Published on 19 Apr 2016
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The armies and technology of World War II required a vast supply of resources. A close look at Germany and Japan shows how the need to secure those resources played a significent role in determining strategy throughout the war.
The armies of World War II needed a vast supply and variety of resources. The Allies had many of those resources on their side, but the Axis powers did not. Germany imported many of its resources from countries it would soon be fighting, and needed their war strategy to account for the acquisition of those resources. The Molotov-Ribbentrop Pact signed with the USSR set up a trade agreement to bring them oil from Russia for a while, in addition to establishing temporary non-aggression with the Soviets. When the war began in earnest, Germany targeted Norway with its supply of aluminum and iron as well as its access to the even more resource-rich Sweden. Conquering France also gave them access to rich farmland to feed the troops. But even though they had gained control of the oil fields in Romania, it wasn’t enough to power their war machine. Many Nazi generals wanted to target North Africa for this, but Hitler had his sights set on the Soviet Union and wound up squandering much of Germany’s reserves in a fruitless effort there. Meanwhile, Japan’s entrance into the war had cost them their primary trading partner: the United States. The Japanese army wanted to pursue the Northern Expansion Doctrine (Hokushin-Ron) and push through China into Siberia, wounding the USSR in the process. They attempted this strategy, but the Soviets met them in Mongolia and pushed them back in the Battle of Khalkhin Gol. So they turned to the Southern Expansion Doctrine (Nanshin-Ron) advocated by the navy, and began to sweep up islands in the Pacific. They planned to strip the European colonial powers of their holdings, and they succeeded in capturing 90% of the world’s rubber production. But the US responded by synthesizing rubber, and built an industry so large that even today, more rubber is synthesized than harvested. If World War I was the first industrial war, marked by mass production and industrial capacity, then World War II was the first scientific war, marked by advancements like synthesis, radar, and jet engines.
May 30, 2016
At the Cobden Centre, Alasdair Macleod explains how the sensible reforms of one man rescued the West German economy from rationing, inflation, and deprivation:
Anyone who favours regulation needs to explain away Germany’s post-war success. Her economy had been destroyed, firstly by the Nazi war machine, and then by Allied bombing. We easily forget the state of ruin the country was in, with people in the towns and cities actually starving in the post-war aftermath. The joint British and American military solution was to extend and intensify war-time rationing and throw Marshall aid at the problem.
Then a man called Ludwig Erhard was appointed director of economics by the Bizonal Economic Council, in effect he became finance minister. He decided, against British and American misgivings, as well as opposition from the newly-recreated Social Democrats, to do away with price controls and rationing, which he did in 1948. These moves followed his currency reform that June, which contracted the money supply by about 90%. He also slashed income tax from 85% to 18% on annual incomes over Dm2,500 (US$595 equivalent).
Economists of the Austrian school would comprehend and recommend this strategy, but it goes wholly against the bureaucratic grain. General Lucius Clay, who was the military governor of the US Zone, and to whom Erhard reported, is said to have asked him, “Herr Erhard, my advisers tell me what you have done is a terrible mistake. What do you say to that?”
Erhard replied, “Herr General, pay no attention to them! My advisers tell me the same thing.”
About the same time, a US Colonel confronted Erhard: “How dare you relax our rationing system, when there is a widespread food shortage?”
Erhard replied, “I have not relaxed rationing, I have abolished it. Henceforth the only rationing ticket the people will need will be the deutschemarks. And they will work hard to get those deutschemarks, just wait and see.”
The US Colonel did not have to wait long. According to contemporary accounts, within days of Erhard’s currency reform, shops filled with goods as people realised the money they sold them for would retain its value. People no longer needed to forage for the basics in life, so absenteeism from work halved, and industrial output rose more than 50% in the second half of 1948 alone.
Erhard had spent the war years studying free-market economics, and planning how to structure Germany’s economy for the post-war years. It goes without saying that his free-market approach made him a long-standing and widely recognised opponent of Nazi socialism, a fact that enhanced his credibility with the military authorities tasked with repairing the German economy. He became an early member of the Mont Pelarin Society, a grouping of free-market economists inclined towards the Austrian School, founded in 1947, and whose first President was Hayek.
Erhard simply understood that ending all price regulation, introducing sound money and slashing the burden of taxation, were the basics required to revive the economy, and that the state must resist the temptation to intervene and had to reduce its role in the economy. He remained a highly successful finance minister for fourteen years, before succeeding Adenauer as Chancellor in 1963.
