🚀 Faster, Please! — The Podcast #26

The conventional narrative about the economic history of World War II says that new learning from wartime mobilization jumpstarted a postwar golden age of fast economic growth. But, economist Alexander Field writes in his 2011 book, A Great Leap Forward, "It was not principally the war that laid the foundation for postwar prosperity. It was technological progress across a broad frontier of the American economy during the 1930s." Field develops that argument in his new book, The Economic Consequences of U.S. Mobilization for the Second World War, released last fall. In this episode of Faster, Please! — The Podcast, I'm joined by Alex to discuss his argument.

Alex is the Michel and Mary Orradre Professor of Economics at Santa Clara University's Leavey School of Business.

In This Episode

* Depression-era technological progress

* Economic detective work (8:04)

* What about the scientific advances of WWII? (13:23)

* The US economy if WWII never happened (17:39)

Below is an edited transcript of our conversation

Depression-era technological progress

James Pethokoukis: You write in A Great Leap Forward, a book that I consult frequently and mention frequently in my writings: “The years 1929-1941 were, in the aggregate, the most technologically progressive of any comparable period in U.S. economic history. … It was not principally the war that laid the foundation for postwar prosperity. It was technological progress across a broad frontier of the American economy during the 1930s.” Your new book builds upon that argument, but could you, just for a moment, give a quick summary of A Great Leap Forward, and then how that moves into your new book?

Alexander Field: The basic argument of A Great Leap Forward was that behind the backdrop of double-digit unemployment for at least a decade, potential output was growing by leaps and bounds during the Great Depression. It wasn't really recognized until Simon Kuznets had to try to do a back-of-the-envelope calculation of what the potential of the economy could be. But the contributors to that were, I think, several. Number one was the last third of the conversion of the internal transmission of power within American factories from the shafts and belts, which was a signature of the 19th-century factory, to fractional-horsepower electric motors and electric wiring. And the second part was just an enormous amount, surprisingly, of research and development spending. Just astounding, if you think of the Depression as being so disastrous macroeconomically, but in terms of the number of people employed growing by leaps and bounds, number of labs established. And then finally, although it's widely accepted that the New Deal spending was too small in a Keynesian sense to immediately bring the economy out of the Depression, nevertheless, that spending on streets and highways and bridges and hydropower and so on had very strong positive supply-side effects. I think it's the combination of those three factors that I see as responsible for making potential output so much larger in 1941 than people thought it was.

For the layman, your finding in that book, your thesis, is extraordinarily counterintuitive. You would never expect that underneath that sky-high unemployment number and the failing banks and the breadlines, there was this sort of innovative ferment happening and foundations laid for future progress. Similarly, to the extent that people would have an economic opinion about World War II, I would guess: 1) that it brought us out of the Great Depression, and 2) that it was a period of key advances, key technologies and the fact maybe we learned how to do things more efficiently during the war, whether it's build boats or what have you. Those two things are what played a huge role in postwar prosperity—I think that might be sort of the everyman way they would conceive of it. That is not exactly what you found.

I think you've done a very good job characterizing what I see as the two key themes in the conventional wisdom about the Second World War. Basically, the argument that fiscal and monetary stimulus rapidly closed the output gap, the unemployment rate went from under 10 percent in ‘41 to unimaginably low, below 2 percent, in ‘43 and ’44. That's accepted and I'm not challenging that. But the second part of the conventional wisdom is what the economists call learning by doing: the emphasis on the decline in unit costs with accumulated output as a result of producing military durables. And the argument is exactly as you stated it. The argument is that learning spilled over into the postwar period and kind of underlined the supply side foundations for the golden age, which is ‘48 to ‘73. Now, my argument is different.

I see the Second World War from a productivity history perspective as a detour. My argument is that the progress, the growth of potential output up through 1941, that's essentially most of the reason why the US stands astride the world economy in ’48, not what happened between ‘41 and ’48. It might have been different if the US had persisted in producing a hundred thousand piston-driven aircraft a year. But we didn't. We didn't produce piston-driven aircraft. Most of the products that we got very good at making, we stopped making them fairly soon after Victory over Japan Day. And I view most of that specific human capital as not really having a great deal of relevance after the war.

