“We can not run trillion dollar deficits year after year. That is just an impossible one for the market to absorb. The second thing would be, how would we service that debt down the road? Are we increasing of our productive capacity enough that we can pay it off? If we just are borrowing money to do consumption we will never be able to pay it off.
And guess what, Roosevelt’s debt got paid off by WWII. WWII was the biggest destruction of capital, and human beings too. So the debt got paid off. We had to build new stuff, and we had an income generation again, and we paid it off. So, destruction of old capital is the solution to building new capital.”
– Rajeev Dhawan, Director of the Economic Forecasting Center at Georgia State University, explaining the economics of paying off massive Keynesian debt, on the Bill Handel Show, KFI 640, Jan. 25, 2010.
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The above quotation is not an example of the broken window fallacy. The broken window fallacy only applies when you are destroying your own resources. Regarding WW II, what other explaination can Austrians have for why FDR’s Great Depression ended? After the war, almost every industrial economy in the world (besides the US) was completely or partially destoryed. The US then had roughly 2 decades of incredible economic growth due to the fact that countries had to buy products from the US in order to rebuild their economies.
If the US were to destory the industrial economies of Europe, Japan, and China, economic problems IN THE US would no doubt go away pretty quickly. On the other hand, this “solution” to the problem is, of course, absurd.
If it’s true that WWII pulled us out of the depression by destroying others’ property, then why are the wars in Iraq and Afghanistan not doing the same?
Iran and Afghanistan have insignificant property/capacity. Also, Americans might have seen the war as a benefit to them from afar, but the tragedy and suffering were unreal. Anyone who believes WWII to be a net positive should be ashamed of themselves. Other places in the world like East Europe and most of Asia continued to be miserable hellholes for decades after the war.
Their response is that Iraq and Afghanistan didn’t have a whole lot of things to destroy, so there isn’t much to rebuild. I know, insane.
Two reasons I can think of:
1. Iraq and Afghanistan don’t have the advanced economy that Europe did in 1945 (albeit heavily damaged) that would provide a base for growing a consumer market for US goods. Plus, to the extent they do, they are too small to be much of an impact on US exports, particularly now, since what little Iraq and Afghanistan buy, they can also get from Asia, which Europe could not do in 1945.
2. The “wars” in Iraq and Afghanistan are not really wars in the way that WWII was. WWII ended, and the military was able to wrap up its major operations in a short time. Vast numbers of soldiers were immediately released. It ended with a relatively clean break. Not now. The current wars in Iraq and Afghanistan are occupations. They are endless. They are also very expensive. The cost of maintaining the “peace” offsets any gains the US gets from destroying their economies and forcing them to buy from us, as we did to Europe.
Correct me if I’m mixing up details but I thought the US was paying for a lot of the reconstruction efforts as well. If I am correct on this detail, the money flooding in through Halliburton and other companies doesn’t ‘count’ in the same way because it is coming ‘from’ the US to begin with.
Sorry I don’t have a source for this second point either but I heard on some news report that the Us was expecting to have more of this paid for by Iraq’s natural resources when they were heading into the war; things just didn’t quite work out as planned.
Such reconstruction efforts as were funded during the Iraq invasion were half-hearted and ineffectual. The purpose was to transfer money from the US Treasury to the firms gaining reconstruction contracts. The work was either shoddy or unfinished, and the costs astronomical. No-bid, cost-plus contracts ensured, for example, that the world’s most expensive concrete be shipped to Iraq from across the globe… while Iraq’s own flourishing concrete industry was allowed to die, forcing tens of thousands of desperate men out of work and into the Insurgency. Because the higher the cost, the greater the cost-plus profit to be gained.
So one purpose of the war was to transfer billions of dollars to friends of the administration under the benign guise of “reconstruction money”.
Another purpose has been less easy to discern. Most people believe either that “we” were unsuccessful in taking Iraq’s oil for ourselves, or that we never intended to take that oil in the first place. Both are inaccurate.
It’s not important physically own the oil. What’s important is to control the flow. And by allowing Iraq’s oil infrastructure to be destroyed, the effect of the invasion was to constrict oil supplies in a very tight world market… sending prices up.
Between 2003 and 2005, the price of a barrel of crude doubled, from approx. $25 to approx. $50. On this basis, the fortunes of every company distributing non-Iraqi oil doubled as well.
By 2008 the price broke $90, and has now been fairly stable at $80. Was the war about the oil? You tell me.
There were, to be sure, a great many other reasons. Iraq was the traditional center of Arab culture, and a vital power center in the global chess game. Also there was a plan that didn’t quite pan out, to make Iraq the first ideologically pure free market nation on earth (in a Friedmanesque sense). Check out Paul Bremer’s One Hundred Orders (link below). No limits to be placed on foreign ownership of Iraqi industry, nor on the repatriation of profits. Iraq was to be sold cheaply to the highest bidders, the way Russia was sold. Only it got too wild there for the business world to want to bid on it.
http://endthewarfirst.org/bremer_100_orders.html
“Such reconstruction efforts as were funded during the Iraq invasion were half-hearted and ineffectual. The purpose was to transfer money from the US Treasury to the firms gaining reconstruction contracts. The work was either shoddy or unfinished, and the costs astronomical. No-bid, cost-plus contracts ensured, for example, that the world’s most expensive concrete be shipped to Iraq from across the globe… while Iraq’s own flourishing concrete industry was allowed to die, forcing tens of thousands of desperate men out of work and into the Insurgency. Because the higher the cost, the greater the cost-plus profit to be gained.
