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The Independent Institute
Commentary

War Prosperity: The Fallacy that Won’t Die


Submitted to The Wall Street Journal

Bob Davis and Gref Jaffe’s article (Feb. 4) on the likely economic consequences of a U.S. war against Iraq errs by giving past wars credit for creating positive economic effects. This hoary fallacy, it seems, just can’t be killed.

The strongest case for it has long been World War II, which Davis and Jaffe claim “clearly was a boon for the U.S. economy.” But a boon in what sense? Unemployment fell during the war entirely because of the buildup of the armed forces. In 1940, some 4.62 million persons were actually unemployed (the official count of 7.45 million included 2.83 million employed on various government work projects). During the war, the government, by conscription for the most part, drew some 16 million persons into the armed forces at some time; the active-duty force in mid-1945 numbered in excess of 12 million. Voila, civilian unemployment nearly disappeared. But herding the equivalent of 22 percent of the prewar labor force into the armed forces (to eliminate 9.5 percent unemployment) scarcely produced what we are properly entitled to call prosperity.

Yes, officially measured GDP soared during the war. Examination of that increased output shows, however, that it consisted entirely of military goods and services. Real civilian consumption and private investment both fell after 1941, and they did not recover fully until 1946. The privately owned capital stock actually shrank during the war. Some prosperity. (My article in the peer-reviewed Journal of Economic History, March 1992, presents many of the relevant details.)

It is high time that we come to appreciate the distinction between the government spending, especially the war spending, that bulks up official GDP figures and the kinds of production that create genuine economic prosperity. As Ludwig von Mises wrote in the aftermath of World War I, “war prosperity is like the prosperity that an earthquake or a plague brings.”


Also see the following:

“Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s,” by Robert Higgs

“Regime Uncertainty: Why the Great Depression Lasted So Long and Prosperity Resumed after the War,” by Robert Higgs

“From Central Planning to the Market: The American Transition, 1945-1947,” by Robert Higgs

“Wartime Socialization of Investment: A Reassessment of U.S. Capital Formation in the 1940s,” by Robert Higgs

“Crisis and Quasi-Corporatist Policy-Making: The U.S. Case in Historical Perspective,” by Robert Higgs

“National Emergency and the Erosion of Private Property Rights,” by Robert Higgs and Charlotte Twight

“World War II and the Triumph of Keynesianism,” by Robert Higgs

“World War II and the Military-Industrial-Congressional Complex,” by Robert Higgs

“How War Amplified Federal Power in the Twentieth Century,” by Robert Higgs

Crisis and Leviathan: Critical Episodes in the Growth of American Government, by Robert Higgs


Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

Full Biography and Recent Publications


New from Robert Higgs!
CRISIS AND LEVIATHAN (25TH ANNIVERSARY EDITION): Critical Episodes in the Growth of American Government
The size and scope of government power has grown in response to crises of war and economic upheavals. Such increased power remains long after each crisis passes, threatening both civil and economic liberties, all at the behest of special interest groups.