I have never heard anyone say that the length of recovery is determined by government policy. Not Garrison or Rothbard anyways. Now, certainly government policy can influence the length of recovery. But saying it is “determined by government policy” makes it sound like there is nothing else to consider. In fact, the opposite is true. Garrison explains the bust in ABCT quite well without relying on supposing that the government will erect obstacles to recovery. The primary obstacle to quick recovery in the ABCT is the heterogenity of capital.
Haha I never knew that the “New Deal” was short hand for all government policy from 1929 to 1941. haha just joking, i kinda expected you to say this. And that may also be true, but it is simply not ABCT. Not to say that it isn’t important, but ABCT predicts a slump because of the malinvestments made during the 1920s. Hoover’s and FDR’s policies at most make a bad recession worse. So it is isn’t really important for my question of why there was such a smooth transition in the post war period.
PS* That may be it for me for the night. Have a good evening all!
Because, excuse me, your question is nonsensical. It is not the case that after WW2 the capital supply immediately fell into warranted productions and the economic expansion occurred instantaneously. There was a dramatic recession which freed up the factors of production for potential uses. Those resources began investments (plural), and absorbed the labor supply. If the boom is non inflationary, then growth will continue as long as there’s an adequate capital stream towards investments which began at period “T0” (starts the boom). If the savings supply increases (additional capital), then more remoter productions begin (lengthen the structure of production), increasing the demand/productivity of labor, and therefore the growth rate. Essentially, the boom began in 1946–this is the time element of production (the marginal productivity of the remoteness of capitalist productions is determined by time preference, and is expressed in the loan market when the market rate equals the natural rate).
Maybe it did, maybe it didn’t. The point is that the liquidation process was allowed to happen after WW2 (as opposed to the new deal policies after 1927). But then the boom was arbitrarily magnified by Keynesian inflationary policies. Likewise, the liquidation process was allowed to happen under Volcker.
Sigh, making me quote mine ><:
_What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of the depression? In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably bring the inflationary boom abruptly to an end, and commence the inevitable depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better. This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease.… The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on.The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. -_Rothbard “Austrian Theory of the Trade Cycle, and Other Works.”
Yes, in pure theory this is correct. But this is also why I said “practically,” because extreme interventions must necessarily prevent (only to reemerge later) or delay this process.
That’s one way to put it. Hoover, at that time, spent more than any other president during a period of peace.
Actually, as the article Giant Joe posted earlier concluded there was not a dramatic recession after the war. Check it out.
Ignoring my question doesn’t answer it. According to ABCT, the obstacle to recovery is capital heterogeneity. Even if the government wasn’t making matters worse, it doesn’t mean corrections didn’t need to be made. Look at the Rothbard quote you copy-and-pasted. Rothbard say government intervention can prolong the agony. He doesn’t say that avoiding government intervention during the bust will allow you to avoid the agony all together.
Your quote is irrelevant. I think I explained myself pretty clearly. I said that policy can prolong the recession, but the way you phrased it made it sound like it was the only relevant factor. I said this is wrong because it is more importantly influenced by the heterogeneity of capital. And in fact your quote only supports my point. Again, Rothbard says the government policies will prolong the agony, he doesn’t say that letting the market correct itself will eliminate the agony all together. Saying the length of the bust is determined by government policy is simply false. At most you can say it is determined by several factors. I am guessing you will say that’s what you meant (and some how forgot to mention in your clarification).
Haha oh come on. You made a mistake. You said the New Deal made a 14% recession worse. In fact, unemployment was 23% before the New Deal was even introduced (and no noone calls Hoover’s policies the New Deal). Its okay. Everyone messes up from time to time. Hopefully you will just start Googling the statisitcs before you quote them.
The American industry being intact you should have had the same effect we had in Sweden after the war also.
A massive boost in export and trade to re-build Europe. America send money for it as well which we didn’t, but I am not sure the Marshall-plan was big enough to create much artificial stimulation of the American economy.
The destruction of Europe would also have increased the demand for capital goods a whole bunch, and that is usually where the malinvestments are made so there would be suddenly be actual demand to meet the expectations …
You’re asking the wrong questions. As you’ve already acknowledged, government intervention plays a big role in this adjustment process. The introduction of this variable makes it impossible to hold the ceterus paribus condition, that is, we can’t isolate and identify all of the various factors (and inflation is frequently concealed by productivity gains, and the various indices are spurious at best). We use logic and theory, and then add certain exogenous variables–come on, you should know this [;)]
I didn’t copy and paste it. I had to open the book, and write the whole thing out ><.
