Rothbard: World War 2 ended the Great Depression?

Miscellaneous General
41

The little I’ve read of AE tells me that if Country A is wiped out by a nuke, Country B is also made poorer by that very event.

In fact, saying that impovereshing everyone else will make us rich is the mercantilistic way of seeing things; AE claims that if our neighbors produce more [given that we trade, of course] there is a bigger pie to be sliced, and our cut of it is bigger.

It’s not always an either/or scenario though. One entity can have a bigger pie slice even if the pie itself is shrinking, if that entity has taken over significant market share from the remaining (now much smaller) entities. You also have to consider timeframes in fact - all these growth/shrinkage relationships change over time.

I’ve seen this in business in fact - the company I worked for grew for a few years, even though the sector it was in was shrinking, because it was taking market share away from competitors.

This is not sustainable of course, but it can happen for a period of time. Indeed this is what happened for the U.S. as a result of WW2. The pie itself shrank a lot, due to the largest war in world history. The U.S.'s share of the pie grew though, vis a vis us remaining physically unscathed. So then when the pie started growing again after the war the U.S. economy exploded, both since we had a larger percentage of the pie (for a while), and because the pie itself was growing rapidly.

Alas, as I mention this is always transitory, and our slice, as a percentage of the pie, started shrinking; mostly in the 60’s.

I’ve seen the question asked, “If their industries were destroyed, how could the rest of the world afford to buy American products at all?”

This is actually a different question. The point put forth (including by me) that the other economies were “destroyed” is a bit hyperbolic. In reality the bulk of the destruction was in the productive capacity part of the economy - the factories and such - because that was what was specifically targetted by the thousands of bombing runs during the war. Other facets of the economy were not directly destroyed, at least to the same scale. People still had “stuff” - houses (particularly in rural areas), land, money, etc.. And especially other countries not involved in the war so much - India, China, etc. And of course the Marshall Plan gave them a bunch of money as well. So as a result they were able to buy at least some American goods and services. It’s true they weren’t able to buy much though. My previous point about American competitive advantage though was more intended to illustrate how Americans were not buying foreign goods in the 1950’s and 60’s, but then later starting in the 1970’s started switching to buying foreign goods, as we started to lose the post-war advantage we had.

We did have a trade surplus after the war, and later lost it of course. It wasn’t a huge surplus, but it was a surplus nonetheless. To be honest I’m not sure about our trade balances before the war; I’m not sure if that data’s available online anywhere - I haven’t been able to find it.

42

I see a few problems with what you are saying.

  1. GDP is measured in dollars, not cardinal utility. Even if it was measured in utils, that would not give legitimacy to utils, but rather would reduce the legitimacy of GDP. If the only way to measure GDP was in ounces of fairy dust, would you become a believer in fairies, or start to doubt the validity of GDP?

  2. I don’t think we should confuse “America” with “shareholders of GM”. The shareholders of GM benefit, perhaps, if they have less competition, but the whole world, including all the residents of the US except for possibly the shareholders of GM, loses out. The backup for this statement is Say’s Law, the law of comparative advantage, and the visible benefits of division of labor.

To understand this clearly, let’s look at your example of Saudia Arabia destroying all the world’s oil but its own, and also destroyed all of France. The supply of oil has diminished. Its price will go up even without monopoly effects. Let’s say the price goes up so high that 90% of all income is spent on oil. That means every person in the world, including every Saudi but the few who own the oil wells, will not have almost no money left to buy anything but oil. Every industry in the world, including every other industry in Saudia Arabia but the oil industry, will lose a lot of money, obviously. In fact, for every penny the oil industry makes, all the other industries are losing a corresponding penny. Most will have to close down. In addition, the price of everything that France produced will go up as well for everyone in the world, [including every last Saudi, including the sheiks who won the wells].

The big losers are everyone but the sheiks. The little losers are the sheiks, who now have plenty of money, but none of the goodies France used to offer, as well as most of the products the rest of the world has to offer.