So one purpose of the war was to transfer billions of dollars to friends of the administration under the benign guise of “reconstruction money”.
I agree with what you say here michael. If you think this though, why are you constantly telling us that the state is the solution to all our ills?
It seems to me like you want to put forward the state as the solution when it suits your worldview, but point out the extreme corruption and wastefulness of the state when that suits your worldview. You flit between these as and when you feel like – your general pov simply does not make any sense (it is in fact incoherent delusional bullshit).
You are correct Salami. Michael loves the State when his Saviors are in charge, i.e. the Democrats. He hates the State when the evil ones are in charge, i.e. the Republicans. Yet, he fails to notice that both parties are practically the same. Michael posts are nothing spectacular. They are just boilerplate, Democrat talking points bullshit. We have heard it all before.
“It seems to me like you want to put forward the state as the solution when it suits your worldview, but point out the extreme corruption and wastefulness of the state when that suits your worldview. You flit between these as and when you feel like – your general pov simply does not make any sense..”
Salami: The great difference between you and me is that for you, there has to be some great unifying theory that explains everything all at once. And the world just isn’t like that.
Some things the state does are good. Others are bad. It is at times wasteful, at times evil and at times very useful to us. Is that so hard to wrap your head around?
Richie: I don’t mind that your comment is peurile and juvenile, that’s to be expected around here. But I do mind that it’s inaccurate.
Obama has proven to be a very ineffectual president. He came wanting to end the wars, or at least telling us he did, and immediately continued the same policies carved out by his predecessor. And in his non-war policies, like health care, he has been the Great Compromiser, giving away not only the high ground but the middle ground even before the debate begins. The Democrats generally offer lip service to social ideals, but rarely do anything about them once in office.
And if you look over the past sixty years you find that the Ds have been even more of a war party than have the Rs. If you want to know where I stand you can just ask.
No thanks. Good bye.
“I agree with what you say here michael. If you think this though, why are you constantly telling us that the state is the solution to all our ills?”
The question is, Mr Salami, why do you think I say that? I don’t believe it and I’ve never said it. To think so would be both stupid and simplistic. And I defy you to find a quote where I’ve said that.
Government provides many actual solutions. It also provides many potential solutions, if properly directed and managed. It also provides lots of headaches, inefficiencies and huge loads of downright evil. Counterproductive, insanely expensive, stupidly conceived and inhuman evil.
Is everything in your world either totally good or totally bad? Let’s take water. Without it you die. With too much of it, you also die. Isn’t the trick to get the amount just right?
I get annoyed with simple minded approaches.
michael – you are an evasive, lying disgrace.
When I ask “…why are you constantly telling us that the state is the solution to all our ills?” you say “The question is, Mr Salami, why do you think I say that? I don’t believe it and I’ve never said it. To think so would be both stupid and simplistic. And I defy you to find a quote where I’ve said that.”
You DO constantly and repeatedly proclaim that the state is the solution to problems (maybe not EVERY SINGLE problem, but you knew I never meant that that anyway and are just playing games). Let’s see if I can find an example. I’ll look at, oh I don’t know, the last tripe diatribe of yours that I read 2 days ago, quoted below.
“Let’s take a look at how an actual free market operates. In ancient times the bakers cut the bread with sawdust. The grain sellers used loaded scales. The gamblers used loaded dice. And the pickpockets roamed the crowd. Sure, sometimes one got caught and the angry crowd tore them apart. But not so often that the cheap hustlers didn’t all think they could make a living on the strength of their wits there. It was unsatisfactory. And that’s why the King became involved. He sent deputies into the marketplace with the express purpose of finding the cheats that so distorted the market’s activities. And when one was found he was promptly hanged, as an example to the others. It still wasn’t perfect– but it was better.”
Here, you propose, out of the clear blue sky, that the state – which you agree to be sometimes “evil” – step in as the solution to these (essentially trivial) problems. This is a regular theme in your claptrap.
But now you suddenly are CLEARLY saying the state is not well suited to solving ALL problems. Great – I’m with you there. From now on then, maybe you could say why the state – which in your view at times “provides lots of headaches, inefficiencies and huge loads of downright evil. Counterproductive, insanely expensive, stupidly conceived and inhuman evil” – is, despite these, a good solution to the particular problem at hand and why this capacity for “evil” will not get in the way.
But you won’t – because establishing what is going on isn’t your agenda. Talking about yourself and cherry picking facts to keep you from admitting that maybe, just maybe, you don’t really understand what you profess to be an expert in.
