Did World War II End The Great Depression?

The newest issue of The Freeman is out, and it includes a quick and insightful essay on World War II and the Great Depression by Art Carden. Carden challenges the conventional wisdom that World War II brought the U.S. out of the depression by noting that war consumes capital; it doesn’t create it.

Citing economic historian Robert Higgs, Carden notes:

“Instead, Higgs argues, the war was a period of capital consumption rather than capital accumulation. Tanks, bombs, and helicopters have limited uses outside of military applications. The labor that was used to produce them was not available to produce consumer goods and services; in fact, people went without consumer goods. The warships at the bottom of the world’s oceans represented lost opportunities for real consumption and prosperity. Conflict is sometimes necessary, but we should recognize what wartime expenditures represent: destruction of life and resources. If a depression constitutes a widespread contraction in living standards, then the Great Depression cannot have ended during the war.”

But Carden’s essay goes into more detail, noting that the illusion of prosperity is partly an artifact of the way we collect, report, and analyze data in the national income accounts. Opportunity costs are not part of this analysis, so the trade offs involving productive uses cannot be analyzed. Without market prices to evaluate a resource’s worth, the data themselves have little meaningful value.

“The illusion of wartime prosperity is rooted partly in how national income is calculated and the statistics were compiled. Gross Domestic Product, one measure of a country’s output, is defined as the sum of consumption expenditure, investment expenditure, government expenditure, and net exports. A serious problem arises with government spending: How do we assess something not traded in markets? We can assess my computer, my shirt, and my pen because I voluntarily exchanged money for them. How do we assess government purchases? In the national-income accounting they are valued at cost, but at best this only tells us what those resources could have earned in alternative lines of production. The costs don’t indicate the value of what the government has produced. (This may not be the case when the government is providing a genuine public good or correcting a large externality, but much government action is aimed not at these things but at providing favors for well-connected constituencies.)”

The essay is well worth a read in the context of the current federal stimulus package and rebirth of rote Keynesianism.

Samuel R. Staley, Ph.D. is a senior research fellow at Reason Foundation and managing director of the DeVoe L. Moore Center at Florida State University in Tallahassee where he teaches graduate and undergraduate courses in urban planning, regulation, and urban economics. Prior to joining Florida State, Staley was director of urban growth and land-use policy for Reason Foundation where he helped establish its urban policy program in 1997.