To libertarians / Rand clones

[The Don]

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Namely, growth implies a creation of wealth

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Excellent, that is what I conclude as well. In fact, its what Adam Smith concluded. Adam Smith further articulated that the source of a nation's wealth is its ability to efficiently transform resources (inputs) into goods and services. It is the people who perform this transformation through their labor which is applied to land and capital. This is what determines a nation's economic production - Y(GDP) is a function of K(capital), L(labor), and resources(M). What this means to the people is income for which they can then purchase goods and services. But without jobs, people lack income. When people lack income, they cannot buy goods and services, and their quality of life plummets. This was clearly the case in the 1930s for many millions of Americans.

Something happened from 1940-1945 that brought tens of millions of new jobs for men in private firms contracted out by the government in order to apply their labor(L) to transform worthless metal (resources, M) into much more valuable goods (value added) such as tanks and planes (final output). In addition, 19 million women were brought out of the homes for the first time and entered the labor force to apply their labor and receive income as well. With all of these jobs, people once again had income, and plenty of it. This led to greater amounts of both savings and consumption than before as well. Of course, supplies of standard consumer goods were rationed, but the income was there none the less, and quality of life increased for the average American, as joblessness vanished entirely. On top of all of this, our ability to "efficiently transform resources" grew during this time period as well, as new processes for mass production were developed for everything from airplanes right down to penicillin.

So, clearly, as our increased capacity and efficiency to transform resources into output was more than fulfilled, our nation's wealth increased. There are several numerical indications of this, such as GDP, index-base 1939, in which it increased substantially. This is typically an indicator of economic growth, however. Economic health is usually defined in terms of unemployment, incomes, and quality of life. We also know that these indicators also improved greatly from 1939 to 1945. After a decade of economic depression, our economy was surging according to all standard economic indicators.

Now the $64,000 question. What happened following the economic depression of the 1930s that so greatly improved our nation's wealth? Clearly it was not WWII, since "wars cannot possibly be good for an economy, ever, period". What, then, was it?

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I thought we agreed that a high GDP and a low unemployment rate mean nothing in terms of actual gains in wealth.

1) The fact that you are relying on GDP to prove this is fallacious. Much of this increase was due to money spent on arms. Even if you do consider arms to be wealth, they are created to be destroyed, thus nullifying their positive effect on the economy. Again, I can hire a guy to dig a ditch and fill it back up again. This will raise the GDP, but won't do anything to increase wealth.

2) Your unemployment argument is also terrible. First of all, roughly one fifth of the workforce went to war from 1941-45. Second, these workers were paying themselves for their labor in the form of taxes and the bonds which they bought from the government. The government took care of the rest by priniting money.

So let's get this straight. People were producing products whose purpose was to be destroyed. In compensation for this, they recieved their own money in return (and some new inflationary money). You actually believe that wealth was created during this period?

Please read this... Broken Window Fallacy and some other stuff you really need to get straight...

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1) The fact that you are relying on GDP to prove this is fallacious.

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No, I didnt rely on GDP to prove anything. GDP indicates a rise in economic production. It is simply an indicator that there was an increase in gross domestic output, somewhere, somehow . Did you even read my post?

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Much of this increase was due to money spent on arms. Even if you do consider arms to be wealth, they are created to be destroyed, thus nullifying their positive effect on the economy.

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All goods are created to be consumed. The government consumed our private firms production of tanks and guns. This says nothing of their effect on the economy. The simple fact that they are produced and then consumed means they count towards economic production

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Again, I can hire a guy to dig a ditch and fill it back up again. This will raise the GDP, but won't do anything to increase wealth.


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No, you are wrong. A ditch is not a good. A ditch does not count in economic output.

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Your unemployment argument is also terrible...these workers were paying themselves for their labor

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Wrong. Unemployment is a significant indicator of economic health. The many millions of unemployed men were not paying themselves because they had no income to begin with. Redistribution of wealth? Perhaps.

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So let's get this straight. People were producing products whose purpose was to be destroyed.

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See above.

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You actually believe that wealth was created during this period?


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Do you still believe that wealth is the ability to efficiently transform resources (inputs) into goods and services? Or is that a completely false definition of economic improvement?

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... Broken Window Fallacy

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The Broken Window Fallacy in no way applies to the economic surge of 1940.