Erhard not only allowed unfettered free markets to rapidly turn Germany around from economic devastation, but being publicly credited with this success he presided over the economy long enough to ensure that bureaucratic meddling was kept at bay subsequently. His legacy served Germany well, despite the generally destructive actions of his successors.
The contrast with Britain’s economic performance was stark, where rationing was not finally lifted until 1954, and her post-war socialist, anti-market government was nationalising key industries. The contrast between Germany’s revival and Britain’s decline could not have been more marked.
May 29, 2016
Published on 12 Apr 2016
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After Germany’s early push, the situation looked dire in Europe. The United States had resources to help out, but initially clung to an isolationist policy. Gradually, measures like Cash and Carry and the Lend-Lease Act expanded their involvement.
Germany’s blitzkrieg had been largely successful. France fell early, and Great Britain appeared on the verge of collapse. Europe needed more resources to sustain their resistance, but the United States was bound by the Neutrality Act which established a policy of isolationism and forbade the US from supporting foreign wars in any way. President Franklin Delano Roosevelt skirted those restrictions. He lobbied Congress to reinstate a provision in the law called Cash and Carry, which would allow other nations to buy US war materiel with cash and transport it themselves into the warzone. He also established an agreement which allowed him to place American military bases on British colonies in exchange for destroyer ships, thus safeguarding the far reaches of the United Kingdom from possible Axis invasions. When it turned out that the English won the Battle of Britain and successfully staved off the attempted Nazi conquest, America decided to support them in a more substantial, long term way. Thus the Lend-Lease Act was signed: the US would loan equipment to their strategic partners (who were not the Allies yet). Though supposedly the equipment had to be returned, it was pretty obvious that war materiel would not come back in the same shape if at all, so this was really the largest donation of war supplies ever. But it wound up benefiting the US in turn, since the increased production galvanized an economy that had been stagnant since the Great Depression. It also kickstarted the involvement of the US Merchant Marine, who were among the earliest US citizens to give their lives in World War II and suffered the highest casualty percentage of any branch of the service. These unarmed ships navigated U-boat infested waters to bring much needed supplies to Europe, North Africa, and Asia. Despite this, their service has gone largely unrecognized and unrewarded as they are still denied many veterans’ benefits and were not even formally thanked by Congress until 2012.
May 25, 2016
Published on 5 Apr 2016
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To understand nations at war, you have to look at how their economies function. With World War II on the horizon, Europe and Asia dug themselves in for a fight – and a look at each other’s resources told them what to expect.
European economies were so closely connected that some people expected they have to avoid another world war or destroy their finances, but in fact World War I had taught them how to prepare for just such a scenario. Germany, France, and Great Britain all invested in their military before war broke out. When evaluating these economies to see how war would affect them, we look at four main factors: GDP, population, territorial extent, and per capita income. Broadly, this helps us determine how resilient, expansive, self-sufficient, and developed a nation is. All of those factors determine how a nation must conduct its war. For example, the vast territorial holdings of the British Empire meant that they had vast resources to draw upon but needed a long time to mobilize them, which helped Germany determine that they needed to strike fast and win big if they hoped to win the war before Britain’s full resources came into play. Japan also estimated that they could win a war in the Pacific if they managed to win before the US had been involved for more than 6 months. These calculations drove the early strategies of the Axis powers, but the participation of the US would later prove to be a crucial factor.
BONUS! Economies of Japan and China before WWII:
GDP (Bn USD-1990)
Japan – 169.4
Japanese Colonies – 62.9
China (exc. Manchuria): 320.5
Japan – 71.9
Japanese Colonies: 59.8
China (exc. Manchuria): 411.7
TERRITORY (thous sq.km)
Japan – 382
Japanese Colonies – 1602
China (exc. Manchuria): 9800
AVG ANNUAL WAGE (USD-1990)
Japan – 2,356
Japanese Colonies – 1,052
China (exc. Manchuria) – 778
From: The Economics of World War II: Six Great Powers in International Comparison by Mark Harrison
Some commentators blame lazy, overpaid faculty [for the rising cost of tuition]. But while faculty teaching loads are somewhat lower than they were decades ago, faculty-student ratios have been quite stable over the past several decades, while the ratio of administrators and staff to students has become much less favorable. In his book on administrative bloat, The Fall Of The Faculty, Johns Hopkins professor Benjamin Ginsberg reports that although student-faculty ratios fell slightly between 1975 and 2005, from 16-to-1 to 15-to-1, the student-to-administrator ratio fell from 84-to-1 to 68-to-1, and the student-to-professional-staff ratio fell from 50-to-1 to 21-to-1. Ginsberg concludes: “Apparently, when colleges and universities had more money to spend, they chose not to spend it on expanding their instructional resources, i.e. faculty. They chose, instead, to enhance their administrative and staff resources.”
