I came across an interesting article by Steve Horowitz (and Michael J. McPhillips) that fleshes out the idea of Robert Higgs that World War II did not cure the economy from the Great Depression. Instead, the war had to end first before better standards of living returned. The argument is that all standard aggregate measures of an economy are pretty misleading during the war because of conscription, price controls, wage controls, and shortages in the accessibility of goods and services that people normally desire, all a result of the creation for destruction process. Beyond the obvious interest that I have in the role of World War II as remedy to what ailed the economy way back when, the article also brought to mind something else that I read.
Paul Krugman has a recent post on his blog about Latvia that includes the following statement: “Even in Keynesian models, a small open economy can, in the long run, restore full employment through deflation and internal devaluation; the point, however, is that it involves many years of suffering — in the long run we are all dead.”
So, to bring it all together, WW2 is often portrayed as the compelling case for Keynesian theory as the solution to depression. But, if the point is to avoid prolonged agony, and as Horowitz and co-author formulate quite well that, for as long as it lasted, the Keynesian “solution” was also quite unpleasant, then shouldn’t there be a major re-think by the Keynesian overlords?