“Is everything in your world either totally good or totally bad? Let’s take water. Without it you die. With too much of it, you also die. Isn’t the trick to get the amount just right?”
Oh just shut up. You accuse this site of being ivory tower? It’s YOU who constantly wants to make “but on the other hand” type arguments, constantly giving the goldilocks not too hot not too cold argument – sometimes the answer is COLD porridge and any attempt to heat it up is WRONG and refusing to say so is you just showing that, really, you want to be able waffle on for your own purposes – posturing really – rather than establish what is really going on.
I can only echo what was said to you in response to another of your comments on another thread.
Michael: so what we do instead is to get on the gravy train and divert some of the flow our own way. If you don’t choose to do that, I applaud your high principles
Phinn: You make me want to vomit.
You make me want to vomit too. I’m done with you – go away.
Both World Wars, but especially World War II, were extremely profitable to the United States. We did not become involved in the war for quite some time and while we were not fighting in the war, we were selling supplies to the rest of the world to support their war effort. Obviously, we got a ridiculous amount of profit from this. Also, by the end of the war, the countries fighting in the war (for the most part, with one exception being the US, as the fighting in general was not on our soil–not counting the attack on Pearl Harbor, before some ass mentions that) were in shambles. They used the United States to help rebuild.
Iraq and Afghanistan are entirely different wars from the world wars, under entirely different circumstances.
War is still war. It destroys capital and wastes resources. This goes against the grain of Austrian philosophy. WWII did not make the U.S. wealthy – just observe the various controls implemented by the government at the time and the lack of resources which could’ve gone towards creatiing goods and services that do not destroy capital. Inflation is also created and nations go into more debt. Do you know how much capital equipment i.e. tanks, planes, guns etc were left overseas to rot?! Millions! Americans were worse off during the war, as was much of the world. Other economies were detroyed, thus destroying many benefits of free trade (comparative advantage). Unfortunately, it is a common fallacy that WWII brought the U.S. out of the depression. I believe Thomas Woods or Walter Block address this fallacy very well in a lecture. It can be found by checking out Youtube user: libertyinourtime (has many great Austrian lecture posts). Can’t remember the exact name of the post/lecture.
p.s.
American govt deceived people into entering WWII. Pearl Harbour was the nail in the coffin that was “allowed” to happen, much like the Gulf of Tonkin incident is also an official lie (declassifed). The government entered for political reasons, as they often do during economic crisis. Tariffs on Japan – think Adam Smith re commerce not crossing boarders means armies will – helped create popular facist ideals in Japan that brought aggression with it. Likewise today’s war on Terror is also politically motivated and making us poorer for it. Based on lies that futher impoverish the many. No doubt we will soon be invading Iran!
on top of bob higgs’ valuable work debunking the wwII prosperity myth, those interested may find vedder’s paper illuminating.
http://mises.org/journals/rae/pdf/RAE5_2_1.pdf
“you are an evasive, lying disgrace.”
i takes one to know one.
No, it doesn’t.
Have you got anything more substantial to say to me?
The Broken Window Fallacy applies to destruction of anything. If a glazier smashes another man’s window and sells him a new one society is just one window poorer.
By the way, the Austrian explanation for the end of the Great Depression is the fact that the fascistic schemes were abandoned with the war’s end. Is it any surprise we got more eggs after we quit strangling the chickens?
Ah, but fascist schemes were not abandoned everywhere after the war. Communists took “broken window fallacy” thinking to a new level. Deprivation and misery follow everywhere this thinking exists. Why can’t average people see this?
I believe Robert Higgs has argued convincingly that the wartime “prosperity” was really just statistical subterfuge, as production was diverted from consumer goods into war materiel, and of course there was rationing, etc (not to mention Americans who were drafted and killed along with foreigners). True prosperity only returned after the war, when various Keynesian and planning measures were ended.
You mention an important thesis advanced by Robert Higgs.
Also, the wage and price controls in effect during WWII resulted in officially-reported real output being greater than would have been the case without the price controls. And obviously, unemployment was greatly reduced as a result of conscription.
higgs on wwii “prosperity”
http://www.independent.org/newsroom/article.asp?id=138
The glazier and plumber in town A sneak over to town B and destroy windows and plumbing. Town B doesn’t have a glazier or a plumber, so they must hire the glazier and plumber in from town A to fix their windows and plumbing. While this situation is a net negative for “the world”, it provides a boom in the economy of town A. Hence, the broken window fallacy only applies if you are destroying your own resources.
What specific policies were abandoned after WW II?
“While this situation is a net negative for “the world”, it provides a boom in the economy of town A.”
By the same token, if the glazier in town A destroys all the windows in town A, this will be a positive for him. But that’s not the point of the broken window fallacy. The BWF does not say that destroying windows is good for the glazier, but that it is good for the people whose windows are destroyed! Thus, the BWF usually arises in the case that someone else destroyed your goods, and it is an exceptional case when you did the destroying yourself.