  1. Let us consider the opposite case. Say the US companies GM and Exxon have a total monopoly on all the cars and all the oil in the world. Space aliens drop down a whole new country from the sky, call it New France, and in addition drop down an endless supply of free oil and free cars to every last person in the world. Everyone. All you have to do is look to the skies longingly, and the aliens read your mind and give you all the oil you want at that moment as well as any car you want, be it a new car or replacement parts. Do you think the USA gains or loses?
43

One entity can have a bigger pie slice even if the pie itself is shrinking, if that entity has taken over significant market share from the remaining (now much smaller) entities.

That is true if the entity is a company. Because then the pie that shrank is only one small part of the economy as a whole, but there are plenty of other things for the company to spend its money on. Even then, it is only the company that benefits, not the country in which it is situated. I think my last post elaborated on this point.

The story of your company getting more market share, though interesting, is not what we are talking about. That was a story of decreasing demand on the whole, but increasing demand for your company’s product. WW2 is a whole 'nother kettle of fish. There the situation is decreased supply, which is not good for anyone but the small group [= a few individuals] that owns the remaining supply. Everyone else suffers, including all the residents of the country those few individuals live in.

Our slice of the pie started shrinking in the 60’s not because everyone else had finally opened up their bombed factories, but because we were wasting our resources on the vietnam war and gifts to the polically favored [=great society].

People still had “stuff” - houses (particularly in rural areas), land, money, etc..

We bought up their houses in rural areas and their land? That was the great benefit of trading with them? That even happened? As for money, foreign money is only useful if you can buy foreign products with it, right?

And of course the Marshall Plan gave them a bunch of money as well.

So the US citizenry benefited from giving their money to the Europeans for nothing in return, then having the Europeans use that money to buy up the cars being made here, thus increasing the price of cars to boot. I dunno, I think there’s a flaw there somewhere, not sure what it is.

My previous point about American competitive advantage though was more intended to illustrate how Americans were not buying foreign goods in the 1950’s and 60’s, but then later starting in the 1970’s started switching to buying foreign goods, as we started to lose the post-war advantage we had.

Wait a minute. If we were not buying foreign goods in the 50s and 60s, that means we were either giving our stuff away to those furriners and getting nothing in return [because the return on an export is an import], or else we were not exporting anything either. In either case, I dont see how we had some tremendous advantage from europe having its productive capacity destroyed.

The time is ripe for Smiling Dave to post a link to his enlightening article on imports and exports and trade surpluses and deficits, that we may all be on the same page. Without further ado:

http://smilingdavesblog.blogspot.com/2011/07/imports-and-exports-which-one-is-good.html

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  1. Yes, but the assumption behind GDP is that it is representative of welfare, which is quantifying welfare, and quantifying welfare implies cardinal utility (as ordinal utility cannot be quantified). Now, I’ll give you that a measure like GPP (Gross Private Product) may be value neutral, since it’s purely representative of individuals’ subjective preferences being fulfilled, expressed in their spending. But, GDP includes a significant amount of government spending, so to assume GDP is representative of welfare requires the assumption that government spending is representative of welfare, which requires a value judgement on behalf of the analyst (the value judgement that government spending either represents what people want, through some feature of democracy, or represents what the analyst wants).

