How to restore growth – give war a chance

I received a note from “Rob” in response to a recent post of mine on the useless of modern economics. So he wrote:

But at least it has advanced enough to tell us that for more growth, we need …. more broken windows:

The Lack of Major Wars May Be Hurting Economic Growth

Tyler Cowen is a professor of economics at George Mason University

I mean, what would a dead white male like Frederic Bastiat know anyway?

Tyler Cowen is, of course, a live white male, but given there are such things as negative knowledge – things that if you believe them make you dumber than if you knew nothing at all – it is possible for him to know less than Frederic Bastiat, dead though he may be. Let me quote from the opening of that column:

The continuing slowness of economic growth in high-income economies has prompted soul-searching among economists. They have looked to weak demand, rising inequality, Chinese competition, over-regulation, inadequate infrastructure and an exhaustion of new technological ideas as possible culprits.

An additional explanation of slow growth is now receiving attention, however. It is the persistence and expectation of peace.

Let me put it this way. There is bad economics, there is unbelievably stupid economics, and there is the belief that growth has slowed because there are no wars.

It is neither here nor there that there’s not all that much peace around anyway. But let me remind you of the greatest disproof of Keynesian economic policy in history. Everyone always points out that one Keynesian data point which is the so-called boom that came at the start of World War II. Not a boom at all since what most people remember about the home front was rationing and controls of every kind, and if you are thinking about the labour shortages, merely recall that around half the labour force under thirty was drafted into the army. But that’s not that point either, although it should put quite a dent into such Keynesian thought.

It is the coming of peace in 1945 that is the grand refutation of Keynesian economics. At the end of the war, within a year millions who had been overseas fighting, or had been part of the war effort at home, were suddenly in the labour market looking for work. Many women who had taken jobs while the men were overseas also remained in the workforce. The Keynesians were continually badgering Truman to maintain war-time deficits since, they said, if he did not the US would go straight back into the depression. Truman, however, having had a business background, hated deficits and the US virtually balanced its budget in a single year. No deficits, no stimulus, no nothing. The US slashed its expenditures and in so doing set off the greatest economic boom in world history, a boom that lasted straight through until ground into the dust by the war on poverty, and dare I say it, the unfunded, deficit-financed war in Vietnam.

Thinking about economic issues from the demand side is the single biggest mistake anyone can make in economics. In fact, if you do think that way, you aren’t even an economist since Say’s Law was once considered the best test of a sound economist. Not many of them around any more, I fear.

Here is the message. An economy is driven only by real value adding supply. Nothing else. This is the message of Say’s Law, supposedly discredited by Keynes but as accurate a statement of economic principle as there has ever been.

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23 Responses to How to restore growth – give war a chance

  1. Crossie

    US economy is weak because Obama inspires uncertainty which makes investors hang on to their money. Everybody is waiting for a better time when businesses can rely on laws rather than presidential whims.

  2. Just Asking

    Let’s imagine there’s a $50 Million Lotto draw this week, and 50 individuals win a million apiece. Each of them decides to have a million-dollar house built. Does this “genuine” demand lead to job creation and economic growth?

    Let’s imagine there is no $50 Million Lotto draw this week, and that, instead, I counterfeit $50 Million and hand a million apiece to my best 50 mates, who believe I’ve inherited it. Each of them then decides to have a million dollar house built. Doesn’t this “counterfeit” demand also lead to job creation and economic growth?

    In the first case, the $50 million distributed by the Lotteries Office is money which was handed to them by Lotto players instead of being spent elsewhere. In the second case, the money which could have gone to the Lotto winners via the Lottery Office has been spent on other stuff….and the 50 new houses bought with counterfeit notes are in addition to this.

    Isn’t the second case twice as much economic activity as the first; caused by the “conjured out of thin air” fake notes?

  3. Peter

    I think this post would have benefited from the author actually having read Cowen’s article.

  4. Yohan

    Yes, while ‘GDP’ was booming during the WWII years, anecdotal reality was one of rationing, shortages and lower standards of living. So this would be an example of the crowding out effect, where scarce resources are commandeered by the state for use in activities that do not satisfy the wants of the consumer.

    Its also an example of the bogus use of statistics, where one government department sets ‘prices’ that it books against a commandeered industry used in war production (factories, resources, minerals), thus giving the illusion of real economic activity. (the prices on the accounting ledger are dictated by the state, not set by supply and demand in a market).

    And yet Keynesians point to WWII as the single and only example of their economic theory being true, an example that fails the most basic and simple of investigations.

  5. cynical1

    A few million POWs does wonders for unemployment figures, though…

  6. Every dog has its day

    “Thinking about economic issues from the demand side is the single biggest mistake anyone can make in economics.”

