“War prosperity is like the prosperity that an earthquake or a plague brings.”
-Ludwig Von Mises
Many economists and historians today like to look back in the past to World War II and say that the war helped to end the Great Depression. They use this as justification for their current policies to paint history as favorable to their ideology. On a moral level, this seems absolutely disgusting. We can kill others in order to boost our own prosperity? Statists think that unregulated capitalism is cut throat yet they support a system that believes killing others who are not a member of “us” will make “us” more prosperous? Why don’t we just war our way to prosperity then (this seems to be what we have been doing ever since WWII)? Not only is this morally reprehensible, but it also is historically and economically untrue.
What Caused the Great Depression?
Henry Hazlitt in, his amazing book “Economics in One Lesson“, says the following about economists:
“The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.”1
So let us be good economists and not buy into the diagnosis of the statists but look deeper into what is going on. To start, I think it is important ask what really started the Depression. This leads to another historical inaccuracy which is the claim that unregulated capitalism is what brought about the depression. One main factor to the cause of the Depression was an inflation bubble that popped. Inflation is an increase in the money supply which usually comes about when the money supply is centrally controlled. Our money supply, the U.S. Dollar, is centrally controlled by the Federal Reserve and they have had a policy of inflation under the guise of price stability and price control since it’s inception in 1913.
Take a look at the chart below:
As you can see, right after WWI the Federal Reserve was using inflation to deal with the massive financial cost of the war. It started pumping out cash which caused a depression from 1920 to 1921. As soon as this inflationary bubble popped, the fed started pumping out more money again creating a bigger bubble as they tried to inflate their way to wealth. This is the bubble that would eventually pop and leave so many hurting in the depression of 1929-39.2
So to say that capitalism, flat to no inflation or deflation caused the depression is being selective with the information. These crashes are simply the market trying to correct itself after Government tried to exercise its will over it. This is the boom-bust cycle caused by inflation that we have been going through since then. Most notably was the bust in 2008.
Tom Woods explains it well in this video:
Did WWII Really End the Depression?
War can only give the appearance of prosperity. This is for a number of reasons but mostly because it makes a nations GDP look better than what it actually is. Gross Domestic Product is a “measure of a country’s output,” and “is defined as the sum of consumption expenditure, investment expenditure, government expenditure, and net exports.”3
The issue here is that during war, war materials are not priced accurately. Tools of war are worth more in a time of war than peace because weapons have a limited use outside of war.
“This problem was compounded by price controls during World War II — official prices simply did not reflect the true cost of the war. If we are going to have meaningful economic calculation, we need real market prices. Price controls and similar interventions introduce arbitrariness and uncertainty. Procurement at below-market prices is a way to mask the cost of any endeavor. Consider the draft, which forces people into military service at wages below what they would earn on the unhampered market. The amount spent on wages and board for conscripts is an underestimate of the real cost of maintaining the force.”3
This is the problem with GDP. It includes government spending but says nothing about a standard of living. And lets face it, the standard of living during the war was not that great due to rationing and the redirection of scarce resources for destructive purposes.4 “In human terms, a depression isn’t a shrinking GDP or some other changed statistical construct. It’s a decline in real people’s living standards. Therefore, ending a depression requires not a change in sign from minus to plus in a statistical measure, but a rise in prosperity. You can tell a depression has ended by the fact that people live better than they did previously.”4
Prices and the economy where highly regulated and resources were redirected to the war effort. This simply means that the consumer goes without products. Ask anyone from that era and they will tell you about how gas, food and other products became scarce. That is not prosperity. I think most people think of having more than enough, not having barely anything, as being prosperous. Limiting consumer choice is not prosperity either.
If anything, the only thing the war created was a shift from production and exchange to attempting to acquire wealth through redistribution.3 Not only that, but we can now use inflation as a way to remain in a constant state of war and have these apparent boosts in prosperity. Unfortunately, war means the destruction of life and property. The destruction of life and property, the redirection of resources to destructive purposes, and using inflation (or an inflation tax) to pay for it all is not a legitimate method for creating prosperity.
On top of this, the New Deal created uncertainty and wasteful public work products influenced by John Maynard Keynes and his broken window fallacy. It only created the appearance of creating jobs and wealth. Unfortunately, this is bad economics. To bring it back to Henry Hazlitt, they were only looking in the short term. In the long term they prolonged the effects of the depression and made it harder for the economy to repair itself from scratch.
War is not our friend and anyone who thinks it is is a fool. War is the friend of big government. So in short, WWII had nothing to do with the Depression ending. Statists can’t take credit for this one. Production is the creator of wealth so a thing like war that does not produce anything but only destroys can hardly be seen as the statistical cause of economic recovery simply because we happened to recover at the same time as war (or despite it). This ideology and false story of economic recovery means that our politicians lament that the only way to turn an economic downturn around is for another war. Why do you think in the modern world, the legislators are constantly trying to get everyone else involved in conflict around the world? Now I’m not saying that we should or shouldn’t have entered the war, that is discussion with different consequences. I only wish to point out that saying “War, a destructive activity that takes property and life, created so much wealth and prosperity for everyone” is a dangerous and immoral position.
1: “Economics in One Lesson” by Henery Hazlitt
2: “Defending the Austrian Explanation of the Great Depression from an Internet Attack” By Robert P. Murphy
3: “World War II Did Not End the Great Depression” by Art Carden
4: “World War II Spending Did Not End the Great Depression” by Sheldon Richman