  2. It depends on the extent to which GM’s exports boost the strength of the dollar. Now, this analysis is based on freely floating currency, so I apologise if it doesn’t apply to the quasi gold standard of the pre-Nixon era, but I imagine the same principles would still hold. When other countries want to buy GM’s goods, cars, they must purchase American dollars to do so. This increased demand for the dollar therefore increases the value of the dollar, increasing the international purchasing power of all dollar holders and people who earn an income denominated in dollars. This is how market power in American export industries is translated into international purchasing power for American citizens. As an Australian, so I’m particularly familiar with this effect. During the mid 2000s, the Australian dollar fell to as low as US$0.58 per AUD. Then, as demand for Australian resource exports picked up in Asia, particularly China, and our dollar was made attractive by an interest rate of around 4% (compared to close to 0% in most of the developed world), the AUD soared to as high as US$1.10 per AUD. This represented an effective near-doubling of Australian wages, in real terms. The price of everything imported (which is most non-food consumer goods, in Australia) plummeted, particularly electronic goods. One didn’t have to be a shareholder or employee of BHP Billiton or Rio Tinto to share in these benefits, rather they accrued to anybody whose wealth and income were denominated in AUD. This is how residents of the US could benefit if GM had a monopoly on all automobile production, even without being shareholders or employees of GM, if the exports boosted the USD enough to increase purchasing power sufficiently to offset the loss Americans faced from having no other car suppliers.

With your Saudi Arabia counterexample, you’re taking what I said too far. I should make myself clearer. I’m not stating that “in all cases, increased market power/purchasing power will offset the loss from having less goodies overall” (which your counterexample disproves). What I’m stating is that “in some cases, it is possible for increased market power/purchasing power to offset the loss from destroying someone’s industry and having less goodies overall”. Such as the chocolatier example; it’s hard to argue that a chocolatier wouldn’t get enough benefit from destroying all the competition and so having monopoly power to offset the loss from there being no other chocolatiers. And, I’m arguing that America after WW2 may be one of those cases where the increased purchasing power it gained from destroying competing heavy industries made up for the overall loss of welfare it suffered from there being less production in total worldwide.
Also, some specifics. You say “the price of everything that France produced will go up as well for everyone in the world, [including every last Saudi, including the sheiks who won the wells].” Yes, but the value of the Saudi Arabian currency will also increase, due to greater demand for it bidding up prices, which may offset the loss in purchasing power that would result from the higher prices. And, the sheiks would likely share some of their wealth with the populace, to prevent civil unrest, as they currently do (socialist, planned economy). But anyway, I agree that if the price goes up so high that 90% of all income is spent on oil, then the disruption this would cause could well offset any benefit Saudi Arabia gained from the price rise. There is no reason, however, that a more moderate price rice couldn’t accrue a benefit to Saudi Arabia that offset the overall loss to the world from the destruction of France and much oil.

  1. Of course the USA gains. But, the amount of goodies Germany produced pre-WW2 is vastly less than the amount of goodies provided by said aliens (assuming American and Germany were even engaged in significant trade then). I repeat: I’m not stating that “in all cases, increased market power/purchasing power will offset the loss from having less goodies overall”. What I’m stating is that “in some cases, it is possible for increased market power/purchasing power to offset the loss from destroying someone’s industry and having less goodies overall”. Whether the destruction results in a net loss or a net gain to the remaining monopolist, will depend on the nature of the situation in question. For instance, in my chocolatier example, the benefits to the chocolatier from having a monopoly on chocolate likely outweigh any loss he suffers from there being no other chocolatiers (at least in the short term). In your examples, on the other hand, of the planet with only one producing country vs the planet with all countries producing, or the space aliens giving cars, then the benefits to the monopolist are far outweighed by the costs they face if in the monopoly situation (cost of having no other producers / no helpful space aliens). We could continue providing example and counterexamples, but it would make no difference: only analysis of America’s specific situation post WW2 can determine if the benefits that accrued to it from having a near monopoly on heavy industry and technology were sufficient to offset the losses from there being reduced production in the countries damaged by war.
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I’m going to have to defer reading your link and addressing most of your post until later, for time reasons. However I did want to address one thing:

Wait a minute. If we were not buying foreign goods in the 50s and 60s, that means we were either giving our stuff away to those furriners and getting nothing in return [because the return on an export is an import]

Here’s where I and (I think) most Austrians diverge. From what I’ve seen and read (correct me if I’m wrong) Austrians / libertarians generally see trade deficits or surpluses as irrelevant; what’s important to prosperity being the level of trade, specifically that the more the better - right? As you say - anything given is always given in exchange for something, even if that something is money.

