Bryan Caplan  

Always Keep Your Eye on Production: A Wartime Priority

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When they're in major wars, governments often seem to suddenly discover my "Always keep your eye on production" principle.  Case in point: During the New Deal, Team Roosevelt eagerly pushed militant unionization, using now-standard arguments about the hidden economic benefits.  Like: "Unions boost demand by putting money into the hands of people who will spend it," and "Unions encourage technological progress by raising the price of low-skilled labor."

Once the U.S. entered World War II, however, the Roosevelt administration asked for - and received - the famous No-Strike Pledge.  Unions promised not to strike for the duration of the war, and their real wages eroded in the face of high inflation.  The reasoning behind the Pledge was clear: The war effort depends on production, strikes reduce production, so strikes are bad.  What about all those arguments about the hidden wonders of militant unionism?  Whatever - we've got to win the war.

If government eagerly keeps its eye on production during wartime, why not during peacetime?  A cynic would say that politicians care a lot more about winning major wars than fostering economic growth.  A bigger cynic would add that politicians are just following the voters' anti-market, pro-government worldview.  When they identify with an system's motives and aims - like militarily crushing evil foreigners - voters stop trying to make water run uphill.  Productive societies are victorious societies.  The rest is details.




COMMENTS (14 to date)
Andrew_FL writes:

But World War II is a case in point WRT the point I made in my second comment on your previous post:

Maximizing "real production" as deflated by some subjectively chosen P, even if prices weren't extensively controlled at the time, may have been to the benefit of the War effort: In some sense, the war time economy may have "produced more." But it "produced more" of what the government wanted, not what consumers wanted.

Christopher Chang writes:

I propose a less cynical model: during peacetime, aggregate happiness and production *capacity* are the relevant variables. Slightly reducing production in a way that (i) reduces discontent re: how the produced goods are distributed, and (ii) can be rolled back in wartime, seems close to a Pareto improvement over all production all the time.

I believe something related is going on with human interest in games. Mental effort that results in success at games is "wasted", but it indicates the presence of reserve capacity that can be employed in times of crisis.

Tom Hickey writes:

The US ran many economic programs and policies during WWII directed toward the war effort in addition to ramping up production of war materials by converting domestic production to military. No new automobiles were produced during this time to make room for tank production, for example.

On your reasoning that what is good in wartime should continue in peacetime, your are advocating for wage and price controls, rationing of scarce resources, government mandated production, and large fiscal deficits.

MikeP writes:

Indeed, wartime production is a terrible way to develop useful insights. In fact, believing that wartime production is interesting yields lame conclusions like, "World War II pulled the US out of the Great Depression."

Wartime production is the exact opposite of peacetime production in that the productive capacity of the nation is geared to serve a couple thousand generals' and admirals' easily determined urgent needs rather than of a couple hundred million distinct consumer desires.

So, yeah, the president might say, "My economic advisers tell me that once productive capacity gets above 90%, the last 10% is hard-to-discover long-tail demand. I'm better off urging higher wages and benefits rather than pushing that marginal last 10% of production." And this stance would be utterly reversed in war when the populace is stuck getting 70% of what they want -- the easy 70% to discover, mind you -- while the military gets the other 30% of productive capacity.

michael pettengill writes:
If government eagerly keeps its eye on production during wartime, why not during peacetime?

Given government was consuming 60% of all production in WWII, and that was not sufficient to win fast enough, any stoppage from strikes reduced the allowed government consumption to win faster, so strikes would extend the war and increase the number of people killed.

If Bryan were willing to have government increase its consumption to drive up production to say 50% of GDP, then acting to stop strikes would be something desirable to ensure government does consume 50% of the largest GDP possible.

Of course, the WWII, taxes were paid by everyone which was a significant change from US history to that point, and everyone was pretty much forced to loan money to the government, also a change from prior US history.

If government is consuming 50% of GDP and doing everything possible to ensure the 50% was the largest possible, then taxes would need to be extremely high and hit everyone as well as forced everyone to make loans to government, just like in WWII.

TANSTAAFL - for government to consume 50% of GDP it must reduce non-government consumption to under 50% by taking the wage income out of the hands of workers.

But Bryan seems to be advocating free lunch economic theory which holds that workers are not consumers, but blackholes that suck money out of the economy, while consumers are not workers, but infinite whiteholes that emit as much cash as is required to pay for all that is produced.