1) Economic production and dedication of resources towards civilian consumer goods was not simply replaced dollar for dollar by military goods production

2) Utilization of labor, resources, and wealth were at stifling lows during a Great Depression

3) It does not factor in redistribution of wealth through income where there was none from the wealthy top to the jobless millions at the bottom (whether or not you agree with this)

4) It does not factor in the vast improvements to technological innovation, technological efficiency and technological efficiency growth rate, our capability to transform resources into finals goods, experienced during WWII

[Kurn, son of Mogh]

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Would you oppose FDR's new deal of the early 30's?

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If I could travel back in time and kill any single person, it would without a doubt be FDR. That evil [censored] did incalculable damage to this country.

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Despite my antipathy for the New Deal, I disagree.

1) The new Deal basically short-circuited the growth of the Socialist Party in the US. As one socialist relative of mine once lamented - "Roosevelt saved the banks for the bankers." Hyperbolic, perhaps. But there's no guarantee the country woudn't have gone even further in that direction.

2) Roosevelt understood that we had to be involved in the growing unrest in Europe. Take him out of the picture, and the America First crowd and fans of Hitler like Joseph Kennedy might have prevailed. A diiferent outcome to WWII might have made the US much worse off.

[tylerdurden]

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Again, I can hire a guy to dig a ditch and fill it back up again. This will raise the GDP, but won't do anything to increase wealth.


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No, you are wrong. A ditch is not a good. A ditch does not count in economic output.


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Digging a ditch is a service, and DOES count towards GDP. Do you think it doesn't count if you just have one dug then filled in? GDP doesn't take into account the motivations for production. Mind-reading is not part of economics.

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Digging a ditch is a service, and DOES count towards GDP.

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Only the labor paid to the ditch digger counts toward GDP. The ditch itself does not count as economic production. No resources were transformed into output. The ditch itself even subtracted value from the land. The economy did not become any more productive and so the example has no relevancy to what began to happen in 1940.

[tylerdurden]

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Digging a ditch is a service, and DOES count towards GDP.

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Only the labor paid to the ditch digger counts toward GDP. The ditch itself does not count as economic production. No resources were transformed into output. The ditch itself even subtracted value from the land. The economy did not become any more productive and so the example has no relevancy to what began to happen in 1940.

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Land value may or may not be changed. The point is, paying a guy to dig a ditch and fill it in DOES increase GDP, even though, as you point out, the economy is not "more productive" in any meaningful way.

In a broader sense, if you grasp this point, you should see that in a full-blown WWII-style wartime economy, even though there are lots of people working and making money, they aren't really better off, mostly because there's not very much for them to spend money on, as the war is consuming almost all of the production beyond basic sustenance.

[Borodog]

For anyone reading along with the thread who is interested in a cogent analysis, Hazlitt mainly emphasizes the refutation of the "Destruction is Good" argument from the side of the war that has suffered destruction of goods and productive capacity in war. But one can easily see that all of his points apply equaly well to the side doing the destroying. One merely has to replace in his imagination all of the goods that were not manufactured so that bombs and tanks could be, which were then destroyed, and we can easily see all of these goods were in a sense destroyed and the productive capacity wasted (although value can be recover from retooling plants postwar that cannot be recovered from bombed out plants postwar).

Riddick seems to be concerned with two main things: Erroneous measurements of economic health such as GDP and unemployment, which have already been dealt with, and technological innovations during war that may lead to increased productivity. Hazlitt deals with the latter in only a cursory manner in his final paragraph. I believe this has already been adequately refuted to the extent that while it is a certainty that technological innovation will take place during a war, funding a war to achieve it has to be the most inefficient R&D program imaginable.

There is another factor that Hazlitt neglects and Riddick has not brought up, although it is in his favor. When you win a war and completely destroy the productive capacities of nations that would compete against your industries on the world market, you produce a competitive advantage for yourself. If the world wanted cars, for example, at the end of World War II, what country could they purchase them from? Japan? Germany? Italy? France? Great Britain? Only the United States.

However, again, this is a small factor affecting a few industries for a relatively brief time (as short as a single decade for most industries). This caould not in any way make up for the destruction of labor and capital in the war.

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From Economics in One Lesson, Henry Hazlitt.