(without having read your link yet… I’ll get to it!..)

I propose that no - the surplus/deficit is not irrelevant, that indeed trade deficits are a bad thing, especially in the long run. Here’s why:

Contrary to your statement above - a return on an export is not always in an import. Usually exports are paid for in money, are they not? However money is not a thing. It’s a promise - specifically it’s a promise that whoever is receving the tangible good/service will sometime later provide the good/service in return (either directly or indirectly).

The “sometime later” part is key, and is what seems to often overlooked or at least underestimated. What that “sometime later” is, is borrowing from future productivity. That’s fine and good if the future has slackness in productivity - but what if it doesn’t? When the time comes to provide those goods and services - if we’re otherwise in a stable economy (theoretically - i.e. with good and proper allocation of capital, production, etc) the act of having to steal capital etc from current production results in misallocation of resources. We now have to produce goods that the other country wants, not what we want. This of course drives up prices.

Oil is a great example. Our trade deficit with China has resulted in a level of production in China that has been higher than it should be in a normal equilibrium scenario. As a result, they use their excess US dollars to buy oil, because that’s what they want (inordinately so). This drives up the price of oil, making Americans pay more for oil than they otherwise would, if they hadn’t bought so many cheap clothes from China 10 years ago. So 10 years ago we made choices to improve our quality of life then by buying cheaper clothes from China, with the tradeoff being that 10 years later we would have to pay more for gasoline and heating oil (or wheat, or rice, etc.)

That’s fine and good - as long as the people making those purchases are the ones deciding to make that tradeoff. But they aren’t - the Chinese people are, and “future people” are. They’re driving up the prices of things they want.

In the extreme case - the country doing the borrowing simply defaults (as is starting now in various places). And then of course there’s an extreme misallocation of capital, and an extreme level of inefficiency that exists. In that case the “sometime later” discussed above never comes. Indeed it ends up being a one-way transaction, where the receiver of the goods/services gives nothing (or nearly nothing) in return. This, of course, is very bad for the general economy.

Backing up - if the people of 10-20 years ago knew that they were making that tradeoff, that buying cheap Chinese stuff now would result in lots of pain later, most of wouldn’t have done it. But probably 99.9% of people just don’t have the information necessary to make such a proper tradeoff decision - it’s hidden by so many layers of things - #1 on the list being the ability of the government to spread out such pain via the public debt.

I’m 100% for free trade. But only with the following caveats:

  • It has to be accompanied by sounds fiscal policy - both public and private. Otherwise you get what I described above - imbalances in trade, driven by extreme debt, that end up blowing up and robbing future prosperity.

  • It has to be fair; i.e. the rules the same for both sides. Right now it very much is not - e.g. the U.S. has far more restrictive rules with regards to environmental, workplace, and wage regulations than most of our trade partners. As a result we have an imbalance where we’re able to buy much more stuff than we are able to produce, at a given exchange rate, also resulting in the aforementioned imbalances.

There’s nothing wrong with country (or a person) A being able to produce some good or service more cheaply than their neighbor B, and then trading it to them. However that only works if their neighbor B can produce something else cheaper than A can, and trade it back. If instead A can produce everything cheaper than B, then trade doesn’t work, because B will never be able to pay A back for the goods and services it received; because A will never be willing to pay the price demanded by B, since it can produce the same thing cheaper.

(Sorry I think I got off on a lengthy tangent and laid out the bulk of my trade theses.)

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Well greetings to you, my Aussie friend. I have a bit invested in the Ozzie dollar myself.

  1. Just to get back to WW2 ending the Depression, a swift read of this http://en.wikipedia.org/wiki/Home_front_during_World_War_II, with its talk of starvation and malnutrition etc, shows it was not the case.

1.Yes, but the assumption behind GDP is that it is representative of welfare, which is quantifying welfare, and quantifying welfare implies cardinal utility (as ordinal utility cannot be quantified).