As you mentioned, the things we got good at making were not just the instruments of war, but the instruments of war at a particular period. They were not going to be applicable to future conflicts, but they're also not applicable to a civilian economy that, once the war was over, began to expand very quickly. You mentioned the airplanes. I would also assume the kind of ship building that was done in the war was also not particularly applicable to the post-war era.

That's right. That's exactly right. I see basically, the success of US industry under government leadership in producing the military ordinance that supplied our armies, as well as those of Britain and the Soviet Union, our allies, and so on — I see that basically as the application of technologies that had been honed in the ‘20s and particularly in the 1930s, producing automobiles and refrigerators, and applying that management experience to mass producing military durables, rather than the view that it was experience producing military durables that laid the foundations for the postwar period in terms of the supply side.

Economic detective work

I think people would think that we didn't need to look anymore at the Great Depression or World War II, that this is, they would say, settled science. We know exactly what happened and why it happened. Apparently the role of the World War II, what happened there, is not settled science. So what were people missing previously? What did you find that presents a different perspective?

I think, as you say, it began with the findings about the Great Depression. I think what we're doing in the business of research, particularly academic research, is we're researching things: We're trying to find something new to say. But finding something new to say is only part of it; it also has to be something that actually might be true. And so it really it came out of really deep immersion in a variety of sources, both statistical and documentary: reading the minutes of the War Production Board, reading the minutes of the planning committee. And as this happened, a lot of preconceptions that I had about the war began to fall away. For example, the central empirical finding, surprising finding, in this book, or the argument, is that the productivity of American manufacturing—and it is within manufacturing that we would expect to see the effects of learning by doing—actually dropped dramatically between 1941 and 1945.

And one of the things that I kind of picked up from this immersion in the sources was, rather than a view of American industry during the war as 24/7, 365 days a year, I get a picture of really profound production intermittency. In other words, essentially the need to shut down production lines, because it's a shortage economy. You've moved from a surplus economy to a shortage economy; sub-assemblies and raw materials and ultimately labor are being rationed. And if you can't get the heat exchanger you need, then the whole line is going to sit there. It's a very different view. And then you see this being said. In [War Production Board chairman Donald] Nelson's biography he talks about destroyer escorts: “Well, they were sitting there for six months because they couldn't get the part that they needed to complete it.” And those are kind of throwaway lines. They're there, but they’re not part of the kind of standard narrative; they're kind of overlooked as anomalies. And I don't want to get too Thomas Kuhn-ian about that, but if you start kind of pulling those anomalies together and assembling them and so on, then you get a different picture. And that's what I've tried to articulate in the book.

I love your role as a kind of economic detective. It's not just about going to the BLS website and pulling up the data and then off you go. There's some real detective work as a historian, as much as an economist, going on here. It's really interesting thinking about the narrative because I think you're right that I picture December 7th, 1941, we head off to war and then it's all hands on deck, the production lines are never quiet, the steel mills are never cool, and it's all that way until August 1945. But perhaps now having gone through this pandemic, we're a little more aware of what happens when you have a shortage economy, which is what you found.

Yeah, it's absolutely the case. I mean, ‘42 was absolutely a chaotic, terrible year. I would say there was no consensus in Washington that the United States was going to win the war, and it wasn't just the problems of suddenly having to produce a radically different set of products and making all this transition. The Japanese and the Germans weren't making it any easier for us, and I talk about that in the book as well. I think also vastly overlooked: I had absolutely no idea of the severity of what I call the rubber famine in the United States. When the Japanese overran Singapore in February ’42 and then rapidly shut off all of the exports, they cut off over 95 percent of the one strategic material in which the United States had effectively no domestic sourcing. And they were panicked, absolutely panicked about this, the Rubber Survey Committee. So that was another negative supply shock. And then the Germans were enormously successful in torpedoing what I call the tanker pipeline that was bringing petroleum and petroleum products from east Texas and Louisiana to the eastern seaboard. That's how it was moved and so forth. And between January and June of ‘42, they torpedoed 400 ships in the Atlantic and the Caribbean and just completely shut that down. And there were also serious consequences about that.

What about the scientific advances of WWII?

Was the war a time of great science productivity? Or is that also a detour toward science that was not as applicable to the postwar period, and we were not able to build on the gains and science of the ‘20s and ‘30s and so forth?