    Hmm. And ignoring demand is just as big a mistake.

    Putting all faith on supply is just that, faith, and doesnt sound any different to the faith placed by Keynesians.

  7. Tom

    Steve, FYI this is actually a prehistoric lefty talking point first flown up the flagpole during the anti-Vietnam war era that had legs until the Reagan era in the late 1980s. It was never based on verifiable economics; it was only ever an Alinskyist talking point for communist activists. In the current era of leftist insanity, someone has simply decided to give it a spin again to see if it gets traction.

  8. Paul

    if the lack of killing and maiming is an impediment to growth, then I think we need a whole new paradigm.

  9. entropy

    Seven comments and Numbres has yet to turn up.

  10. mundi

    Any one else notice the strange parallels between what is being suggested and communism? They want the government controlling all the industries, with themselves as the main economic advisors of course.

  11. Cato the Elder

    Steve

    You may have missed the argument. The proposition is that the fear of war focuses otherwise lazy governments:

    Today the major slow-growing Western European nations have very little fear of being taken over militarily, and thus their politicians don’t face extreme penalties for continuing stagnation. Instead, losing office often means a boost in income from speaking or consulting fees or a comfortable retirement in a pleasant vacation spot. Japan, by comparison, is faced with territorial and geopolitical pressures from China, and in response it is attempting a national revitalization through the economic policies of Prime Minister Shinzo Abe.

    An argument, in other words, for competition in government.

  12. Roger

    The US slashed its expenditures and in so doing set off the greatest economic boom in world history, a boom that lasted straight through until ground into the dust by the war on poverty
    I know this is a complex question, Steve, an answer to which would require going beyond economics, but why didn’t the greatest economic boom in world history end the extreme poverty in the US? I had an aunt, an academic, who travelled through the southern US in the mid-1960s in order to study poverty in the region. She was too hard-headed to be a Leftist but I remember how deeply affected she was by the poverty she encountered among both blacks and whites. It was a side of the US that most Australians at the time, before the ‘Great Society’ really kicked off, knew little about.

  13. Ellen of Tasmania

    The continuing slowness of economic growth in high-income economies has prompted soul-searching among economists.

    They might search their souls, but they won’t change their presuppositions.

  14. Did you actually read the article? It argues something quite different to the broken window fallacy, and Tyler Cowan is hardly a Keynesian! I encourage everyone to read it properly.

  15. prompted soul-searching among economists

    They found none, I warrant.

  16. Cato the Elder

    Or this one:

    The claim is also distinct from the Keynesian argument that preparing for war lifts government spending and puts people to work. Rather, the very possibility of war focuses the attention of governments on getting some basic decisions right — whether investing in science or simply liberalizing the economy. Such focus ends up improving a nation’s longer-run prospects.

    Fear as motivator; war as a form of extreme competition among nation states. Hmm.

  17. Louis Hissink

    Just Asking

    But when you win a lotto and spend the money, you don’t need to repay it back to the lottery company. Lottery winnings are from saved money from economic production.

    But in the case of the extra counterfeited money, aka fiat money, that has to be repaid back by the borrower to the lender, the bank.

    It’s the repayments that are the problem, not so much the counterfeiting.

    I suspect Keynes, never having been in business, never really understood the reality of borrowing capital.

  18. Roger

    I suspect Keynes, never having been in business, never really understood the reality of borrowing capital. Add to that the fact that his own capital was inherited and replenished by his father when Keynes lost it in the Great Depression. Perhaps that tells us quite a bit about not only his outlook on life but his economics?

  19. .

    The article is correct.

    If we want to fund a capable military, we need economic growth to be maximised, otherwise it will never be affordable.

    However, for those who missed that, it amazes me how often Keynesian policy can fail, only then to be seen as a reason for more Keynesianism.

    It is like the Eucharist to those who think the government ought to have its nose in everything.

  20. Sinclair Davidson

    I think Cowen was making a somewhat more subtle argument.

  21. .

    More subtle than what I surmised it to be?

    Please explain.

  22. AP

    Hey, and guess what the entire world’s population was really, really good at, after living through years of extreme hardship: SAVING!

  23. Dave Hamilton

    Seems you needed to read more than the first two paragraphs, as the end

    Counterintuitive though it may sound, the greater peacefulness of the world may make the attainment of higher rates of economic growth less urgent and thus less likely. This view does not claim that fighting wars improves economies, as of course the actual conflict brings death and destruction. The claim is also distinct from the Keynesian argument that preparing for war lifts government spending and puts people to work.

    seems to suggest that his argument isn’t a Keynesian argument.

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