It’s a commonplace that it was only World War Two that finally pulled the United States out of the Great Depression. Everyone went to work and that produced the economic growth etc. What a startling vindication of Keynesian demand management that is. All we’ve got to do is do whatever - a job guarantee, run the economy hot, industrial policy with strict conditionality - that employs everyone and all will get richer. Economic growth see?

This always does run up against the thought that here in the UK we solved the Great Depression in 18 months. We had expansionary austerity. Significantly loosened monetary policy by coming off the gold standard, cut government spending, produced a budget surplus and triggered a house building boom. It’s that balance between monetary and fiscal policy which defines the overall stance - it’s possible to use so much monetary policy that it overcomes fiscal austerity. Britain in 1939 was definitely richer than in 1931.

There’s also that point about the American experience that if it really were true, that only WWII worked, then all that faffing about by Roosevelt didn’t, possibly even was counterproductive.

But, just as a tease, what if the US was not richer in 1945 than it had been in 1939 (or ‘41 maybe)? Even, possibly, than 1929?

Yes, yes, it’s entirely true that recorded GDP, also GDP per capita, was higher. But is that really true?

Think on it. By definition GDP equals all production, all incomes and or all consumption. Any one of the three, by definition, equals either of the other two.

So, err, was consumption by the average USian higher in 1945 than ‘41 (or ‘39, ‘33, or ‘29)? If consumption wasn’t then is it really true to say that real incomes were? Probably not actually.

Sure, sure, we’re all agreed that US production rose mightily. But producing what the government wants to be produced (even leaving aside that it was produced to then be blown up) doesn’t, necessarily, seem to produce growth for the people.

Which is an interesting thought, no? To us the aim and purpose of an economy, even a civilisation, is that we the people get more of what we the people want. There’s an awful lot going around at the moment of we the people would be best served by government deciding what should be made, how, by whom and when. It’s not entirely obvious that the last time government did all the planning, decided upon the investments, had strategic plans with strict conditionality, that that did actually make us the people richer.

So, umm, what’s different this time? If 1939 to 1945 meant we all worked longer hours, on worse diets, travelled less, had fewer clothes, colder houses and all that - what is that evidence that government grows the economy and makes us richer?

The solution to that production = consumption = income = GDP thing seems to be that government can indeed increase production, even create full employment. But also while doing so demand the production of a lot of things with negative value in terms of income and consumption.

Oh.

No, no, we agree, beating the Nazis was a good thing. A Good Thing. but it didn’t make us richer so we shouldn’t use the episode as an example of government action making us richer, right?

And next time, heck this time, how do we know that producing what government insists is going to make us, the people, richer?

Tim Worstall