Does World War II “Prove” Keynesianism?

In “How the Great Depression Ended,” I say that

World War II did bring about the end of the Great Depression, not directly by full employment during the war but because that full employment created a “glut” of saving. After the war that “glut” jump-started

  • capital spending by businesses, which — because of FDR’s demise — invested more than they otherwise would have; and
  • private consumption spending, which — because of the privations of the Great Depression and the war years — would have risen sharply regardless of the political climate.

That analysis is by no means an endorsement of simple-minded Keynesianism (as propounded by Paul Krugman, for example), which holds that the government can spend the economy out of a recession or depression, if only it spends “enough” (which is always more than it actually spends). But there is no point in pumping additional money into an economy unless the money elicits productive endeavors: business creation and expansion, leading to net capital formation and job creation.

Pumping additional money into government programs results in the misdirection of resources, at best, and in the discouragement of productive private activity, at worst. Discouragement takes two forms: crowding-out and active interference (usually through regulatory inhibitions).

The answer to the question of this post’s title is that World War II has nothing to do with Keynes or Keynesianism, as it is widely understood. Employment and output (measured in dollars) rose sharply during World War II, but most of the additional output was devoted to the war effort. Huge increases in government spending did not lead to huge increases in the material well-being of Americans, most of whom were working harder while being deprived of the fruits of their labors, through rationing.

If anything, the post-war recovery “proves” the folly and wastefulness of efforts to stimulate an economy through government spending. It was not government spending that re-started the U.S. economy after World War II, it was private spending on capital investments and consumer goods. Some of that private spending was encouraged by the end of regime uncertainty. That end was brought about by the curtailment of New Deal initiatives (until the 1960s) because of the war and FDR’s death. Private spending — which was boosted by wartime saving — would have been purely inflationary had businesses not been willing and able to create jobs and expand output.

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