No, it is [meant to be] representative of productivity as measured in dollars. Nothing more. Maybe some economists think it represents welfare etc., but who cares what they think? They have missed the boat.

  1. The case of Australia is indeed intriguing. And I concede that great demand for the Ozzie dollar benefitted all you lucky guys. However:

Was anything destroyed in either Australia or the rest of the world? Nope, quite the contrary. The rise in the Ozzie dollar happened because of increased Australian production. We are discussing a case where the American dollar may rise because of decreased European production.

The idea is simple. When there is stuff out there to buy, your currency being highly valued is good for you. When there isn’t, what can you do with your highly valued money? Nothing.

  1. In any case, I finally bothered to look up the facts. All from wikipedia in various places:

Germany:

At the Potsdam conference, with the US operating under influence of the Morgenthau plan,[1] the victorious Allies decided to abolish the German armed forces as well as all munitions factories and civilian industries that could support them. This included the destruction of all ship and aircraft manufacturing capability. Further, it was decided that civilian industries which might have a military potential, which in the modern era of “total war” included virtually all, were to be severely restricted. The restriction of the latter was set to Germany’s “approved peacetime needs”, which were defined to be set on the average European standard. In order to achieve this, each type of industry was subsequently reviewed to see how many factories Germany required under these minimum level of industry requirements...

The first “level of industry” plan, signed by the Allies on March 29, 1946, stated that German heavy industry was to be lowered to 50% of its 1938 levels by the destruction of 1,500 listed manufacturing plants.[2] In January 1946 the Allied Control Council set the foundation of the future German economy by putting a cap on German steel production capacity: the maximum allowed was set at about 5,800,000 tons of steel a year, equivalent to 25% of the prewar production level.[3] The UK, in whose occupation zone most of the steel production was located, had argued for a higher limited reduction by placing the production ceiling at 12 million tons of steel per year, but had to submit to the will of the US, France and the Soviet Union (which had argued for a 3 million ton limit). Steel plants thus made redundant were to be dismantled. Germany was to be reduced to the standard of life it had known at the height of the Great Depression (1932).[4] Car production was set to 10% of prewar levels, etc.[5]

…West Germany enjoyed prolonged economic growth beginning in the early 1950s (Wirtschaftswunder or “Economic Miracle”).[132] Industrial production doubled from 1950 to 1957, and gross national product grew at a rate of nine or 10% per year, providing the engine for economic growth of all of Western Europe.

…Overnight, consumer goods appeared in the stores, because they could be sold for realistic prices, emphasizing to Germans that their economy had turned a corner. [He seems to be talking about 1949 here].

Oh, here’s a bit more. [Tone seems a bit whiny for a country that mass murdered 11 million people, but the facts remain]:

Contrary to common myth the US did in fact take “reparations”, parts of it by John Gimbel called “plunder and exploitation”, directly from Germany. The US for instance took a 8.9% share of dismantled Western German industry.[27]

The Allies also confiscated large amounts of German intellectual property (patents and copyrights, but also trademarks).[28] Beginning immediately after the German surrender and continuing for the next two years the US pursued a vigorous program to harvest all technological and scientific know-how as well as all patents in Germany. John Gimbel comes to the conclusion, in his book “Science Technology and Reparations: Exploitation and Plunder in Postwar Germany”, that the “intellectual reparations” taken by the US (and the UK) amounted to close to $10 billion.[29][30][31] The US competitors of German firms were encouraged by the occupation authorities to access all records and facilities.[32] In 1947 the director of The US Commerce Department’s Office of Technical Services stated before congress: “The fundamental justification of this activity is that we won the war and the Germans did not. If the Germans had won the war, they would be over here in Schenectady and Chicago and Detroit and Pittsburgh, doing the same things.”[32] A German report from May 1, 1949 stated that many entrepreneurs preferred not to do research under the current regulations (Allied Control Council Law No. 25) for fear of the research directly profiting their competitors. The law required detailed reporting to the Allies of all research results.[32]

