When someone questions the effectiveness of Keynesian economics, the obvious reply is: Remember World War II?
The British economist John Maynard Keynes argued that there is a role for government intervention when aggregate demand for goods and services drops, as it did during the Great Depression. Without increased public spending to make up for decreased private spending, he said, an economy will slide into a vicious circle of low demand and low output, ensuring a prolonged period of high unemployment. Government thrift at such times will only deepen the problem. “The boom, not the slump,” said Keynes, “is the right time for austerity.”
In 1939 dark clouds of war were gathering over Europe, but Keynes saw a silver lining: an opportunity to prove his theory correct. He believed that the massive government-funded war mobilization would finally give sufficient stimulus to end the Great Depression. On May 23 of that year Keynes gave his famous BBC radio address, “Will Re-armament Cure Unemployment?” He said, in part:
It is not an exaggeration to say that the end of abnormal unemployment is in sight. And it isn’t only the unemployed who will feel the difference. A great number besides will be taking home better money each week. And with the demand for efficient labor outrunning the supply, how much more comfortable and secure everyone will feel in his job. The Grand Experiment has begun. If it works–if expenditure on armaments really does cure unemployment–I predict that we shall never go back all the way to the old state of affairs. Good may come out of evil. We may learn a trick or two, which will come in useful when the day of peace comes.
When the day of peace did come, the Great Depression was over and England and America were embarked on a long period of rising economic prosperity. In these times of recession and government austerity, it may be good to remember something else Keynes said in his radio address: “If we can cure unemployment for the wasted purposes of armaments, we can cure it for the productive purposes of peace.”
You can find Keynes’ classic work, The General Theory of Employment, Interest and Money, in our collection of Free eBooks.
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What actually happened durng World War II is that real wage rates (judged by real i.e. “black market” prices) fell – so of course the market cleared and unemployment vaished (those concripted British soldiers were not earning high wage – not if you dodge them by real i.e. “black market” prices).
If government spending increases could cure unemployment (without real wages comming down) then please explain the FAILURE of such a policy in the United States in the 1939s – by 1938 vast amounts of money had been spent and mass unemployment was still there.
There is no need for war to clear a labour market by wage levels ajusting to new realities – IF the government steps out of the way (including no PRO UNION STATUTES) the market will clear.
For example, in 1921 Herbert “The Forgotten Progressive” Hoover, was not President.
Hoover after the 1929 credit bubble bust (the bust of the Benjamin Strong New York Fed created bubble) prevented wages adjusting to the bust – he was a classic believer in the “demand” fallacy.
Hoover also greatly increased taxes on “the rich” and generally was the opposite of his the image given of him today.
But in 1921 Hoover was not President – so when that credit bubble burst he was not able to threaten and demand that wage rates be kept up (and they durely fell) and Hoover was not able to “protect” government spending either – the Warren Harding Administration (with Hoover as a dissenting member) cut government spending by 25%.
According to Keynesian ideology allowing wages to fall and cutting government spending by 25% (not “cutting the increase” like a modern government – actually CUTTING GOVERNMENT SPENDING) should have destroyed the economy if done in the face of a bust.
In reality the economy was in recovery within six months – and mass unemploymet fell away.
1921 (indeed every other previous bust going all the way back to 1819) is impossible to explain by Keynesian doctrine – in each case after wages fell the economy RECOVERED and unemployment FELL.
And wages?
AFTER the economy recovered wages starting to go UP – but based on RISING PRODUCTIVITY (not “demand” ideology).
Stuff to read.
Robert Higgs – on World War II.
Hunter Lewis – “Where Keynes Went Wrong”.
And Thomas Woods (“Meltdown”) on the true cause of the current crises.
War does not create wealth. Using scarce resources to make bombs to blow up other scare resources makes people poorer, not richer. Of course, enslaving young men and shipping them oversees to fight will lower unemployment.