But that has failed to work in the 21st century because consumers get their cash from labor income, and as worker incomes have been stagnant or declining, the only thing driving GDP growth is debt funded consumption, and most of the debt funded consumption to drive growth is the big deficits that Reagan proved could go on forever, or at least as long as a president is in office. Thus tax cuts, borrowing hikes, and spend is the solution to suppressing unions so wages are not increasing faster than GDP to constantly spur increasing growth.

Since the 80s, businesses have changed their practices to never produce without the certainty of selling it, so the biggest hindrance to production is a lack of customers hammering down the door to buy. When the rich like Warren Buffett are seeing their income rise rapidly, you do not see Buffett frantically increasing the number of cars he buys or the number of Big Macs or houses. Given Buffett long ago paid off his houses, he has no reason to employ more workers to build him ten more.

However, half his income depends on people buying cars and houses, so he wants tens of millions of workers getting big raises or higher paying full time very stable jobs in their 20s so they will be new customers for Buffett. Bryan is suggesting that if government holds down wages and creation of high paying jobs and focuses only on getting Buffett to order his building supply companies to produce more stuff without any customers and fill warehouses, that would be better for Buffett. TANSTAAFL

Shane L writes:

If I remember correctly there was an Econlog post sometime about any potential benefits of war?

This might be an example. When countries are tensely competing they perhaps cannot afford to drift towards economically harmful policies forever as the state with a less dysfunctional system will probably enjoy more growth, more production, more tanks and guns. The threat of war could perhaps make governments more inclined to keep their systems lean and efficient.

Miguel Madeira writes:

No contradiction.

The theory that strong unions are good for economy is that strong unions create more demand for consumer goods; in war, what you want is more supply of military goods.

Unless we assume an absolutly horizontal AS curve, everything who increases the demand from consumer goods will decrease the supply of military goods.

Jeff R. writes:
If government eagerly keeps its eye on production during wartime, why not during peacetime? A cynic would say that politicians care a lot more about winning major wars than fostering economic growth. A bigger cynic would add that politicians are just following the voters' anti-market, pro-government worldview. When they identify with an system's motives and aims - like militarily crushing evil foreigners - voters stop trying to make water run uphill.

Maybe, but a simpler and perhaps even more cynical explanation might be that unions are just another interest group that politicians try to pay off in various ways in order to buy their votes during peacetime. When war breaks out, however, there is so much public money being thrown around in defense contracts that politicians can ask for and receive favors from the unions. For example, if Michael Pettengill's figure of 60% of GDP going toward the war effort is correct for WWII, well, that gives the government real monopsony-like power in many industries, doesn't it?

Daniel Kuehn writes:

Why not during peace time - you mean like the USSR?

ThomasH writes:

Not all politicians benefit from greater production. Some think that reducing the size of government (except the defense and security state, of course) is worth prolonging a recession in with austerity and opposition to monetary stimulus.

vikingvista writes:

Those who think managed wartime economies are productive are being myopic. Yes, there is a great increase in production of *certain things* (like guns and tanks). But this comes at the expense not only of a vast expanse of other human production, but also at a massive depletion of the capital stock (not least of which are human lives), thereby setting back future production as well. Wartime economies are both unsustainable, and very costly to the vast majority of people who live in them.

The false appearance of wartime production is an illusion crafted by misdirection from the previously productive economy that is being depleted.

Andrew_FL writes:

Revisiting this quote:

"Always keep your eye on production" superficially sounds free-market or right-wing. But it's non-ideological.

I think it should be obvious that this statement is wrong. "Always keep your eye on production" isn't non-ideological. Applied literally it's a deeply left-progressive view.

Hazel Meade writes:

"Unions encourage technological progress by raising the price of low-skilled labor."


That one is hilariously ironic. How many union advocates today would come right out and say "We're encouraging you to develop ROBOTS so our workers can be replaced!" ?

MikeP writes:

"Always keep your eye on production" isn't non-ideological. Applied literally it's a deeply left-progressive view.

It's beyond even left-progressive. When Khrushchev said, "We will bury you," he meant, "We will outproduce you."

And well they could. Pick some factory output, and the Soviet Union could outproduce the United States in it. Hence the perception that the two were near equal economies in the 1960s and 1970s. But match production to consumer demand? Under a command economy? Without a working price system? That the Soviet Union couldn't do.

"Always keep your eye on production" seems so laden with traps that one wonders whether it does more good than harm. How about "Always keep your eye on total household consumption" as a better rule? Households can consume only what is produced, so all the useful production implications are still there. But households -- as opposed to militaries or monuments -- are where we want to see consumption.

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