And according to a 2010 study by the Goldwater Institute, administrative bloat is the largest driver of high tuition costs. Using Department of Education figures, the study found administration growing more than twice as fast as instruction: “In terms of growth, the number of full-time administrators per 100 students at America’s leading universities increased by 39.3% between 1993 and 2007, while the number of employees engaged in teaching research or service only increased by 17.6%.”
Colleges and universities are nonprofits. When extra money comes in — as, until recently, has been the pattern — they can’t pay out excess profits to shareholders. Instead, the money goes to their effective owners, the administrators who hold the reins. As the Goldwater study notes, they get their “dividends” in the form of higher pay and benefits, and “more fellow administrators who can reduce their own workload or expand their empires.”
But with higher education now facing leaner years, and with students and parents unable to keep up with increasing tuition, what should be done? In short, colleges will have to rein in costs.
When asked what single step would do the most good, I’ve often responded semi-jokingly that U.S. News and World Report should adjust its college-ranking formula to reward schools with low costs and lean administrator-to-student ratios. But that’s not really a joke. Given schools’ exquisite sensitivity to the U.S. News rankings, that step would probably have more impact than most imaginable government regulations.
Glenn Harlan Reynolds, “Beat the tuition bloat”, USA Today, 2014-02-17.
May 24, 2016
In the Wall Street Journal, economist Deirdre McCloskey pinpoints the launch point of the greatest increase in global human wealth ever seen:
In the 18th century, liberal thinkers such as Voltaire and Benjamin Franklin courageously advocated liberty in trade. By the 1830s and 1840s, a much enlarged intelligentsia, mostly the sons of bourgeois fathers, commenced sneering loftily at the liberties that had enriched their elders and made possible their own leisure. The sons advocated the vigorous use of the state’s monopoly of violence to achieve one or another utopia, soon.
Intellectuals on the political right, for instance, looked back with nostalgia to an imagined Middle Ages, free from the vulgarity of trade, a nonmarket golden age in which rents and hierarchy ruled. Such a conservative and Romantic vision of olden times fit well with the right’s perch in the ruling class. Later in the 19th century, under the influence of a version of science, the right seized upon social Darwinism and eugenics to devalue the liberty and dignity of ordinary people and to elevate the nation’s mission above the mere individual person, recommending colonialism and compulsory sterilization and the cleansing power of war.
On the left, meanwhile, a different cadre of intellectuals developed the illiberal idea that ideas don’t matter. What matters to progress, the left declared, was the unstoppable tide of history, aided by protest or strike or revolution directed at the evil bourgeoisie — such thrilling actions to be led, naturally, by themselves. Later, in European socialism and American Progressivism, the left proposed to defeat bourgeois monopolies in meat and sugar and steel by gathering under regulation or syndicalism or central planning or collectivization all the monopolies into one supreme monopoly called the state.
While all this deep thinking was roiling the intelligentsia of Europe, the commercial bourgeoisie — despised by the right and the left, and by many in the middle, too — created the Great Enrichment and the modern world. The Enrichment gigantically improved our lives. In doing so, it proved that both social Darwinism and economic Marxism were mistaken. The supposedly inferior races and classes and ethnicities proved not to be so. The exploited proletariat was not driven into misery; it was enriched. It turned out that ordinary men and women didn’t need to be directed from above, and when honored and left alone, became immensely creative.
The Great Enrichment is the most important secular event since human beings first domesticated wheat and horses. It has been and will continue to be more important historically than the rise and fall of empires or the class struggle in all hitherto existing societies. Empire did not enrich Britain. America’s success did not depend on slavery. Power did not lead to plenty, and exploitation was not plenty’s engine. Progress toward French-style equality of outcome was achieved not by taxation and redistribution but by the Scots’ very different notion of equality. The real engine was the expanding ideology of classical liberalism.
The Great Enrichment has restarted history. It will end poverty. For a good part of humankind, it already has. China and India, which have adopted some of economic liberalism, have exploded in growth. Brazil, Russia and South Africa, not to speak of the European Union — all of them fond of planning and protectionism and level playing fields — have stagnated.