It’s a bit harder to see why but it’s bad for town A too in the long run, even for the glazier and plumber too. What those in town A get from the “reparations” purchased by town B is not wealth but money. Money that is now capable of less as some of town B’s resources have to be diverted into replacing destroyed wealth instead of creating more.
unless better more energy efficient windows were used. and perhaps pipes that didnt freeze requireing fewer plumbers anyway.
Ah but you’re falling into the classic trap. Take your example a step further and you will see why, in fact, economy A will be hurt as well.
Suppose the window the glazier breaks in town B belongs to that of the great tailor. Suppose further that many people in town in town A due to his legendary reputation. To offset his cost of a new window he must raise the price of his suits. Now the townspeople who live in town A must pay more to the tailor in town B. An inefficient exchange of wealth has occured and society is still one window poorer.
Or perhaps the plumber from town A destroys a bunch of pipes in peoples homes in town B. Now lets say that some of those people whose pipes were destroyed are regular customers of the great artist who resides in town A. To offest the cost of purchasing fixed pipes from the plumber in town A, they must not purcheases the paintings from the artist in town A. Society is now at a loss of good pipes as well as the paintings that the artist in town A never got to paint.
The broken window fallacy is simply that a broken window is good for society because it allows the glazier to make a new window. This is not true because of the opportunity cost of buying the glass. However, in the above scenario, there is no lost opportunity cost for town A (assuming the money used to pay for the new glass would otherwise be spent buying goods from people in town B). Perhaps my example was not through enough. If Europe buys $1000 of goods from the US in 1937 and $10000 of goods from the US in 1947, this is a net gain for the US.
But remember Europe doesn’t buy 10000 “dollars” worth of goods from the U.S. after a war. It must pay us in its currency… the euro, the deutsche mark, etc. Now if all their stuff is destroyed, then the euros that we get from them can’t be used to purchase any worthwhile goods because all the worthile goods that the currency is backed on are all destroyed.
We may have a temporary customer for exporting our goods, but on the other side of the coin we are further limited in our import capabilities.
“Regarding WW II, what other explaination can Austrians have for why FDR’s Great Depression ended?”
Easy. FDR became worm food.
I’m not joking, this is legitimately a large factor as to why the economy recovered post WW2.
FDR’s death (combined with the fact that in the WW2 period he appointed essentially only real businessmen instead of political cronies to various government organization) resulted in the end of the immense hostility towards business that was present for the entire tenure of the FDR administration. Folks tend to have a much greater incentive to invest when 1) The highest public official in the country is no longer blaming every failed intervention on you and 2) his moronic interventions are no longer occurring.
Loved this comment, Slim, thanks. Didn’t Tom Woods say that a similar effect prevented a depression in 1920?
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Also, “weak stream’s” comment at “August 27, 2010 at 8:12 am”, excellent, thank you.
“The above quotation is not an example of the broken window fallacy.”
Yep, it is.
“The broken window fallacy only applies when you are destroying your own resources. ”
Considering national lines are arbitrary fictions, no, it’s not. There was never anything in its original exposition that said it only applies to resources that lie in your borders.
“Regarding WW II, what other explaination can Austrians have for why FDR’s Great Depression ended? After the war, almost every industrial economy in the world (besides the US) was completely or partially destoryed. The US then had roughly 2 decades of incredible economic growth due to the fact that countries had to buy products from the US in order to rebuild their economies.”
What is your explanation for the destruction and malinvestment of capital causing an increase in wealth? Sounds like the stupidest idea I’ve ever heard. Why not read Robert Higgs’s explanations on the matter, rather than taking this idiotic myth at face-value?
Nope. In the original fallacy, a hooligan destroy’s the Baker’s window not the Baker himsef.
The point of war, like all other large scale economic activity, is for the rich to get richer and gain control over the working class. Pragmatically, capital is not destroyed in war any more than it is by urban renewal demolition. For example, the Twin Towers were built on the cheap and the vacant lot is probably more valuable than when the buildings were on it. It would have cost the owners big bucks to demolish them and haul away the trash. Who paid the garbage dump bills?
Re: Billwald,
That is pure nonsense. Suddenly losing your house or factory is NOT the same as when planning to demolish a structure.
Re: Atown,
You do not understand the fallacy. It’s not “our” resources, it’s the fact that capital is destroyed. Building tanks and planes has the same productive value as making the very rock that hits the window in Bastiat’s story.
It ended much AFTER the war ended, when government involvement in the economy was reduced. GNP numbers after 1946 indicate a massive divestment by the government and, at the same time, a growing investment by the private sector, after many of the old “New Deal” economic policies were phased out after FDR’s death. The war itself brought FURTHER privation for most Americans, most of the productive capacity being tailored to produce bullets and guns, which cannot be worn or eaten nor help to make houses or clothes.
That’s false, in fact it is a grotesque lie. What happened was the economy sprung back to produce the goods people wanted AT HOME, after almost 2 decades of low productivity and high scarcity.
That is a non sequitur. It’s like saying my economic situation would improve as soon as I burn down my neighbor’s house, so that I can sell him construction wood and nails. What if he doesn’t?