The patents, drawings and physical equipment taken in Germany included such items (or drawings for) as electron microscopes, cosmetics, textile machinery, tape recorders, insecticides, a unique chocolate-wrapping machine, a continuous butter-making machine, a manure spreader, ice skate grinders, paper napkin machines, “and other technologies-almost all of which were either new to American industry or ‘far superior’ to anything in use in the United Slates.”[33]

The British took commercial secrets too, by abducting German scientists and technicians, or simply by interning German businessmen if they refused to reveal trade secrets.[34]

Konrad Adenauer stated “According to a statement made by an American expert, the patents formerly belonging to IG Farben have given the American chemical industry a lead of at least 10 years. The damage thus caused to the German economy is huge and cannot be assessed in figures. It is extraordinarily regrettable that the new German inventions cannot be protected either, because Germany is not a member of the Patent Union. Britain has declared that it will respect German inventions regardless of what the peace treaty may say. But America has refused to issue such a declaration. German inventors are therefore not in a position to exploit their own inventions. This puts a considerable brake on German economic development.”[35]

So bottom line, the USA got off to a head start for the few years they kept Germany down, but as of 1950 Germany was booming. They had a name for it, even, the economic miracle.

Japan:

The Japanese post-war economic miracle is the name given to the historical phenomenon of Japan’s record period of economic growth following World War II,…

France:

Les Trente Glorieuses (“The Glorious Thirty”) refers to the thirty years from 1945-1975 following the end of the Second World War in France. The name was first used by the French demographer Jean Fourastié. Fourastié coined the term in 1979 with the publication of his book Les Trente Glorieuses, ou la révolution invisible de 1946 à 1975 (“The Glorious Thirty, or the Invisible Revolution from 1946-1975”). The term is derived from Les Trois Glorieuses (“Three Glorious Days”), the three days of revolution on 27–29 July 1830 in France.

Over this thirty-year period, France’s population and dirigiste economy grew rapidly. These decades of economic prosperity combined high productivity with high average wages and high consumption, and were also characterised by a highly developed system of social benefits.[1] The French standard of living, which had been ruined by both World Wars, had become one of the world’s highest.

But why do single countries. Here’s this:

The post–World War II economic expansion, also known as the postwar economic boom, the long boom, and the Golden Age of Capitalism, was a period of economic prosperity in the mid 20th century, which occurred mainly in western countries, followed the end of World War II in 1945, and lasted until the early 1970s,…

During this time there was high worldwide economic growth; Western European and East Asian countries in particular experienced unusually high and sustained growth, together with full employment. Contrary to early predictions, this high growth also included many countries that had been devastated by the war, such as West Germany (Wirtschaftswunder), France (Trente Glorieuses), Japan (Japanese post-war economic miracle) and Italy (Italian economic miracle).

Now it’s true that the US was the dominant economy, but these other countries were very happy, too. My guess is that the US had the most free-market economy, and was therefore the leader. But it seems to me mistaken to think that the US was growing because nobody else was, when they all were.

As for my case about space aliens etc being an extreme example, the point is that there is an economic law at work. The richer the neighbors, the better for you, as well. The space aliens story is but an extreme thought experiment to show this law in a fashion obvious to all. But the principle behind the story applies always.

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Oh, you own some AUD? Just a warning: it suffered quite a big fall during the last ‘recession’, http://www.exfin.com/images/AUDUSD-10-Years.gif (down to below US$0.65), so if there’s another ‘recession’ it could drop again, which’d really suck if you had it on margin. I don’t doubt its fundamental strength in the longer term, though (but then, if one think there’s serious potential for USD hyperflation, then any currency’s a good bet in the longer term, apart from maybe the Euro, haha!)