The evidence is pretty clear, and I would cite James Conant, former president of Harvard and also a member of the Rubber Survey Committee, basically saying, “During the war, basic scientific research was shut down.” This was an all-hands-on-deck, we're going to essentially exploit our existing larder of scientific knowledge to fight the war. Now, sure, obviously there were developments in terms of technology and science during the war. I can talk about some of them. We could talk about jet engines. It's clear that jet-engine technology did advance during the war. But look, aircraft and aircraft-engine technology was advancing very rapidly in the 1930s. And you have to ask the counterfactual: What would've happened without that? As far as the United States, we never flew any jet engines in the Second World War.

Nuclear power: We spent $2 billion on the Manhattan project and so on. And I think the first nuclear power plant was in England in ‘56, I think. And we obviously have relied to some degree on nuclear power. I think the jury is kind of still out on the extent to which that was a big plus. And it's operated only with enormous subsidies in terms of government accepting the liability limits and so on. So we could talk about other factors. There were some significant institutional consequences of the Second World War, but from a technological perspective, I do see it as a detour. And as far as basic science, I think this is one of those areas in which there is not a lot of dispute. It was shut down as was R&D development in terms of consumer durables.

What sort of response have you gotten from other economists, other economic historians?

There have been sort of people nibbling at the edges. They're not happy with one little thing, one or the other. But I think the reality is that World War II is not something that economic historians have given that much attention to. The time series, econometricians will typically drop the observations from World War II: “Ah, it was a controlled economy. Everything was messed up. We can't run our [models].” And so on. The basic thesis I have not gotten a lot of pushback on.

When I saw that your book had come out, the first thing that popped in my head, since I write a lot about productivity growth, was a passage in Robert Gordon's book in which he very specifically writes about labor productivity in World War II and how the improved production techniques and so forth were not forgotten after the war. What you're describing is a very different view of productivity.

What Bob Gordon did in chapter 16. . .

Obviously you're familiar with it.

I read all of the manuscript in chapters, so yes, I am quite familiar with the book. And what he did in chapter 16 was, I think, absolutely crystallized and state very clearly the second key theme, in terms of the conventional wisdom, about the war. He went beyond that. He then kind of advertised it as novel. But in the book, if you read the book carefully, I have considerable documentation because whenever you're trying to say something novel, you have to persuade people that we didn't already know this and so on. And what I think Bob is doing, basically, there is just absorbing and very clearly stating what is the received wisdom by many historians and economic historians. And I just think it's wrong.

The US economy if WWII never happened

I think one of the more intriguing economic counterfactuals is what the American economy looks like in the ‘40s and in the postwar era if there was no postwar era—if all else equal, there was no need for a war. If we had not had this diversion, what does the economy of the United States in the second half of the 20th century look like?

It is a counterfactual. One thing I would say is that the war did interrupt a very strong trajectory of productivity growth, both labor productivity and total factor productivity, as the output gap closed between ‘39 and ‘41. And what you're seeing there in terms of my interpretation is, number one, just a continuation of that trend during the Depression of very strong productivity growth, secular trend, combined with a boost also from closing the output gap because of the pro-cyclicality of TFP. Now, if you just were to statistically extrapolate that through the ‘41 to ‘48 period, things look pretty good. It's a questionable kind of exercise in terms of how accurate that would be.

If you look the world in 1948, people, historians, everybody else is looking at that and they're seeing the United States is standing like an economic colossus astride the world. The Soviet Union has lost 20 million people. Germany: Dresden, Hamburg, they've been fire bombed. England has had to basically liquidate its overseas economic empire to pay for the war. Japan has had two atomic bombs and virtually all of the other major cities have been fire bombed with incendiaries and so on. And I think it's natural, particularly because the US was victorious and so on, and particularly because it was so successful in production—but of course, productivity is not the same as production; it's production per unit input—because it was so successful in that to say that was attributable to the war years. And again, I come back to my thesis, which is: No, I see essentially in ‘48, the US had a major productivity lead over Western Europe and Japan, and the next 30 years, what the French call “les trente glorieuses” and so forth, essentially saw living standards converging among the developed world as that productivity gap is closed. But my argument is that that productivity gap is already quite evident in 1941. It's not a function of the war. It's there in spite of the war.

