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This works very nicely in fact

In no way can wartime spending be used to justify fiscal stimulus.

We see nominal GDP rise as a result and all that, sure. And yet:

The second is that many assumptions needed to estimate economic output in the form of Gross Domestic Product (GDP) vanish or are weakened in wartime. One must account for, for example, the depreciation of capital goods, which means selecting a depreciation rate. Qualitative and quantitative evidence at the firm level suggest that businesses used capital more intensively during the war, and thus that capital depreciated faster — something that is not taken into account. Corrections for the rising depreciation rate during the war only lower the estimated growth rates.

What was the justification for the nationalisation of railways and buses post-1945? That the entire sector was wholly clapped out. That is, depreciation had been higher than investment. Eat your seed corn and sure, you can have higher eating now but that’s not the way it works for the long run.

Thus we can’t accept – not the face numbers at least – the GDP rise in wartime. Because we’re eating the seed corn. We’re not value adding, we’re consuming capital.

The very proof of this is the justification used to nationalise the transport sector after WWII. QED.

16 thoughts on “This works very nicely in fact”

  1. The further WW2 recedes into historical memory, the more obvious it becomes what an unmitigated disaster that war was for Britain.

    What did we “win”, again?

    Neville Chamberlain did nothing wrong.

  2. The miracle growth of post ww2 West Germany was explained by my teacher as they got to build new Factories and install new machine tools whereas Britain was left with the old pre war stuff.

  3. HB

    Indeed that is partially true and they concentrated on making “new” stuff. They also deferred re absorbing the army, because many remained PoWs for a while ( in Russia 5 or 10 years ) after hostilities ceased. The western allies reformed the German currency and wrote off her debts in 1953, which really sparked the subsequent boom.

    But also, UK took the wrong lesson from the war and believed that the central planning that worked for making Spitfires could also be applied to Austin cars. ( Well not quite but certainly the continued propping up of moribund heavy industries ).

  4. I’d argue that WW1 was a pyrrhic victory for the UK. Then it went ahead and did it again with WW2. With the inevitable result that Pyrrhus foretold.

    As for Chamberlain Steve, I feel that Britain’s real error was to agree to the formation of the League of Nations and its subsequent designation as the Policeman of the World without making sure the US ratified the treaty as well. After all, at least part of the reason WW1 lasted so long was that the blockade was continually breached by the US. If the UK was to attempt to bully the entire world, it was absolutely essential to drag the US into the mess as well.

  5. That government control of the railways in WWI and WW2 had ruined the companies was understood perfectly well when I was growing up – at least it was by my father and therefore presumably by lots of other people too.

  6. The reason for the nationalisations was a government which believed those things ought to belong to the state. It was ideological, it was done with money the state didn’t have and its effects last to this day to the detriment of the UK. Don’t give Attlee and the rest the excuse of ‘the industry was out of money’ when they did it for socialism.

  7. @Boganboy

    That’s right. Had this country not joined in, it’s very difficult to see how the US could have got involved. Without British, empire and later US manpower, and above all, without very deep British and bottomless American pockets, Germany probably would have won in 1916.

    Would the Europe and wider world of today have been worse if they had?

  8. Amongst the strategic considerations was that UK could not allow Germany in the Great War to have control of the Channel ports. Antwerp and Zeebrugge were bad enough.

    In the Second, Germany did not have much of a surface fleet ( most of the destroyers had been lost in Norway ) so the Channel was not such a problem, but the Uboats had free rein from the Atlantic ports.

  9. Bloke in North Dorset

    Hallowed Be,

    The miracle growth of post ww2 West Germany was explained by my teacher as they got to build new Factories and install new machine tools whereas Britain was left with the old pre war stuff.

    That may have been the case once they got going, but they needed the right underlying economic conditions to get started and keep going in the first place. Ludwig Erhard doesn’t get anywhere near the credit he deserves for the so called German economic miracle:

    Ludwig Erhard agreed with Röpke. Erhard himself had written a memorandum during the war laying out his vision of a market economy. His memorandum made clear that he wanted the Nazis to be defeated.

    The Social Democratic Party (SPD), on the other hand, wanted to keep government control. The SPD’s main economic ideologue, Dr. Kreyssig, argued in June 1948 that decontrol of prices and currency reform would be ineffective and instead supported central government direction. Agreeing with the SPD were labor union leaders, the British authorities, most West German manufacturing interests, and some of the American authorities.