No, of course not. Here’s the first part of the quote: “In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably bring the inflationary boom abruptly to an end, and commence the inevitable depression.”
There must be a liquidation–that is, a depression/recession (as the quote clearly says). And we had one.
I said, “the length of the correction is, by practical means, determined by government policy.” This is vague, so I understand the confusion. In pure theory the length of the correction depends on the heterogeneity and complementarity of the capital goods, and the remoteness of their productions. But in the real world, governments interfere, a lot.
And I explained why. People also say that FDR got us out of the recession, does that make that statement correct? Hoover and FDR were both interventionists (which is why the Roosevelt administration called him a socialist). Are you here to talk about theory or meaningless technicalities?
I feel like I need to make one thing clear: You don’t need to purge the economy of all malinvestments for a boom. This is especially true if the government tries to magnify the boom with inflation. You can have a persistent malformed capital structure. A boom can be created at will, and the bust can be delayed for a significant period of time.
But the question is why we didn’t have a severe recession after the war (and again, we didn’t, read the article posted from mises.org). Everyone, including you, keeps saying (for some reason) that the government allowed the market to correct itself so capital restructuring happened quickly.
If this is the case, then this tells me that a lot of people on this board don’t think capital heterogeneity is actually that great of a consideration in understanding business cycles. At least no so great that it isn’t trumped by government policy reaction to the down turn.
Effectively, there is no need to read Roger Garrison. I can get the story you’re telling me about how the New Deal prolonged the recession from Amity Shales. I can make the same arguments everyone else is making without even referencing ABCT.
Now, of course, I don’t think anyone here actually believes that, but it is surprising how few specifically Austrian arguments I’m seeing in this thread.
Anyways, that’s really it for me for tonight (for real this time!!!). I may just let the thread die because I am definately not getting what I expected. I had hoped I would get a list of articles directly addressing the issue of how the Post-WW2 economy handled capital restructuring. Instead, I have only gotten one article (that dealt with a seperate but related question) and a lot of people that seem convinced that capital structuring simply wasn’t a major problem, or at least not a problem that couldn’t be fixed in a few months. Yep, not what I expected.
I don’t even know what you’re talking about at this point. You seem to have a real problem with dynamics and capital theory (which is inherently dynamic). Investments aren’t instantaneously completed. They begin at period X and are completed at period Y. At period X they absorb labor (what Hayek means when he says a “misdirection of the original means of production”), and need a steady flow of savings (real capital) to be completed profitably and on time. There was a recession which freed up the productive powers (the extent to which is unknown), and allowed for more warranted investments, aka a boom. Then the government, backed by Keynesian theory, stimulated investments with inflation and artificially low interest rates. Investments which require an artificially low interest rate (inflation) will fail as soon as the interest rate rises towards the natural rate, thus they need perpetual inflation (which has diminishing returns). If there’s an increase in the demand for current goods relative to future goods (boost in “aggregate demand”) the market rate will rise and force the liquidation (“forced savings”). This is why Hayek is considered to be an “overconsumptionist” (as opposed to underconsumptionist–Keynes/Friedman).
There was a recession, the severity of which, I guess, is controversial. I’ve been taught that it was quite severe. Either way, I’ve already addressed this point. Go back one page and read my last comment (don’t need complete liquidation for robust booms, and can delay bust for an extended period of time. And that there was liquidation during the great depression (the degree of which is unknown), an influx of labor after the war, and deficit reductions–what Mises’ suggests as government policy during a recession).
That article says that output fell by 22.7% and productivity fell by 25%… And then mentions that these numbers were revised. You’re entirely misunderstanding this article. He’s attacking the Keynesian belief that government spending (expansionary fiscal policy) is an effective counter-cyclical tool, and he makes a distinction between depression and recession.
You’re trying to find inconsistencies, but failing miserably.
It must be noted that, by the monetary base graph that Student posted, money supply growth stopped dead in 1945 and did not pick up again before 1950. That means that the recovery before 1950 had nothing to do with an expanding money supply. It was pure old-fashioned liquidationist policy.
