Cafe Hayek

Higgs on the Economy, Economics, and Economists

The great economic historian Robert Higgs was interviewed recently on C-SPAN2's "Book tv."  The interview is three-hours long; every minute is worth watching.

As regular readers of this blog know, I greatly admire Bob's work (and Bob personally).  His 2006 book Depression, War, and Cold War is just out in paperback; this book -- data-rich and well-argued -- effectively challenges the claim that the New Deal helped to improve the American economy during the 1930s, and the claim that war and military spending promote prosperity.

Oh, and his 1987 book Crisis and Leviathan is, justifiably, a classic.

Peace and Free Trade

"If soldiers are not to cross international borders, goods must do so" - so wisely said a now-forgotten aide to F.D.R.'s Secretary of State Cordell Hull.  And Ed Glaeser makes this important case in yesterday's Boston Globe.  Here's his closing paragraph:

Other countries provide us with clothes, cars, markets for exports, and lending for the government and banks. Shutting our markets will make life more expensive for us and hurt the rest of the world. In the 1930s, legislators embraced high tariffs, but putting America first led to a devastating world war. Today, US lawmakers need to choose hope over fear, and stick with free trade.

War, Taxation, and Inflation

Robert Higgs -- who explains that the Great Depression was not cured by the New Deal or by World War II -- is featured here in this 30-minute-long video on war, taxation, and inflation.

World War II Cured the Great Depression? Unlikely

Here's a letter that I sent today to the Wall Street Journal:

To the Editor:

In his otherwise superb letter, Rolf Goehler repeats the dubious, if common, claim that World War II got America's economy "going again" (Letters, October 22).

The official unemployment rate did fall (from 14.6 percent in 1940 to 1.2 percent in 1944), but it did so overwhelmingly because of military mobilization rather than because of improvement in the economy's performance.  As economist Robert Higgs wrote about the war years, "Official unemployment was virtually nonexistent, but four-tenths of the total labor force was not being used to produce consumer goods or capital capable of yielding consumer goods in the future."  So it's not surprising that, according to Higgs's estimates, personal consumption per capita in 1945 was only a paltry 2.5 percent higher than it was in the still-deeply-depressed year of 1940.

Regardless of WWII's merits on other fronts, almost surely it was no great economic boon.

Sincerely,
Donald J. Boudreaux

See Robert Higgs's indispensable book Depression, War, and Cold War (New York: Oxford University Press, 2006).  The quotation in the letter is found on pages 63-64; the data on consumption are found on page 71.

Also note that personal consumption per capita in 1944, the last full year of WWII, was about two percent less than it was in 1940.

Iraq and Germany

As the aftermath of the Iraq war continues to be chaotic, there is a tendency to hope that this is just a passing phase and that time and action, such as the surge, will lead to better outcomes in the future. This article by David Stafford in the Washington Post, looks at the parallels between post-war Iraq and post-World War II Germany. In both cases, there was looting, anarchy, and disappointment at the pace of progress. There was also a political struggle over how to deal with those who had been involved in an evil government before the war.

But as Chris Coyne points out in this week's EconTalk (and as Stafford mentions briefly in his article), there are crucial differences between Germany and Iraq. And between Iraq and Japan, the other successful result of US attempts to export democracy after war. Coyne also examines numerous other failures of US efforts to export democracy--Cuba, Somalia, and Haiti, just to name three, that failed miserably because the basic institutional infrastructure for democracy could not be created from scratch.

Coyne argues that most interventions hoping to create democracy don't just fail, they make things worse. He argues for non-intervention and free trade as the best hope of helping people living under miserable conditions.

The War and Wildfires

This morning I heard a report on the radio of Senator Barbara Boxer (D-CA) complaining that the war in Iraq interferes with government's ability to fight the wildfires in southern California.  No doubt.  But.....

I oppose the war in Iraq; I always have done so.  But this war, while it does interfere with efforts to extinguish wildfires, does not interfere any more so than does nearly any other government program you care to name.  Resources have multiple uses and are scarce.  To use a worker or raw materials fighting a war is to take that worker and those materials, at least for a time, away from other potentially valuable uses.

The same is true of using workers and other resources to fight the "war on drugs" -- or using workers and other resources to administer agricultural price-support programs -- or using workers and other resources to run the Departments of Education, Transportation, Commerce, and so on -- or using workers and other resources to enforce the Endangered Species Act.