    The Change
    Ludwig Erhard won the debate. Because the Allies wanted non-Nazis in the new German government, Erhard, whose anti-Nazi views were clear (he had refused to join the Nazi Association of University Teachers), was appointed Bavarian minister of finance in 1945. In 1947 he became the director of the bizonal Office of Economic Opportunity and, in that capacity, advised U.S. General Lucius D. Clay, military governor of the U.S. zone. After the Soviets withdrew from the Allied Control Authority, Clay, along with his French and British counterparts, undertook a currency reform on Sunday, June 20, 1948.

    On that same Sunday the German Bizonal Economic Council adopted, at the urging of Ludwig Erhard and against the opposition of its Social Democratic members, a price decontrol ordinance that allowed and encouraged Erhard to eliminate price controls.

    Erhard spent the summer de-Nazifying the West German economy. From June through August 1948, wrote Fred Klopstock, an economist at the Federal Reserve Bank of New York, “directive followed directive removing price, allocation, and rationing regulations” (p. 283). Vegetables, fruit, eggs, and almost all manufactured goods were freed of controls. Ceiling prices on many other goods were raised substantially, and many remaining controls were no longer enforced. Erhard’s motto could have been: “Don’t just sit there; undo something.”

    And I love these stories:

    Clay:“Herr Erhard, my advisers tell me what you have done is a terrible mistake. What do you say to that?”

    Erhard:“Herr General, pay no attention to them! My advisers tell me the same thing.”2

    Hartrich also tells of Erhard’s confrontation with a U.S. Army colonel the same month:

    Colonel:“How dare you relax our rationing system, when there is a widespread food shortage?”

    Erhard:“But, Herr Oberst. I have not relaxed rationing; I have abolished it! Henceforth, the only rationing ticket the people will need will be the deutschemark. And they will work hard to get these deutschemarks, just wait and see.”

    And as others have pointed out we opted for dirigisme and we don’t need to rehearse the problems with that here.

  10. Man Straddling the Noth Channel

    Going off at a slight tangent, I’ve been listening, belately, to the “We have ways of making you talk” podcast on the history of the 2nd world war (Al Murray & James Holland). Its actually v good (IMO) but one thing that comes out is that Britain & France had a real chance of stopping the Germans if they had acted more decisively during the early “phoney war” stages. Of course, armchair generals and all that.

    It’s interesting to speculate on how things might have panned out if that had occurred. For example no big boost to the USA economy from the war and the wealth they extracted from Britain during and after it.

  11. I have arguments with people who insist my town’s railway is a branch line, I have to repeatedly point out that it was a twin track main line until 1916 when the government nicked one of the tracks and sank it in the Channel on the way to Flanders. Which was then used by Beeching to justify closing it. As others have pointed out, the more things fade into the past, the more people think recent stuff is the normal.

  12. The article that Tim quotes from concerns the USA, Man Straddling. WWII did not provide a growth spurt, contrary to a lot of myths. The surge in the US began ~1945 and accelerated from there.

  13. Mark, I don’t think Oz’d be any worse off if the 2nd Reich’d won in 1916. I also suspect that the UK’d be still being bullied by their version of the EU.

    But I don’t think the 2nd Reich would have been quite as kindly as the present day West is to the Third World. I suspect guerilla wars would be met with the good old kill-the-lot approach.

  14. @Boganboy

    You could also consider the wider world.

    What would communism have looked like in Russia. Would it have happened? (now that’s a what if).

    The sheer scale of ideological driven murder in eastern europe in WW2 just boggles the mind. Much – maybe all – of that would not have happened. I wonder how successful imperial germany would have been at coralling the cats of europe.

    What other wars might have happened instead? Second reich vs Russia at some time. British vs american empires?

    Who knows, but there would very, very likely have been no hitler or nazism. Quite possibly no Stalin and communism either.

    But without the wars that did happen, would we have gotten from crude airplanes to jets, fireworks to ICBMs, adding machines to the first real computers in 30 years?

    Whatever the politics, that’s what intrigues me the most.

  15. But I don’t think the 2nd Reich would have been quite as kindly as the present day West is to the Third World. I suspect guerilla wars would be met with the good old kill-the-lot approach.

    I can’t imagine Gandhi’s tactics succeeding against any empire but the British. And those Indians (most prominently Subhas Chandra Bose, now a national hero) who went over to the Japanese, believing that they’d be better off as part of a Jap empire, would have had an horrifically rude awakening had their side won.

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