  1. But what I’m saying is, if something had been destroyed, then the near-doubling of our purchasing power would have offset it. Unless the destruction of that foreign industry (assuming that the destruction of a foreign industry had been necessary to increase demand for our exports, appreciate the currency, and increase our international purchasing power) caused enough damage to the world economy to double the price of everything, we’d still get more benefit than loss from the destruction. Because, the benefit would be a doubling of our international purchasing power, and to offset that benefit the destruction would have to be so severe as to literally double the price of all internationally produced goods and services, thereby leaving us with no net gain.

  2. You don’t think stuff like "Konrad Adenauer stated “According to a statement made by an American expert, the patents formerly belonging to IG Farben have given the American chemical industry a lead of at least 10 years.” could have given America some degree of monopoly power in technological/industrial production? And, taking an “8.9% share of dismantled Western German industry”. Of course, Germany grew fast, but as packman said, it was growing from a very low starting point. I suppose the only way to be certain would be to make a graph of US Heavy Industry/Technology exports as a percentage of total world Heavy Industry/Technology exports, and if it’s something like 70-80%, then it’d be fair to conclude that the US had sufficient market power to charge ‘monopoly prices’ (prices greater than cost of production). Then, if this percentage starts falling at about the same time America starts slowing down (the 70s), then it’d be reasonable to conclude that declining market power in the export of Heavy Industry and Technology at least contributed to falling (or at least slower growing) American welfare. I don’t have the data to make such a graph, however, and wouldn’t know where to get it.

Here’s a question: what ended the ‘postwar economic boom’, caused a stagnation in US real income growth? Was it the end of the Bretton-Woods, and the adoption of complete fiat money? Was it the 1973 oil crisis, and the OPEC cartel raising oil prices? Did the western world simultaneously adopt restrictive regulations and labour laws? Because I’ve often seen statists argue that post-war economic miracle was due to regulation, and deregulation in the '70s lead to its end, so I imagine it’d be difficult to argue that the 70s and 80s were in fact periods of greater regulation. Personally, I think the best explanation is increased competition on the production of manufactured goods putting downwards pressure on wages. Have you heard of the Heckscher-Ohlin model? http://en.wikipedia.org/wiki/Heckscher–Ohlin_model Imagine there are two factors of production, labour and capital. The return to labour (wages) is proportional to the ratio of capital to labour. The more capital per unit labour, the higher wages will be. Conversely, if the labour supply increases significantly, and the capital supply doesn’t increase proportionally, than the ratio of capital to labour will decrease, and wages will decrease. The Heckscher-Ohlin model illustrates a mechanism by which this effect can be approximated by trade, even without free movement of labour. Essentially, it’s just another way of saying that trade means American low-skilled workers have to compete with Chinese low-skilled workers who are willing to accept much lower wages, thereby pushing American wages down. Look at it this way: if 100million Chinese had immigrated to America in the 1970s, you can’t deny that the increased competition for work would have put downward pressure on wages; less capital per worker means lower wages. Trade can approximate this affect, at least according to the Heckscher–Ohlin model.

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  1. If it falls sharply, so much the better, chance to buy more.

  2. Makes sense.

  3. I don’t know about the rest of the world, but for the US, it was the money printing that financed vietnam and the welfare state that drained the resources and caused inflation. Deregulation means closer to a free market, so that is a good thing, not a cause for recession.

My Sherlock Holmes-like powers tell me, especially based on your last paragraph, that you are more familiar with standard economics than the Austrain version. Because increased production leads to more wealth, not less.

As for the Chinese coolies lowering wages for us all, AE [=Austrian Economics] as I understand it rejects such a proposition, as will be made clear in what follows.

The key question is, why are the Chinese “willing to accept” lower wages? Another thing to consider is this, If a guy with a tractor has sudden competition from a guy who digs with his bare hands, will the tractor guy’s wages drop because there is less capital per worker? Granted that the average of the two wages is lower, but that is a meaningless staistic. The tractor guy is still earning way more, because he has a tractor and the other fellow doesn’t.