Bastiat’s oft-told tale only applies if someone has engineered the war. Absent that, it provides opportunity to the degree that capital assets have been destroyed. All you have to do is mobilize the work force to build new assets. And for that, you need to create some money to pay them with. Just as you would after a hurricane or any other natural destroyer of assets.
You can always pay down the debt that’s been created by taxing their incomes. And it really doesn’t take that long when income taxes are in the 30% range. 2/3 of the debt gets repaid after the first five taxable occasions, that is, whenever the money changes hands.
The formula doesn’t work unless corporations and dividends are taxed at a like rate. Because much of what people buy gets paid into corporations. If their gross income isn’t taxed, the new money gets lost in their profit stream and in subsequent dividends.
Cost accountant time:
When considering destroying capital a comparison must be done with present values of destroying it vs leaving it as-is. There is a time and place to destroy capital goods, but only if:
a. It is planned on being replaced with something far superior.
b. The present value of the enhanced production value less the cost of destruction, rebuilding, and the the lost productive days of the now-destroyed asset is greater than the present value of not destroying the capital at all.
Rajeev Dhawan needs to sit in my desk for a few years before he opens his yap on subjects he knows nothing about.
Wait – Maybe I’m misreading his comments. It sounds like he’s making an Austrian argument (albeit a bitter one):
a) “Everyone” who had incurred a debt was killed.
b) “Everyone” who had issued a debt was killed.
c) All the buildings/land/capital/etc. that had been financed with debt were destroyed
THEREFORE
d) Society had no choice but to go back to producing, saving, and reinvesting.
He should write a book: Economics of the Apocalypse.
I’m not sure I disagree with him (although obviously this can’t be true of ALL debt at the time). But maybe I’m giving him too much credit.
No, he’s saying blow everything up so we can create jobs to rebuild it again.
Here is a list of the myths surrounding the Hoover-Roosevelt Great Depression and WWII period:
1. Hoover was a hands off person. Hoover was anything but this. The people need to read his biography.
2. Roosevelt really saved capitalism by removing any means people had to generate capital. The measures of employment rose and fell during the Depression but capital formation as shown by the stock market was non-existent, long term unemployment high and all the stupid policies failed to get unemployment rates back to where they were in the 1920s.
AND THE REAL WHOPPER:
3. WWII ended the Depression. I really wish the WWII was good for the economy folks would get their history correct. Millions of people across the world were conscripted into a giant orgy of the destruction of Life, Liberty and the Pursuit of Happiness. The economies of Eastern Europe have only recovered in the 1990 and early 2000s. The economies of Central Asia have yet to fully recover from Communism. In the USA, WWII had rationing and complete government control of the economy. People were prevented from increasing salaries and were taxed to the hilt. Of course unemployment was low as conscription resolved the wage desires of the people in the military.
Yes, I will agree that in the immediate aftermath of WWII the returning soldiers who wanted more money began to start businesses and existed for a long time without any foreign competition. So they had control of prices and the economy grew rapidly. This is true of the automobile industry into the 1970s.
But my real argument against WWII ending the Depression is in the area of capital formation valued by the stock market values. Capital formulation only started after the war and was slow then. The Dow Jones on 1929/09/09 was 381 and on 1937/06/01 was 168. On 1946/02/16 it was 204 after the “Good War” had helped the economy. The Dow never fully recovered back to its 1929 high until 1954/11/23 or about 9 years after end of WWII
“Yes, I will agree that in the immediate aftermath of WWII the returning soldiers who wanted more money began to start businesses and existed for a long time without any foreign competition. So they had control of prices and the economy grew rapidly. This is true of the automobile industry into the 1970s.”
I think your comment is directed at me, so I wanted to clarify that I hold the above position (not that WW II itself ended the depression). While WW II and its aftermath were obviously a net negative for the world, it would be hard to disagree that it wasn’t a postive for the US economy. Hence, there is no broken window fallacy if you aren’t destroying your own resources.
It still is. A net exporting nation isn’t any better than a net importing nation. The US spent a good deal of its own national resources just giving it all away. By destroying their capacity, there was nothing they could trade in return for our own goods.
Trade means you give something to get something. By being a net exporter after WW2, we gave something and got nothing. All that “employment” was merely busy work, no different than raking national parks. It just changed the identity of who got something for nothing.
Got nothing? The internationalists who financed WW2 got the international corporations which now control world trade and are responsible for sending jobs off shore and destroying the US middle class.
That’s an unusual view. Is your remedy a shutdown of trade to preserve US jobs? Surely the impositions and cost compliance of the pages and pages of regulations imposed on US productivity would be a better place to start, plus the erosion of the purchasing power of the lower and middle classes by the relentless 2-3% inflation year in year out, plus the sucking up by the Federal governments of all kinds of resources from the private sector.
And US corporations can no longer be said to dominant world trade – and if I’m wrong there, that situation’s changing. The Chinese are coming, as are the Indians, the Brazilians aren’t far behind, the Europeans are back too.