May 18, 2016
Published on 7 Apr 2015
Wages in America differ greatly among workers. Why is that? One reason includes differences in human capital — tools of the mind. Education is one of the biggest investments people make to increase their human capital. Which college majors offer the greatest returns? And are all returns on education due to human capital? A college degree can “signal” other factors as well, and we discuss what is commonly known as the “sheepskin effect.” In this video, we also discuss how globalization has affected wages in the U.S.
May 13, 2016
The US rail system, unlike nearly every other system in the world, was built (mostly) by private individuals with private capital. It is operated privately, and runs without taxpayer subsidies. And, it is by far the greatest rail system in the world. It has by far the cheapest rates in the world (1/2 of China’s, 1/8 of Germany’s). But here is the real key: it is almost all freight.
As a percentage, far more freight moves in the US by rail (vs. truck) than almost any other country in the world. Europe and Japan are not even close. Specifically, about 40% of US freight moves by rail, vs. just 10% or so in Europe and less than 5% in Japan. As a result, far more of European and Japanese freight jams up the highways in trucks than in the United States. For example, the percentage of freight that hits the roads in Japan is nearly double that of the US.
You see, passenger rail is sexy and pretty and visible. You can build grand stations and entertain visiting dignitaries on your high-speed trains. This is why statist governments have invested so much in passenger rail — not to be more efficient, but to awe their citizens and foreign observers.
But there is little efficiency improvement in moving passengers by rail vs. other modes. Most of the energy consumed goes into hauling not the passengers themselves, but the weight of increasingly plush rail cars. Trains have to be really, really full all the time to make for a net energy savings for high-speed rail vs. cars or even planes, and they seldom are full. I had a lovely trip on the high speed rail last summer between London and Paris and back through the Chunnel — especially nice because my son and I had the rail car entirely to ourselves both ways.
The real rail efficiency comes from moving freight. As compared to passenger rail, more of the total energy budget is used moving the actual freight rather than the cars themselves. Freight is far more efficient to move by rail than by road, but only the US moves a substantial amount of its freight by rail. One reason for this is that freight and high-speed passenger traffic have a variety of problems sharing the same rails, so systems that are optimized for one tend to struggle serving the other.
Freight is boring and un-sexy. Its not a government function in the US. So intellectuals tend to ignore it, even though it is the far more important, from an energy and environmental standpoint, portion of transport to put on the rails.
May 4, 2016
Published on 8 Mar 2016
What’s the point of education?
Do you learn about things, because the learning itself matters, or is education all about the signal you — and your degree — send out to the world? Is education really about building skills, or does it serve only to transmit intangible traits, like your level of talent or your persistence?
These are the questions we’ll be tackling in this new Econ Duel debate from Marginal Revolution University.
And since we believe that nothing beats a good friend-vs-friend duel, we’ve picked two friends, whom you’re probably familiar with. For this debate on education as signaling vs. skill building, we’ve got Tyler Cowen and Alex Tabarrok, ready to go head-to-head.
You’ll see them argue about nearly everything—from peacocks, to private markets, to street sweepers, to Scandinavian education laws, and even the real value of Harvard University. In the end, you’ll see them duke things out, in a quest to determine education’s effect on our lives and well-being.
The video also asks:
-Why do students tend to rejoice when their professor cancels class?
-When we’re talking education, what really counts? Is it the soft skills, or the hard facts?
-If evolution still can’t sort out good vs. bad, can we really expect the market to do any better?
-Can the things you learn today still matter 20 years down the line?
-Why do peacocks still sport huge, colorful tails, despite the fact that evolution should’ve come up with a better signaling device by now?
Once you reach the end of the video, we have one specific request. It’s hugely important.
Ask yourself: “Is education only about signaling, or is it really about skill building?”
Think it through and then let us know by voting at the end of the video!
BTW, Alex is right in this debate.
April 23, 2016
Published on 7 Apr 2015
In this video on the marginal product of labor, we discuss some commons questions such as: How are wages determined? Why do most Americans earn so much by global standards? What exactly is meant by ‘human capital’? Do labor unions help workers, and if so, by how much? How does discrimination affect labor markets? How is the demand for labor different than the demand for a good? We’ll discuss how to derive the demand for labor based on the marginal product of labor, and use real-world examples — such as the demand for janitors in a fast food restaurant — to illustrate this calculation. We’ll also cover an individual’s labor supply curve vs. market supply of labor.