This article enlightened me on the whole subject: http://mises.org/rothbard/protectionism.asp

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  1. Yep, just as long as you don’t already own some AUD on margin (meaning you’ve borrowed money from your broker to buy them; leverage) since a drop like that would likely result in a margin call.

  2. Correct, I’ve got a degree in mainstream economics, and most of the AE I’ve learnt has been from this site. But, as far as I’m aware, doesn’t AE also support the idea that wages are determined by capital per worker? Since the productivity of labour is seen as directly determined by the amount of capital it has to work with (bulldozers vs shovels). So, the average labour productivity would still depend on the amount of capital per worker, meaning if the number of workers was increased significantly without a corresponding increase in capital, average productivity would fall, and so would average wages. Imagine the tractor guy gets $30 per hour. The same amount of work can be done by 20 guys with shovels, and they each accept a wage of $1 per hour. Then, since somebody could get a job done by 20 guys with shovels for $20 per hour, why would they want to hire a guy with a tractor for $30 per hour? Hence, the guy with the tractor would have to accept a lower wage in order to compete.

Why are the Chinese ‘willing to accept’ lower wages? Well, literally speaking they’re not ‘willing to accept’ lower wages; they accept whatever wage they can get, lest they not be able to buy things and eventually starve. Equally, if you had 100 million migrants suddenly turn up in the US, they’d accept any work they could, just to pay for food so that they didn’t starve (assuming no welfare/food stamps). From that Rothbard article: “But a wage rate is determined not just by personal quality but also by relative scarcity, and in the United States the worker is far scarcer compared to capital than he is in Taiwan.” So, does this not suggest that if the American worker were to become less scarce compared to capital (a large increase in the amount of workers, not accompanied by an increase in capital), his/her wage rate would decrease?

50

Whether WW2 saved us from the Great Depression is a complex issue and the comments here are very informative. The clearest answer, which makes the most logical sense to me, is that American land was not destroyed in the war nor did it suffer as much loss as the other world powers of the time. The World War created an avenue for America to step into the global economy and leave an indelible mark. The losses of the greatest world powers were so high that all efforts were spent on recovery which means they had high capital investment, while America was relatively untouched.

51

While it wasn’t the only factor that brought the Great Depression to an end, the war definitely had a part to play. It created employment, be it by recruiting/drafting soldiers, factory workers, etc, and left to themselves, women also began to step outside their homes and work. Multiple incomes started flowing into houses that had seen utter poverty during the Great Depression.

52

FDR early 42 “Dr. New Deal is dead, meet Dr. Win the War.” As soon as we got in, Britain, the French gov. in exile, and the Poles sent nearly their entire stocks of gold to the U. S. to pay for weapons. We truely were the arsenal. To give you an idea of the scale of it, the Germans pruduced about 94,000 aircraft during the entire war, we produced about 13,000 just in September of '43. With so many men in uniform and so many women working in factories, unemployment was ended. Companies had to compete for workers but could only pay what was mandated. That is how we got the non-sense of employer provided health care and pensions.

53

I fully agree that the war put an end to the New Deal but as to what ended the depression you need to look at Robert Higgs’ book on Leviathon. You will see that was the soldiers coming home, the retooling of manufacturing capacity and the cutting of government spending by 2/3 that led to the economic boom in the later part of the 20th century for the US.

54

I have Higgs on my to read list. We certainy did not have prosperity during the war but we had full employment; even if way too much of it was government. Luxuries and even most conveniences were in short supply but necessities could be gotten. As to after, the only countries whose manufacturing bases amounted to anything were us and the Soviets; they of course being lost in the la la land of communism. The combination of our manufacturers supplying basically the entire world, and Bretton Woods almost gauranteed our growth. If not for the one legacy of the New Deal to survive the war, ie. Social Security, we might have held off our Leviathon longer and still be free and continue to prosper. Of course Bretton Woods was a giant invitation to excess as well. I think we are in 100% agreement, even without my having read Higgs yet.