The broken window doesn’t just apply to literally broken things. By diverting scarce resources to fight a war, you are destroying all those things that would have been created if those resources never would have been diverted.
Good point, except for in World War II, when the men left to fight the war, women took their place. Granted, they aren’t as trained since it wasn’t originally their job and many women still did not work, as they had been brainwashed that the only suitable place for them was the home.
What is your point here about the women? That women had to leave their home to go to work only proves how backwards the “War helps the economy” argument is. What if children also had to go back to work?
I suppose that if everybody from age 5 went back to work 60 hours a week, then every body would celebrate the wonderful new economic boom?
It was a positive for the US economy in terms of resolving external debts but in terms of individual wealth accumulation it was not as good as having no war at all.
In comparison to other countries we were certainly better off due to the war, but had no war occurred people in the US would have been better off, if all other things were equal. Why? Because we spent a tremendous amount of resources destroying other countries, and then a lot of our own resources rebuilding countries as well. Had we been left to our own choices without war, we would not have sacrificed those resources and would have used them for our own benefit.
Great points, Bogart. Also, the worlds’ resources were wasted in the war. The US simply attained a relative advantage, industrially speaking. The reserve currency became the USD so it could be printed with abandon without the immediate negative consequences. With Basel all currencies would peg to the dollar so we were actually exporting the inflationary misery as well.
Capital is “stuff of value”. Cash is an option to buy “stuff”. When a window gets broken and there is no residual value, then capital has been lost. The boom to the glazier is a bust to the owner of the broken window. The most obvious way to visualize the invalidity of the broken window fallacy is to assume that all windows are broken. The entire world must work for free for some amount of time to pay the glass makers and glaziers. Good for them bad for everyone else. The same advantage goes to thieves that don’t get caught, good for them, bad for everyone else.
A couple of comments, bogart. First you say it’s false that “Roosevelt really saved capitalism by removing any means people had to generate capital. The measures of employment rose and fell during the Depression but capital formation as shown by the stock market was non-existent, long term unemployment high and all the stupid policies failed to get unemployment rates back to where they were in the 1920s.”
Roosevelt really only had three years in which to perform any miracles: 1934,35 and 36. In 1937 Congress tried prematurely to balance the budget, plunging us back into depression. But during the first three years, the indicators were mostly going up… unlike the direction they were going in the previous four years.
Your next myth: “WWII ended the Depression. I really wish the WWII was good for the economy folks would get their history correct. Millions of people across the world were conscripted into a giant orgy of the destruction of Life, Liberty and the Pursuit of Happiness. The economies of Eastern Europe have only recovered in the 1990 and early 2000s. The economies of Central Asia have yet to fully recover from Communism. In the USA, WWII had rationing and complete government control of the economy. People were prevented from increasing salaries and were taxed to the hilt. Of course unemployment was low as conscription resolved the wage desires of the people in the military.”
Let’s restrict our argument to the United States, please. Europe and Asia are irrelevant to the argument. During the war production was largely limited to war materiel. But the factories were churning out goods and making a profit. They were gearing themselves up toward maximum production capacity, for the first time since the Roaring Twenties. That, to me, indicates a huge growth in capital assets.
And everyone at home had good paying jobs in the production effort. They had to delay purchasing consumer goods, but were building up solid savings accounts. Many were buying war bonds, which were all paid down promptly. So that when the war ended, after a brief period where production had to retool for the domestic market, we had a consumer-driven boom like the country had never experienced before.
We also had generous GI benefits: ample credit under the GI Bill to purchase new homes, decent medical treatment under the VA and jobs for just about everyone. Plus, with the Marshall Plan we created ready customers in Europe for our factory goods. Debt was probably never so advantageously deployed as it was following the war.
The unemployment rate? This is just a quick and dirty look, but throughout the twenties it was in the 4-5% range, indicating a booming economy. And it plummeted from 14.6% in 1940 to 4.7% in 1942. Thereafter, from 1944-1956 it was never above 5.5%.
http://www.infoplease.com/ipa/A0104719.html
So I would offer that “all the stupid policies” actually did “get unemployment rates back to where they were in the 1920s”.
What about immense savings during the war?
Those war bonds represented capital that citizens had accumulated during the war-time period. With such an accumulation of capital and the lack of destruction of assets in the United States, growth was sure to follow.
http://mises.org/journals/rae/pdf/rae2_1_14.pdf
Has anyone read that link?
I’ll have to read this, (and I admit my general ignorance on the topic), but aren’t bonds a balance of credit and debit? I understood bonds as only a net gain on the servicing of the debt by the issuer if the issuer is creating more capital accumulation by issuing the debt? Otherwise, why issue serviceable debt?
wiki defines War Bonds as “debt securities issued by a government for the purpose of financing military operations during times of war.”
