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A thought experiment

Posted By Russ Roberts On October 8, 2010 @ 4:24 pm In Stimulus | Comments Disabled

Talking to my same smart friend about World War II, he said, “Surely World War II created prosperity. People who had been out of work had jobs in the tank factory and had money to spend. There was zero unemployment.┬áDon’t tell me that the military expansion of World War II didn’t improve the economy!”

Here is my answer.

Suppose the Federal Government in WWII decided to stay out of the war. Strict isolationism. But they decided to build the tanks and airplanes and bombs anyway. Instead of delivering those weapons to Europe and Pacific Fronts, they secretly blew them up at night and destroyed them. The people working in the factories never knew. They’re never told. Instead they thought they were contributing to the war effort. The soldiers who would have fought in the war were given uniforms (and there were of course all kinds of factories making the uniforms, full of workers). They trained. But they never fought. They simply were told that other soldiers were at the front and their time would come soon. So all the soldiers had jobs and the tank factories and bomb factories are full of workers, many of whom had been unemployed.

Full employment. 100%. Not just that. In this thought experiment, the federal government sets the wages in the tank factory high enough that there’s a waiting list. Not only are all the people who had been unemployed now working, but a lot of people, women for example, find it worthwhile to work. Lots of people have more money to spend than ever before.

So what would happen to the private sector of this economy? Would it grow or shrink? All those women who hadn’t worked before. So many two-income families. Full employment!

But it wouldn’t thrive. And it didn’t thrive in the 1940′s. And it has nothing to do with the fact that the tanks were actually used on the beaches of Normandy. Or that people died fighting the Nazis. You can’t create prosperity by destroying stuff either for real or pretend.

Or better yet, imagine a factory that’s called a tank factory but they don’t produce any tanks. They just pay people to pretend to make tanks. But they pay the workers a lot. There’s zero unemployment, the work force is expanding and people have a lot of money. Would that economy prosper? All that spending and all that income. Surely it would thrive! But it wouldn’t. If you put enough people in the factories pretending to make tanks, there’s less stuff to buy out in the rest of the economy. You’d be poorer as a group. Not as poor as when you actually built the tanks. And not as poor as when people died in real fighting. But you’d still be poorer if lots of people were working in the fake factories.

Spending doesn’t create prosperity.

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