The first and second world wars were characterized by entire societies being mobilized for war. In order to out-fight one another, countries had to out-produce one another. During both wars, England attempted to blockade Germany using surface ships, and Germany attempted a counter-blockade using submarines. During World War II, the location of oil, rubber, and tin helped determine strategy. In the decades following World War II, the Defense Department budgets remained high in order to deal with the Korean War and the Cold War, leading President Eisenhower to issue his famous warning about a military-industrial complex.
Wartime economies involved central planning, as governments sought to control production and allocation to serve military needs. I argue that trade is the central economic activity. But in a wartime economy trade takes a back seat to planning, production and allocation.
I believe that the wartime economy had influence long after wars ended.
1. In the 1930s, intellectuals looked back fondly to the economic mobilization of the first World War. Many of the first New Deal planning bureaus, most notably the NRA, were modeled on wartime agencies. Roosevelt’s team used the metaphor or war, and the phrase “moral equivalent of war” came into use. (Decades later, President Carter famously declared that higher oil prices required a response that was the moral equivalent of war.) In contrast to the free market’s aimless satisfaction of base consumer desires, the wartime economy was considered more rational and purposeful.
2. The story told in MIT and the Transformation of American Economics shows the influence of the wartime economy. The MIT economics department was funded lavishly by the Defense Department, as MIT’s research agenda was useful in planning, production, and allocation.
One of the mathematical tools that became popular in postwar economics, linear programming, is designed to help the central planner solve a resource allocation problem. The classic textbook on linear programming, written in the late 1950s by Dorfman, Samuelson, and Solow, was only just beginning to fade from use in the late 1970s when I was in graduate school.
I believe that the research methods and textbooks that came out of this MIT-centered transformation were too heavily influenced by the wartime economy. Economists worked very hard to develop tools for “seeing like a state.” They lost track of the way that an economy does not have to resemble a wartime economy.
1. The patterns of specialization and trade can emerge, without being centrally planned.
2. The economy does not maximize an objective function. If anything, it maximizes subjective functions. Value depends on what is in the consumer’s head, and this information is not accessible to the central planner.
3. Costs cannot be measured objectively by adding up the prices of inputs. All costs are opportunity costs, and opportunity costs are subjective.
4. Trade is a technology If you think in terms of a production function, new patterns of trade shift the production function.
This is about the general idea of “trade as a technology”
In the WSJ as I write this, there’s a report of world wide gluts of many fundamentally useful things that people generally want – cotton, iron ore, cars, and so forth.
Which raises an obvious issue – trade only helps when the counterparty has something to trade. Perhaps a promise for the future (debt), but more often something they make or have that you do not.
There is not a shortage of people who want cars, there is a shortage of people who want cars and have something to trade for one.
So, by what mechanisms, can “the poor” be transformed into “well off trading partners” when kind of by definition “poor” means ” little to trade…”
(General development, free movement, remote/foreign direct investment, but what else?)
You will find intriguing answers to your question in the works of P.T. Bauer and Hernando de Soto, the latter arguing that the majority of mankind is suffering from a tremendous paucity of government.
For more see: http://redstateeclectic.typepad.com/redstate_commentary/2013/12/thhe-classical-liberal-constitution.html
I think they have something much greater than libertarian pitch forks to worry about. They have to prove their point. It seems to me most of the justifications for government are as defenses against other governments. Just because scale was the historical defense, doesn’t mean it wI’ll always be the remedy or that it can’t become the disease.
“by what mechanisms, can “the poor” be transformed into “well off trading partners” when kind of by definition “poor” means ” little to trade…”
Relative competitive advantage suggests that what matters is that the “rich” has an opportunity cost high enough that he would rather have his “poor” trading counterpart provide goods and services for him, regardless of whether he is actually more competitive at any of the tasks.
point taken but it presumes capacity in the trading partner. i am happy to trade money to plumbers, doctors, lawyers, writers, etc – but they all have skills and labor to trade with me.
Memory says “the moral equivalent of war” goes back to William James, around the turn of the century. He was speculating about the possibility of inculcating soldierly virtues in a population during prolonged periods of peace.
Central planning the moral equivalent of war? Probably more right than they thought but not necessarily in the way they thought.
“All costs are opportunity costs.” Shout this from the rooftop.
Not with government borrowing!
Just ask a Nobel Laureate. Apparently the only one in existence, if his fans are to be believed.