« Apr 23: WWI and the Great Depression [DeLong] | Main | Memo Question for May 7: Divergence, Bigtime »

April 30, 2008

Apr 30: WWII and the thirty glorious years [DeLong]

Apr 30: WWII and the thirty glorious years [DeLong]

Audio

Let us sit in 1945 and look at western Europe. What do we see?

  • A truly genocidal subcontinent--devastated over the past four centuries by wars of religion, ideology, and nationalism.
  • A not-that-rich subcontinent--levels of output per worker averaging perhaps half those of what appears possible given technology elsewhere, in America, Canada, and Australia.
  • A Eurosclerotic subcontinent--lobbies and entrenched interests playing negative-sum games, whether unions, aristocracies, small craft producers, or mini-nations.
  • A politically-disordered subcontinent--Nazis, fascists, communists, shaky democracies, coups, street riots, large-scale political street violence.

You would have had to have been a brave person to predict the post-WWII western European renaissance...

  • Conversely, you might have been "optimistic" about the Soviet Union: cruel, barbarous, murderous, but also--effective in accomplishing its tasks.

Why the reversals of fortune of the 30 glorious years?

What Barry Eichengtreen and I wrote back in 1991:

The 1930’s in Europe had seen not chronic bottlenecks but chronic deficiencies of aggregate demand. Production had fallen far below normal for the entire decade; market forces had failed to restore demand to normal levels. Circumstances during the Great Depression had been exceptional, but circumstances in the aftermath of World War II were exceptional as well. Many feared the return of the Depression.

In fact (aside from the possibility that fear of a renewed Great Depression would act as a self-fulfilling prophecy) the return of the Great Depression was a less likely possibility in the 1940’s than was generally feared. The memory of the Depression, and the greater strength and incorporation of social democratic political movements in government kept right-wing governments from adopting policies of out-and-out national deflation. The availability of the large United States market to European exports--especially with the coming of the Korean War Boom and NATO in the early 1950’s--prevented any large world aggregate demand shortfall as in the Great Depression. With the American locomotive under full steam, Western European economies were unlikely to suffer from prolonged Keynesian demand-shortfall depressions.

Nevertheless, a live possibility in the absence of the Marshall Plan was that governments would not stand aside and allow the market system to do its job. In the wake of the Great Depression, many still recalled the disastrous outcome of the laissez-faire policies then in effect. Politicians were predisposed toward intervention and regulation: no matter how damaging “government failure” might be to the economy, it had to be better than the “market failure” of the Depression. Had European political economy taken a different turn, post-World War II European recovery might have been stagnant. Governments might have been slow to dismantle wartime allocation controls, and so have severely constrained the market mechanism. In fact the Marshall Plan era saw a rapid dismantling of controls over product and factor markets in Western Europe, and the restoration of price and exchange rate stability. An alternative scenario would have seen the maintenance and expansion of wartime controls in order to guard against substantial shifts in income distribution. The late 1940’s and early 1950’s might have seen the creation in Western Europe of allocative bureaucracies to ration scarce foreign exchange, and the imposition of price controls on exportables in order to protect the living standards of urban working classes.

The likely consequences of such alternative policies for post-World war II Europe can be seen in the Argentine mirror....

In 1929 Argentina had appeared as rich as any large country in continental Europe. It was still as rich in 1950, when Western Europe had for the most part reattained pre-World War II levels of national product. But by 1960 Argentina was poorer than Italy and had less than two-thirds of the GDP per capita of France or West Germany. One way to think about post-World War II Argentina is that its mixed economy was poorly oriented: the government allocated goods, especially imports, among alternative uses; the controlled market redistributed income. Thus neither the private nor the public sector was used to its comparative advantage.

In post-World War II Western Europe, by contrast, market forces allocated resources--even, to a large extent, for nationalized industries--the government redistributed income, and the outcome was much more favorable....