So even without the destruction to our competitors in World War II and our lack of destruction, the US in 1950 would still be standing astride the world as an economic colossus on the technological frontier, even without the war.

Right. It's interesting to think about American industry prewar, say in the ‘30s, and postwar. Let's talk about the American automobile industry, because that was central in terms of the prosecution of the war, in terms of the conversion of those factories and the contractors operating, the automobile industry firms operating these big defense plants and so on. Economic historians basically agree that the 1930s was probably the most dynamic period in terms of innovation in American automobiles, in terms of the development of industry. Do you really want to look at the 1950s and say that those were the glory years of American US manufacturing? I mean, the tail fins and so on, and the cars lasted three years, and we essentially owned the marketplace. We weren't threatened by foreign imports yet. But I don't see a major upward progression in that direction. I do want to say, though, in terms of the legacy of the war, that there were clearly some important things that were different because of the war and maybe it wouldn't have been if we hadn't had it. Number one, we had a compression of wages. So there was essentially 30 years of reduced inequality in income and wealth in the United States. Number two, little things like, for example, the incredibly peculiar system whereby Americans provide healthcare tied to your employer. It's just an artifact of what Henry Kaiser did when, because of caps on wages, he wasn't able to raise wages, so we'll have benefits, we'll have hospitals and so on. The introduction of tax withholding, because of the high tax rates, gave the federal government greater fiscal capacity. Blacks did very well. Many American blacks essentially had the opportunity to move from unskilled to semi-skilled positions. So yes, there were some consequences. I don't want to suggest that everything was exactly the same or worse. I wanted to get that on the record. But in terms of the general trajectory of the growth of productivity and potential output, I would argue that the war was a detour.

Then to what extent was the immediate postwar boom — the ‘50s, ‘60s, heading into the early ‘70s — how much of that was based on tech progress and innovation that emerged in those decades, and how much was really building substantially on the foundations from the ‘20s and ‘30s?

There's a couple of things. First of all, the ‘50s and ‘60s did benefit from relatively high levels of aggregate demand, partly because of military Keynesianism and the Cold War. So that problem was not so great. As far as the technology overlap, I think if there was learning during the war, and in chapter nine of my book I talk about this—and it's somewhat speculative there—I don't think it was within manufacturing. It's not the traditional emphasis on learning by doing. It was on logistics. It was on essentially the efforts, particularly in the military, in terms of the enormous knowledge, the use of linear programming, the gradual diffusion of those techniques to the private sector, the development of containerization, multimodal transit and so on. So if I were to kind of say in the post-war period, “what's the productivity legacy?” I think maybe we've been barking up the wrong tree and maybe more emphasis needs to be placed there.

I read various comments from economists at the end of World War II and maybe right at the beginning of the postwar period, and there seemed to be a lot of pessimism about what would happen. Are we going to go back into a Great Depression? What's going to happen when all of these soldiers come back? Am I overstating that, that the postwar boom seemed to have been kind of a surprise to those economists?

If you're thinking about actual output, a couple of things matter. Number one, potential matters, but also the output gap matters. And the big concern among economists at the end of the Second World War was aggregate demand. In other words, they say, “Once all of this military spending stops, essentially, it's going to be back to the 1930s” and so forth. And that didn't happen. I think the conventional wisdom is probably right. It is that the balance sheets of American households were just in great shape, they couldn't buy certain stuff, they were being well fully employed. They had a large lot of deferred demand for cars and washing machines. I think you're absolutely right. There was a lot of pessimism, but it was mostly focused on aggregate demand. I mean, in one sense, who cares about potential if you're way below potential? And that was, I think, what was driving that pessimism.

My last question is about your previous book. I just want to mention again the name of your current book, which is The Economic Consequences of US Mobilization for the Second World War. A book I was delighted to see land on my desk. And as I said earlier, your previous book, A Great Leap Forward, one which is well thumbed-through by me. I have one final question about that book. The cover image is the famous Futurama ride from the World's Fair of 1939, New York City. Why did you choose that image?

I think because it captured the kind of technological optimism and just sort of unalloyed and uncritical confidence in the ability of science and technology to push the economy forward, which had been absorbed by the population in spite of the double-digit unemployment. And of course, that is consistent with my thesis of what was actually happening in spite of the unemployment. I think that's the reason why I put that there.

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