So, war bonds would not create a net gain because the issuing government is destroying the “capital goods” they are creating instead of multiplying it, right? This would not create a net gain, it would only move it around because the only way a government can pay of debt is to tax it’s citizens. This seems to me as a borrowing money from Paul, building a machine and blowing it up, then robbing peter to pay Paul off for the debt issuance, plus interest. In the end we loose the interest payment and the value of the capital good they blew up. Spreading this out over a large area and we still have a broken window situation…
Ohh good point, I’ll have to think about that one. Are War Bonds a broken window fallacy? Are War Bonds different from other types of savings? Hmmm
“…So, war bonds would not create a net gain because the issuing government is destroying the “capital goods” they are creating instead of multiplying it, right?”
I don’t see it, Statureman. You buy a war bond and the cash goes into building physical plant to crank out airplanes, tanks and jeeps. After the war, the government taxes you to pay back the debt, but you’re now employed in converting those plants back to making Chevies and commercial planes for the airlines. Business gets to keep the capital improvements that were created through government funding, and makes more profit in expanding into postwar industries like the commercial airlines. Employment stays high. It’s a win-win-win.
The mysteries of accounting can obscure these important pathways for wealth to build on itself. Me, I’d rather have steady work and pay taxes than be unemployed and pay none.
Capital is not numbers on a sheet of paper. Capital is physical, material things that can be used to the benefit of people. The capital base shrinks during war because the state seizes factories that make things people want and converts them into ones that make bombs.
While savings still exist and mostly increase at home during a war, because of this confiscation the rate of savings growth is vastly decreased. The economy would grow a lot more if the war had never happened.
Pardon me if I come off as arrogant (this is a genuine question).
You regard Capital as physical tangible things…would you concede to the idea that these are actually capital goods? From what I’ve gathered from reading Mises and Rothbard, Capital strictly speaking is money made available for investment.
Just re-reading what you wrote I think I get where you’re coming from when you say that the capital base shrinks when the state seizes factories. The capital goods could be said to encompass real Capital in the very fact of their existence. It took real resources to make those goods (land, labor, and capital). So in effect, when destruction occurs it’s not just goods being destroyed but real resources put into those investments ie Capital. Also the time it took to get the consumption goods produced is destroyed, sending societies retrogressing into reworking and re-accumulating real resources and savings.
From what I’ve gathered so far in my studies is that Capital strictly speaking could be defined as total assets minus total liabilities. Because we calculate in terms of a money commodity, this is what people think of as Capital, namely, just a number denominated in money. However it seems when you look deeper into the situation, Capital in effect is not just an amount of money. It’s all the resources (Land, labor, and time) that it took to produce the Capital up unto this point in time. Is this what you’re referring to?
What do you think of this?
There are different types of capital.
Cash isn’t capital. It never has been. At no point in my accounting career have I ever confused cash with capital. Not in basic financial accounting courses nor in industry or anywhere in between. The common term Investment Capital, for instance, isn’t the cash itself. The cash is being used to invest in capital as opposed to “investing” by buying stock equity, which doesn’t translate into actual capital.
Capital, as you’ve noted, is plant, property, land, labor, and time. Cash is but the means to provide payment for those things.
Now, capital can be divided further into unproductive, productive but not valued, and productive and valued.
Unproductive capital is something like your home. When you buy a home you aren’t doing anything with it that produces something of value. It just sits there and depreciates. This form of capital is necessary for basic survival and security. Unproductive capital can also be empty office buildings, unused retail storefronts, a closed down automobile factory, or other capital assets not being used for anything. This form of unproductive capital is not good and is typically created from government action (in absence of government action, unproductive assets of this category frequently get converted, sold, or replaced with that which is productive).
Productive but non-valuable capital is something that produces a product but it has little value. Productive but non-valuable capital always operates at a loss. In the private market, it can be wise to destroy this form of capital to make room for productive but valuable capital. It’s also sold or converted into something valuable. Government is made up almost strictly of productive but non-valuable capital. A military base, a tank, the IRS building, the EPA employee, AMTRAK, this is all productive capital (they all produce something), but the end product is not something valued by the market (war, taxes, regulation, mass transportation). This form of capital leads to the destruction of productive capital as the resources that make up the capital (plant, property, equipment, labor, time) is being diverted for end-uses that are not valued by the actors in the market. Few of us would voluntarily fund the IRS or purchase their services if we were given the option to, which means no one finds any value in it, but it still utilizes capital and it is still productive.
Then there’s productive and valued capital. This capital is the capital we have voluntarily expended or invested toward ends we decided are valuable. This is the form of capital that must be given top priority. This form of capital can’t be labeled via specific industry. The automobile industry may be productive and valued capital one year but productive and non-valued, or even unproductive capital the next. Productive and valued capital is capital that operates at a profit and is the result of when we all have freedom to use the capital as we see fit.
When Austrians talk about the destruction of capital, it doesn’t literally mean blowing up a building. It means any action that destroys or hinders the formation of productive and valuable capital or the conversion of unproductive or the productive but non-valuable capital (ex. the government takeover of General Motors) into productive but valuable capital. This can be done with bombs, but it can also be done with taxes, regulations, minimum wages, union protectionism, tariffs, credit bubbles, government borrowing, or any number of other actions that block the natural desire to turn plant, property, equipment, land, labor, and time into something of value.