In Díaz Alejandro's estimation, four factors set the stage for Argentina’s relative decline: a politically-active and militant urban industrial working class, economic nationalism, sharp divisions between traditional elites and poorer strata, and a government used to exercising control over goods allocation that viewed the price system as a tool for redistributing wealth rather than for determining the pattern of economic activity.

From the perspective of 1947, the political economy of Western Europe would lead one to think that it was at least as vulnerable as Argentina to economic stagnation induced by populist overregulation. The war had given Europe more experience than Argentina with economic planning and rationing. Militant urban working classes calling for wealth redistribution voted in such numbers as to make Communists plausibly part of a permanent ruling political coalition in France and Italy. Economic nationalism had been nurtured by a decade and a half of Depression, autarky and war. European political parties had been divided substantially along economic class lines for a generation.

Yet post-World War II western Europe avoided this trap. After World War II Western Europe’s mixed economies built substantial redistributional systems, but they were built on top of and not as replacements for market allocations of goods and factors. Just as post-World War II Western Europe saw the avoidance of the political-economic “wars of attrition” that had put a brake on post-World War I European recovery, so post-World War II Western Europe avoided the tight web of controls that kept post-World War II Argentina from being able to adjust and grow...

April 30, 2008 at 07:22 AM in 210a 2008 Notes |

Comments

Ernie Tedeschi

Economic historians are, expectedly, fascinated by periods of growth or decline. No other cycle commands the level of academic interest that the Industrial Revolution does, but deep enclaves of literature have nevertheless grown around several economic events and periods. Usually, this is because a satisfactory narrative is elusive and the true causes of boom or bust are nuanced in each particular case. So it is an interesting change to consider the research into the "Glorious Thirty Years" in post-World War II Europe, where a simple, "unified" explanation evolved quickly that satisfied many, but clearly not all. The detractors then set about to add layers of analysis to a period of history that did not cry out for more.

Neat, tidy historical or economic narratives are suspect, and academics have no purpose if not to approach such assumptions with skepticism. Thus the efforts of Eichengreen and Olson to paint an institutional explanation alongside the familiar canvases of convergence and delayed growth are not categorically wasted paper (or pixels). But William of Occam's treatise not to multiply entities beyond necessity is convincing too, especially when the alternative views are, at the end of the day, not convincing. That's where I find myself after reading Olson and Eichengreen.

To summarize: Temin lays out an explanation for post-WWII European growth that is built upon disequilibrium and convergence. The war itself and the preceding thirty years of World War I and the Great Depression had pushed factor markets into disequilibrium, arresting industrialization and causing countries to over-allocate resources into agriculture. He provides evidence that the more-agricultural countries before WWII were the ones who saw the most robust growth in the thirty years following 1945. While an ex post test for disequilibrium is not terra firma -- Temin does not convince me that, say, Spain would not have been just as agricultural in a non-WWI counterfactual -- I think the pre-post growth correlation is a significant find. Olson and Eichengreen, meanwhile, focus on institutional arguments. Olson believes that political stability hindered growth relative to other nations because stability incubates growth-choking narrow interest groups. Thus Great Britain, whose cities bore scars from V-2s but whose political system was hardly shaken, saw stagnant growth from 1945 - 1975, while Germany and Japan adopted fresh institutions and experienced "miraculous" growth during this same period. My problem with her argument is that many of the interest groups and institutions of the pre-war years survived into the post-WWII era. In Germany, for example, the only interest group casualty was the Nazi Party. Other parties -- including the Communist Party -- and labor unions survived. In fact, in a post-war West Germany that was politically and militarily more stable, Olson's villainous narrow interest groups should have been more effective, not less.

Posted by: Ernie Tedeschi | April 30, 2008 at 11:38 AM

The comments to this entry are closed.

Recent Posts

Archives

More...

Categories

Reference Section

Recent Comments

Search Brad DeLong's Website

  •  
Subscribe to this blog's feed
Subscribe to my Podcast