World War II and / or The New Deal ended the Great Depression
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To understand why this is so you must first understand why recessions happen. A key feature of recessions is the cluster of errors. Businessmen are pretty good at generating profits. Of course not everyone always makes money in the market place, but for the most part they do profit, most of the time. So why is it that suddenly they all start doing so poorly? The answer must have something to do with money, because money is the only thing which touches all areas of the economy. Remember we are dealing with problems not in one specific area of the economy but in every sector.
Interest rates are determined on the market by the amount of money consumers set aside for savings. That is to say, the higher consumer time preferences are (if you have a high time preference you value having things now instead of in the future whereas if you have a low time preference you'd be more of a saver) the higher interest rates would be if they were determined by market forces alone instead of by Ben Bernanke's meddling. When the government artificially lowers interest rates, this sends out false signals to entrepreneurs that consumer time preferences have lowered. This creates malinvestment. Ultimately these investments must be liquidated and thus you have the bust. The bust is actually the healthy part of the boom-bust cycle, when these resources are shifted from capital goods industries back to consumer goods industries.
If economic busts or depressions are then healthy, if these readjustments are important, you can see why it might be a bad idea to prevent these readjustments. This is not to say that booms and busts are an inevitable part of capitalism. Far from it. They are simply the result of fiat money and central banks. With sound money - like a gold standard - and free banking there would be no boom and bust cycle, just steady prosperity. But given that there has been government manipulation of interest rates in the past, and you are now at a depression, the last thing you want to do is have the government try to fix the problem it created in the first place. Thus when Roosevelt's New Deal (actually it was not FDR's new deal he was himself a simple minded man not given to imaginative solutions, he just took what Hoover was doing and expanded upon it greatly) attempted to solve the depression by paying farmers to kill pigs or keeping wages artificially high he actually made it much much worse.
What then of WWII? It is simply a myth - and a very dangerous myth - that war is good for the economy. It is not. War is horribly destructive. The broken window fallacy explains why. Take the example of a shop keeper who's window is broken by a boy playing ball. At first glance this looks like it is good for the economy. The shop keeper must purchase glass from the glass maker, who can then afford to get his car fixed, the mechanic can use this money to buy a new bike etc. But what would have happened if the window were not broken? Then the shop keeper could have spent his money on something else, a new suit perhaps, and the tailor could go to the opera, and the opera house could spend that money on fixing one of it's broken seats etc.
War consumes a tremendous amount of resources and it also ends peoples lives. Those resources could instead have been put into capital, such as building new factories, which would then have created more jobs and created more wealth coming from those factories. If the government were to force companies to make two million cars and then drive them into the ocean, would this be good for the economy? That is pretty much what war is - a vast waste of resources, material and lives.
For one the armed forces created millions of jobs for American men, who would not be able to find a job otherwise. World War 2 provided American Men with roughly 16 millions jobs. 16 million is an astounding amount of employment for a country that seemed to be on the edge of collapse. Not only did it create jobs in the Navy, Army, and Marines, but we saw the creation of the Air Force. Not to mention the manufacturing jobs that were created provided jobs on the home-front. The business that benefited most was the newspapers, their sales increased four fold during World War II.
Finally, and I know this has been a short opening statement, but my opinion on the war being destructive to the American home land diverges drastically. Besides Pearl Harbor and a failed Alaskan campaign by the Japanese we had no home front battles, we brought the fight to the enemy. After the war the GI bills saved the economy by giving jobs to soldiers like my Grandfather. The fact of the matter is the capital which was being invested in America, would have kept failing the economy if not for the war. The New Deal prevented any serious business growth during the Great Depression. Do you really think it was a waste for America to defeat Hitler?
Ludwig von Mises argued that "War prosperity is like the prosperity that an earthquake or a plague brings". The war was a period of capital consumption; capital accumulation is critical to prolonged economic growth. During the war consumers suffered without many consumer goods, precisely because so many resources were diverted towards the war effort. Since a depression is a contraction standards of living, and the war efforts caused consumers to have less to consume, it is clear that the Great Depression could not have ended during the war.
Why then do historians, high school teachers, and economists like Paul Krugman argue that WWII ended the great depression? The answer lies in the methodology of economic statistics particularly that of the Gross Domestic Product. GDP is defined as consumptive expenditure, income expenditure, government expenditure and net exports. This statistic ranks government spending as equal to private sector spending. As if paying a bureaucrat to sit in an office and push paper around was productive! Ultimately the view is the erroneous assumption that what drives the economy is not the production of wealth but it's consumption. This figure doesn't measure the production process itself. It also measures unproductive spending the same as that which satisfies consumer demand. For example if the government began construction of a pyramid this would look, through the lens of GDP, like the economy was taking off! But in reality it would be a huge waste of money.
You cannot simply divorce the economy from the interactions of the individuals that constitute it. The economy is not an abstract fiction it is the efforts of various individuals to satisfy their needs.
One reason why there was so much employment was the draft. The draft is slavery. You are forcing someone,
against their will, to be a part of an organization. Clearly those who had to be forced under penalty of law to serve in the military did no want to. We must also consider as an additional cost to those individuals the wages they had to forgo by being a part of the military at a low price compared with the higher price they would be able to command on the market for their services.
There is a strong argument to be made that the costs of WWII were worth it, that anything was justified in stopping the Nazis and their dreams of global domination but there is absolutely no argument at all that WWII ended the great depression or that war in general is good for the economy. It was only after WWII ended and the dismantling of the regulatory framework that had been developed during the New Deal and WWII that recovery really began in earnest. In short, it was not the war that helped get America back on it's feet, but rediscovery of the market.
: a substance that enables a chemical reaction to proceed at a usually faster rate or under different conditions (as at a lower temperature) than otherwise possible
: an agent that provokes or speeds significant change or action
The war was a catalyst, because it provoked or speed up economic development. Notice the word has two definitions.
So, yes i do know what a catalyst is, thank you.
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