Chapter III: The Blessings of Destruction

SO WE HAVE finished with the broken window. An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moments' thought. Yet the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio and television commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities. In their various ways they all dilate upon the advantages of destruction.

Though some of them would disdain to say there are net benefits in small acts of destruction, they see almost endless benefits in enormous acts of destruction. They tell us how much better off economically we all are in war than in peace. They see “miracles of production” which it requires a war to achieve. And they see a world made prosperous by an enormous “accumulated” or “backed-up” demand. In Europe, after World War II, they joyously counted the houses, the whole cities that had been leveled to the ground and that “had to be replaced.” In America they counted the houses that could not be built during the war, the nylon stockings that could not be supplied, the worn-out automobiles and tires, the obsolescent radios and refrigerators. They brought together formidable totals.

It was merely our old friend, the broken-window fallacy, in new clothing, and grown far beyond recognition. This time it was supported by a whole bundle of related fallacies. It confused need with demand. The more war destroys, the more it impoverishes, the greater the postwar need. Indubitably. But need is not demand. Effective economic demand requires not merely need but corresponding purchasing power. The needs of India today are incomparably greater than the needs of America. But its purchasing power, and therefore the “new business” that it can stimulate, are incomparably smaller.

But if we get past this point, there is a chance for another fallacy, and the broken-windowites usually grab it. They think of “purchasing power” merely in terms of money. Now money can be run off by the printing press. As this is being written, in fact, printing money is the world’s biggest industry—if the product is measured in monetary terms. But the more money is turned out this way, the more the value of any given unit of money falls. This falling value can be measured in rising prices of commodities. But as most people are so firmly in the habit of thinking of their wealth and income in terms of money, they consider themselves better off as these monetary totals rise, in spite of the fact that in terms of things they may have less and but less. Most of the “good” economic results which people at the time attributed to World War II were really owing to wartime inflation. They could have been, and were produced just as well by an equivalent peacetime inflation. We shall come back to this money illusion later.

Now there is a half-truth in the “backed-up” demand fallacy, just as there was in the broken window fallacy. The broken window did make more business for the glazier. The destruction of war did make more business for the producers of certain things. The destruction of houses and cities did make more business for the building and construction industries [, and the manufacture of tanks, bombs, and guns did make more business for arms manufacturers]. The inability to produce automobiles, radios, and refrigerators during the war did bring about a cumulative postwar demand for those particular products.

To most people this seemed like an increase in total demand, as it partly was in terms of dollars of lower purchasing power. But what mainly took place was a diversion of demand to those particular products from others. The people of Europe built more new houses than otherwise because they had to. But when they built more houses they had just that much less purchasing power for something else. Wherever business was increased in one direction, it was (except insofar as productive energies were stimulated by a sense of want and urgency) correspondingly reduced in another.

The war, in short, changed the postwar direction of efforts; it changed the balance of industries; it changed the structure of industries.

Since World War II ended in Europe, there has been rapid and even spectacular “economic growth” both in countries that were ravaged by war and those that were not. Some of the countries in which there was greatest destruction, such as Germany, have advanced more rapidly than others such as France, in which there was much less. In part this was because West Germany followed sounder economic policies. In part it was because the desperate need to get back to normal housing and other living conditions stimulated increased efforts. But this does not mean that property destruction is an advantagve to the person whose property has been destroyed. No man burns down his own house on the theory that the need to rebuild it will stimulate his energies.

After a war there is normally a stimulation of energies for a time. At the beginning of the famous third chapter of his History of England, Macaulay pointed out that:

No ordinary misfortune, no ordinary misgovernment, will do so much to make a nation wretched as the constant progress of physical knowledge and the constant effort of every man to better himself will do to make a nation prosperous. It has often been found that profuse expenditure, heavy taxation, absurd commercial restriction, corrupt tribunals, disastrous wars, seditions, persecutions, conflagrations, inundations, have not been able to destroy capital so fast as the exertions of private citizens have been able to create it.

No man would want to have his own property destroyed either in war or in peace. What is harmful or disastrous to an individual must be equally harmful or disastrous to the collection of individuals that make up a nation.

Many of the most frequent fallacies in economic reasoning come from the propensity, especially marked today, to think in terms of an abstraction—the collectivity, the “nation”—and to forget or ignore the individual who make it up and give it meaning. No one could think that the destruction of war was an economic advantage who began by thinking first of all of the people whose property was destroyed [or expropriated].

Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two side of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods. All this is inherent in the modern division of labor and in an exchange economy.

This fundamental fact, it is true is obscured for most people (including some reputedly brilliant economists) through such complications as wage payments and the indirect form in which virtually all modern exchanges are made through the medium of money. John Stuart Mill and other classical writers, though they sometimes failed to take sufficient account of the complex consequences resulting from the use of money, at least saw through “the monetary veil” to the underlying realities. To that extent they were in advance of many of their present-day critics, who are befuddled by money rather than instructed by it. Mere inflation—that is, the more issuance of more money, with the consequence of higher wages and prices—may look like the creation of more demand. But in terms of the actual production and exchange of real things it is not.

It should be obvious that real buying power is wiped out to the same extent as production power is wiped out[, and that real buying power is diverted to the same extent that production is diverted]. We should not let ourselves be deceived or confused on this point by the effects of monetary inflation in raising prices or “nation income” in monetary terms.

It is sometimes said that the Germans or the Japanese had a postwar advantage over the Americans because their old plants, having been destroyed completely by bombs during the war, they could replace them with the most modern plants and equipment and thus produce more efficiently and at lower costs than the Americans with their older and half-obsolete plants and equipment. But if this were really a clear net advantage, Americans could esily offset it by immediately wrecking their old plants, junking all the old equipments. In fact, all manufacturers in all countries could scrap all their old plants and equipment every year and erect new plants and install new equipment.

The simple truth is that there is an optimum rate of replacement, a best time for replacement. It would be an advantage for a manufactures to have his factory and equipment destroyed by bombs only if the time had arrived when, through deterioration and obsolescence, his plant and equipment had already acquired a null or negative value and the bombs fell just when he should have called in a wrecking crew or ordered new equipment anyway.

It is true that previous depreciation and obsolescence, if not adequately reflected in his books, may make the destruction of his property less of a disaster, on net balance, than it seems. It is also true that the existence of new plants and equipment speeds up the obsolescence of older plants and equipment. If the owners of the older plant and the equipment try to maximize their profit, then the manufacturers whose plants and equipment were destroyed (if we assume that they had both the will and the capital to replace them with new plants and equipment) will reap a comparative advantage or, to speak more accurately, will reduce their comparative loss.

We are brought, in brief, to the conclusion that it is never an advantage to have one’s plants destroyed by shells or bombs unless those plants have already become valueless or acquired a negative value by depreciation and obsolescence.

In all this discussion, moreover, we have so far omitted a central consideration. Plants and equipment cannot be replaced by an individual (or a socialist government) unless he or it has acquired or can acquire the savings, the capital accumulation, to make the replacement. But war destroys accumulated capital.

There may be, it is true, offsetting factors. Technological discoveries and advance during a war may, for example, increase individual or national productivity at this point of that, and there may eventually be a net increase in overall productivity. Postwar demand will never reproduce the precise pattern of prewar demand. But such complications should not divert us from recognizing the basic truth that the wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing.

[TomCollins]

Do you suggest measuring total wealth instead? This seems to be an adaquete measure, as long as you are able to account for inflation.

Does anyone have any statistic figures on the total wealth of the aggeragate of the US in these time periods? Did individual wealth increase more/less than the expenditures of government?

[The Don]

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Do you suggest measuring total wealth instead? This seems to be an adaquete measure, as long as you are able to account for inflation.

Does anyone have any statistic figures on the total wealth of the aggeragate of the US in these time periods? Did individual wealth increase more/less than the expenditures of government?

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www.mises.org - Read up on Austrian economics.

PVN is stating his case from the Austrian perspective. In Austrian economics, value is determined from the perspective of the individual. Scenarios are broken down verbally, through logical deduction rather than through broad, sweeping mathematical generalizations. The primary difference (which leads to a lot of other differences) between the Austrian school and the Neo-classical/Marshallian school (which I am assuming you are familar with) is the methodology.

Anyway, because aggregates like GDP have little to do with the action of individuals, Austrians tend to dismiss them as irrelevant regarding their ability to determine the positive/negative causes and effects in the economy.

In short, he doesn't put value on GDP (or any aggregate) as an economic indicator. The ditch digging analogy, and the fact that it is impossible to quantify human action (because of its heterogenous nature) are just two of the reasons for this.