Keynes from My Father

February 4, 2009
Posted by Jay Livingston

Did the War Effort – massive government spending for World War II – bring about the end of the Depression?

That’s not just an academic question for economic historians. The answer lies at the basis of ideas about what to do now in the current economic crisis. Keynesians answer the question with a resounding “yes” and advocate massive government spending. Other economists aren’t so sure. Here’s Tyler Cowen on a recent segment of This American Life devoted to Keynes and his legacy. (The segment on Keynes begins about 36 minutes into the podcast. The quote from Tyler comes about nine minutes after that.)

World War II was a time of economic misery. There was low consumption, there was rationing. Times were tough. It was a continuation of the Great Depression. The numbers for GDP were high because we were making tanks. But it didn’t make people better off. . . . The war made the Depression worse in terms of real standard of living.

I’m not an economist, and I’m not a historian, but I can make one small contribution to this discussion – my own bit of economic history. My father’s really.

“How did you make so much money in the steel business,” I asked him once. He had worked for a small steel company in Chicago, and in 1942 they sent him to head their office in Pittsburgh. Actually, I think he was the Pittsburgh office. It was a small company. They were steel brokers, middle men* between the mills (still in Pittsburgh in those days) and the fabricators.

“Well,” he explained, “a lot of the people in the steel business in those days weren’t very smart.” I asked him what he meant. “OK, here’s an example. You know that steel was rationed. But towards the end of the war, the mills were making more steel than they could sell to the government. Still, because of rationing, they weren’t allowed to sell it all. But the rule was that if a civilian fabricator placed an order, you could fill one-third of it immediately; then you had to wait for approval before you could fill the other two-thirds.

“So I asked some of the salesman, what if we tell the fabricators to place an order for three times as much as they need. We fill the one-third right away, and then later they cancel the rest of the order.

“They thought that was probably illegal, so I said, ‘I’ll go ask the government office in charge of rationing.’ The other salesmen all said, “Oh God no, don’t go to them. Stay away from those guys.’

My father didn’t understand the reason for their fears, he did go to the rationing bureaucrats, and they had no objections to his idea. He wound up selling a lot of steel.

I leave it to the economists to put this in terms of government stimulus, productive capacity, rationing, and consumption. And in the end, Tyler Cowen may be right in general. All I know is that at least in the Livingston family, the last years of the war were decidedly not a continuation of the Depression. Maybe that’s why my father remained a Keynesian to the end of his life – a life which ended before the combination of high spending, high unemployment, and inflation of the late 1970s that caused mainstream economics to shoo Keynes hurriedly into the closet of failed ideas. Now, Obama and $800 billion of stimulus have opened that closet door.

* They were all men. My mother, learning the business by necessity and on the job after my father’s death, was one of the first and one of the few women in the steel business.