Thanks a lot for the detailed response! However you’ve totally confused my idea of what Capital and Capital goods are now haha
It seems that there’s a lot of confusion in Economics on the basic term of what Capital is and means. Am I just not understanding fully?
I often keep hearing on Mises.org lectures from people like Mr. Murphy that Capital is total assets minus total liabilities.
There is a bit of confusion. We’ve been condition from birth into thinking the value in our life is made up of those little pieces of paper with George Washington’s face on it. I think we (Austrians) don’t comprehend sometimes that while we’ve effectively been able to separate capital from cash in our minds, not everyone has. It’s mostly a subconscious thing. It’s assumed the audience knows the difference between cash and capital.
Even in the business world, those who manage a company’s assets understand the difference between the two. Cash can’t do anything if there isn’t anything to buy.
However, mainstream economics does have that level of confusion. Ask your typical econ professor that follows into the tradition of Keynes and you will get an unambiguous yes when asking if cash is capital.
“When you buy a home you aren’t doing anything with it that produces something of value. It just sits there and depreciates.”
Everyone gots to live someplace. My home is the place where I live. It doesn’t depreciate because I maintain it. Working on the house is a better investment than playing golf. Renting would be better for the bottom line if the difference between renting and owning was invested. But then I’d have to take up golf.
That’s why I called it a basic necessity we’re willing to deal with. And maintenance on a non-productive asset isn’t investment. Investment indicates the activity leads to future gains. Keeping your house from falling apart doesn’t fit the bill.
I think we need to differentiate between A) our prosperity if the war never happened and B) Why growth increased after the war. I think we can all agree that if A) never happened we would all be much better off. But since A) did happen, why did B) happen.
Rajeev Dhawan may think that destroying wealth is to growth. Had wealth not been destroyed we would all be better off, but ‘growth’ after a period of destruction and ‘growth’ after a period of no destruction both still take savings and entrepreneurialism and decreased Gov’t involvement in the economy.
The growth at B was the market filling in the pent up demand for a couple of decades. The real question is where would we have been at the final point without the war as compared with both the war and after-war growth period. I would suspect the former would be superior to the rapid post-WW2 growth as an end result.
“Capital is not numbers on a sheet of paper. Capital is physical, material things that can be used to the benefit of people. The capital base shrinks during war because the state seizes factories that make things people want and converts them into ones that make bombs.”
This is a mistake, Seattle. In 1940 American capital assets (a more accurate term for physical plant, or the tangible result of moneys invested in production) were in a badly depleted state. They had been mothballed since 1929 for lack of a strong consumer base. They were outmoded and rusty. And they mostly built stuff people weren’t buying.
In comes the US government, with tons of cash to spiff the place up. They build enough new, state-of-the-art plant to increase production far beyond any level previously achieved in our history. Capital assets were greatly increased, not destroyed.
After the war it wasn’t all that much trouble to change the Jeep factories over to making Dodges and Fords. And the aircraft plants were used to create our modern commercial aircraft industry, with little required in the way of conversion. Because we already had a huge array of modern capital assets.
More evidence we’re headed toward a new war.
“Who is ‘we,’ Kemosabe? the people who were killed and injured? Me . . . dob 1940 in Brooklyn, I have lived through the best times in the best country the working people have seen in all of history and I’m very thankful for it.
Georgia State Empiricist Envisions Statism.
Rajeev Dhawan, Director of the Economic Forecasting Center at Georgia State University goes on the radio and uses that propaganda platform to predict that the unConstitutional coup will resort to whatever economic terrorism is necessary to sustain its empire. Is he an agent of the unConstitutional coup or a shrewd observer of the super-State?
Either way he is an empiricist who forgot to factor in the human spirit which will revolt against this deadly cancer that is characteristic of this Dark Ages of economics – from which we are emerging?
Those are the words of a ‘glazier’. This new stuff is in fact just a replacement of the precedent one that has been destroyed. It is like replacing a broken window by a new one. If the window had not been broken and the ‘baker’ had spent the same amount of money on a supplementary new useful window, which is also new stuff, the glazier would have made the same income. So no need to break windows on purpose for the glazier to make the same income.
Secondly, it is good only for the glazier, and there is also no reason to favour the glazier more than an other producer.
Thus when someone says that destruction is *the* solution, he is completly wrong. This is only the viewpoint of a glazier ill-intentioned who wants to pay his debts and make money by bringing misfortune and suffering to others.
Actually, the reason why the economy recovered after World War II was quite simple: During the Great Depression, the money supply had contracted, but the government had imposed price floors, so the price level wasn’t able to adjust to the reduced money supply. During the war, the government basically printed money to pay its expenses, and imposed price controls and rationing when this inevitably led to inflation. After the war the rationing and price controls were ended. Essentially, the inflation of the war nullified the effect of the government’s price controls. The result was far from optimal (there were severe shortages during the war, and severe inflation in the following years), but it was better than the imposed mismatch of prices and money that prevailed during the depression. This is why the depression ended, michael’s paeans to central planning notwithstanding.
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