The question is not does fighting the war in Iraq reduce government's (and private persons') ability to battle the wildfires.  Of course it does.  The questions are, rather, are too many resources devoted to fighting the war?  Will Americans likely be made better off by taking some resources away from the war effort and put instead to other uses?

My answer to these questions is yes, mostly because I believe that the war is both unjustified and counter-productive.  But the fact that the war effort detracts from the ability to get other goodies is not itself a sound argument against the war.

I'm delighted that Senator Barbara Boxer is aware of opportunity costs -- that she understands that resources used to do X become unavailable to do W,Y, and Z.   I hope that she'll extend this insight to ask hard questions about the desirability -- and about the costs -- of the countless government programs that she supports.

The Economics of Shame

The U.S. military is giving away soccer balls in Fallujah trying to buy love. Noah Schachtman at Wired explains (HT: BoingBoing):

We walked past piles of rubble and hulks of rusted cars, alongside a slow-rolling convoy of Iraqi trucks and American Humvees.  One of the Hummers had a loudspeaker, telling the people to stop supporting the insurgents, and to come get their treats.  A crowd quickly gathered – children first.  They’re always the first to show up.  “Meester!  Meetser!  Football!” they’d shout, holding out their arms.  “Ani?  Maku,” I’d respond, brushing my hands together – the symbol for being all out.  Then I’d point in the direction of the Iraqi soldier tossing balls into a thickening scrum of pre-teens.  The kids would race off, squealing in delight.

But, after a while, the number of balls started to dwindle.  After every toss, there was a wrestling match.  The bags of food – mostly staples like rice – caused a similar commotion.  An Iraq Police truck would slow down.  A trio of cops would toss the yard-high white bags onto the street.  People would shout and point and nudge each other out of the way, demanding they get their fair share.  The cops would scream at everyone to chill out.  Then they’d get frustrated, and start to drive away.

We made a right onto a double-wide thoroughfare.  I stared at the skeleton of an amusement park ride lay by the side of the road; kids had repurposed it as a metallic playhouse.  Then we heard the crackle of automatic weapons fire.  And then second burst.  “Get inside the vehicle!  Inside the vehicle!” a nervous sergeant screamed at me.  I nodded, and kept on walking.  The fire was way, way off in the distance; no need to get overly-dramatic.

More concerning was the looks on people’s faces.  If the goal here was to win hearts and minds, it wasn’t working.  Early smiles had turned to blank stares.  Something feels wrong.  I couldn't put my finger on what.  But something.

"Standard" economic theory predicts that free soccer balls make people happy. But there's more to life than soccer balls. Adam Smith understood that pride and shame and honor matter, too:

“Mac” Macallister, a consultant working for the Marines, shakes his head when I tell him about the scene, the next day.  He’s spent years on end studying Middle Eastern history and tribal culture – and the Sunnis of Anbar are definitely tribal. 

He greets me a shout of “Utnapishtim!  Utnapishtim!” when we meet – the ancient Mesopotamian name for Noah.  “Man, you’re from like… right here!” he says, jabbing his finger at a patch of southern Iraq.  Mac has a bushy, red-and-gray beard, and wider-than-wide blue eyes.  He’s wearing a pair of faded jeans and red polo shirt.  It makes him look more like a hippie professor than retired Army major.   And he talks in rapid-fire bursts, paragraphs at a time, stopping only to light cigarettes.

The first thing Mac tells military leaders coming into the area is to focus on shame and honor, not hearts and minds.

“I, as an individual, may want that kid to have a soccer ball.  But consider the effect, okay?” he says.

Shame and honor are “limited resources,” Mac explains.  “They’re exchanged like currency.  And it’s a zero sum game.  If I embarrass you, I take some of your honor, and you give me some of your shame. Now you want to do something to get it back. 

“The father, off to the side, is thinking, ‘Hey, that’s my job.’ So you’ve shamed him.  He might also know that the kid doesn’t deserve it.  Shamed him again.  And if you give the ball to the little kid, he could get beat up, since the bigger ones prey on the littler ones. More shame.  So does that father grab an Ak-47 and do a drive-by, to get back some of his honor?”

Okay, the soccer-for-shooting exchange is a little extreme.  But the Marines on the scene realize this little excursion didn’t exactly set the right tone.  So the next day, they go out again.  This time, the Iraqi policemen carry the food bags to people’s doors, instead of tossing them out into the dusty alleyways.  The hand the soccer balls out, one by one.  This time, there’s no gunfire.  And happier faces.