I have never seen a source thoroughly discuss the degree of liquidation that would be required for a robust boom to take place. This would come close to answering my question though. Do you have any sources that describes in greater detail the amount of liquidation that is required? If its a book, please provide specific page numbers (or at least the chapter where it is discussed). [D] Cheers!
I am not quite sure how closely you read this article. [:(] You are right that the authors are attacking Keynesian countercyclical policy prescriptions. But the thrust of the argument is that the late 1940s represented one of the greatest government spending CONTRACTIONS of all time (not only was the nation demobilizing, but they note that President Truman refused to support large public works, tax cuts, and other Keynesian countercyclical prescriptions for fiscal policy see page 15) and YET the economy was able to avoid collapse. They are using the LACK of a collapse as evidence against Keynesian countercyclical policy. Also, as a side note, at one point they go beyond simply saying there was no sever collapse, when citing the work of Robert Higgs (page 13): “Carefully examining the work of Simon Kuznets…Robert Higgs believes that there was prosperity and no downturn in the post war conversion era.” They do not disagree with his conclusions.
And you’re right they cite those figures, but they don’t simply say they were revised. They spend a good deal of time explaining why those numbers are flawed and give a misleading impression of the period. Here are their conclusions stated explicitly on page 5:
“Conventional wisdom is correct on one thing, there was no depression in 1946 or anything resembling one. Accordingly, aggregate economic statistics [like those GNP numbers you’re quoting] need to be viewed with a skeptical eye, particuarly in periods where there are pronounced government interventions in markets.”
And later on page 29…
“Modern statistical sources suggest that there was a very severe economic downturn in 1946. The evidence does not support that conclusion and it is clear that the statistical revisions have served to distort the historical experience”
Haha. I think I made myself clear in an earlier discussion that I thought I had with you (maybe it was some one else). I have a great appreciation for the Duhem-Quine thesis (google it). I do not believe that any piece of empirical evidence can refute any hypothesis a particular theory yields. Why? Because the assumptions of the original hypothesis can be revised to preserve the validity of the original theory. This is why I don’t ever say ABCT (or any theory) is wrong, I only say that I find it unconvincing.
As a result, I am not interested in naively trying to refute ABCT using individual instances of economic history. [H]
I am just interested in seeing how Austrians explain the Post WW2 economy. Simple as that.
Though I must say that the defensive posture of some people in this thread has been frustrating. [*-)]
I think it’s a topic that would require more research than most forum members are willing to invest into just to answer your question.
I have a hypothesis, which although I do not necessarily ascribe to, it would be interesting to research further. During the Second World War, industries were heavily planned in the effort to churn out as much war material as possible. I wonder if this represents Jesús Huerta de Soto’s theory that an increase in credit that is directed towards consumption will lead to a flattening of the structure of production. According to him, this will not lead to an investment boom, just continued depression. As a result, a steep contraction in 1946 was unnecessary.
Please take into consideration that this is just an idea that I have, and is not necessarily supported by any real evidence.
I agree that it would be a lot of reasearch, but that’s also why I asked in the initial post for peer-reviewed articles and other sources. I am a big fan of arm chair theorizing, but in this thread I was hoping to dig into the existing literature. I normally just google for this stuff, but I found nothing. And this thread is starting to convince that there is no extensive lit on the subject.
I think your theory sounds interesting, but I am not sure it fits the facts of 1946. As Vedder and Gallaway note (linked above), there simply wasn’t a continued depression during this time. Indeed, the post-war economy was relatively robust. For example, unemployment was in the low single digits for the remainder of the decade. But I might be misunderstanding you. Hopefully I didn’t get it wrong. [H]
Have you read anything by Robert Higgs? Admittedly, the information he offers may not be enough, either. As for my “theory”, I meant depression during the war, not after (i.e. the war represented a flattening of the structure of production, not a lengthening; this is something I would have to research to verify, however).
haha just joking, i kinda expected you to say this. And that may also be true, but it is simply not ABCT. Not to say that it isn’t important, but ABCT predicts a slump because of the malinvestments made during the 1920s. Hoover’s and FDR’s policies at most make a bad recession worse. So it is isn’t really important for my question of why there was such a smooth transition in the post war period.