April 14, 2016
ESR explains why the Trans-Pacific Partnership is such a huge monstrosity of regulations, crony capitalist favours to big business, anti-consumer intellectual property rules, and other mercantilist interventions in trade:
Today there’s a great deal of angst going on in the tech community about the Trans-Pacific Partnership. Its detractors charge that a “free-trade” agreement has been hijacked by big-business interests that are using it to impose draconian intellectual-property rules on the entire world, criminalize fair use, obstruct open-source software, and rent-seek at the expense of developing countries.
These charges are, of course, entirely correct. So here’s my question: What the hell else did you expect to happen? Where were you idiots when the environmentalists and the unions were corrupting the process and the entire concept of “free trade”?
The TPP is a horrible agreement. It’s toxic. It’s a dog’s breakfast. But if you stood meekly by while the precedents were being set, or – worse – actually approved of imposing rich-world regulation on poor countries, you are partly to blame.
The thing about creating political machinery to fuck with free markets is this: you never get to be the last person to control it. No matter how worthy you think your cause is, part of the cost of your behavior is what will be done with it by the next pressure group. And the one after that. And after that.
The equilibrium is that political regulatory capability is hijacked by for the use of the pressure group with the strongest incentives to exploit it. Which generally means, in Theodore Roosevelt’s timeless phrase, “malefactors of great wealth”. The abuses in the TPP were on rails, completely foreseeable, from the first time “environmental standards” got written into a trade agreement.
That’s why it will get you nowhere to object to the specifics of the TPP unless you recognize that the entire context in which it evolved is corrupt. If you want trade agreements to stop being about regulatory carve-outs, you have to stop tolerating that corruption and get back to genuinely free trade. No exemptions, no exceptions, no sweeteners for favored constituencies, no sops to putatively noble causes.
April 13, 2016
One part of the explanation is that gasoline refiners are likely now switching to the production of summer-grade mixes, which are more costly to produce than are winter grades. But even if such switching is not taking place, we nevertheless expect prices at the pump to rise the moment crude-oil prices start to rise regardless of the prices that gasoline retailers paid for the fuels that they are currently selling. Furthermore, it’s good that prices at the pump rise as soon as crude-oil prices start to rise.
The reason […] is that markets are forward looking. If crude-oil prices start to rise today, this fact means that crude oil is today more scarce, relative to anticipated demand, than it was yesterday. Given this reality, we want consumers to start immediately to economize further on their use of gasoline, and we want refiners to have adequate incentives to refine enough gasoline to satisfy consumers’ anticipated future demands. Rising prices at the pump today promote both of these desirable responses.
But there’s an even deeper point: the value of something is not what the owner of that something paid for it or what it cost the producer of that something to produce it. Instead, the value of something is what people are willing to pay for it. And there’s nothing at all unfair or economically harmful about an owner of something selling that something for more than he or she paid for it. Suppose that today you buy 10 shares of Apple, Inc., at $100 per share. Further suppose that one year from today the price of Apple stock rises to $150 a share. Would you be wrong or unethical to sell your shares next year at $150 a share (or at any price higher than $100 a share)? After all, you paid only $100 a share to get them.
Of course you would not be wrong to sell your shares at a price higher than what you paid for them. What’s true for you and your Apple shares is true for all economic goods.
Donald J. Boudreaux, “Markets Are Forward Looking (And That’s Good)”, Cafe Hayek, 2016-03-18.
April 11, 2016
In a way most of us don’t really understand how differently we live from even a very short time ago. Read the comments in this excellent piece from Sarah Hoyt.
The fact is that right now just about everybody in the Developed nations can afford products that are better and cheaper than anything has ever been made. For instance my car is almost ten years old and has never required major maintenance and the body is as free of exterior rust as when it was new. The computer I’m writing this on is more powerful than ANY computer that you could buy in 1980. The clothes I’m wearing are more durable and sewn better than anything you could buy in 1950. And everything is essentially so cheap that just about everybody can afford it.
The fact is that, because of the constant improvement of manufacturing techniques the difference between the highest quality and lowest quality goods has become essentially nonexistent.
The great gap in lifestyles due to wealth is by and large gone, which begs the question, what can the wealthy buy with their money? The answer isn’t very pleasant.
What they buy is access and power. You don’t have to look much further than Warren Buffett, George Soros or Tom Steyer to see that. Or the Koch Brothers for that matter. All of these people and other have created large influence building organizations for the sole purpose of influencing the rest of us stupid schmucks to do what they want us to. What they want us to do all too often is to give up the liberties and standard of living that our parents and grandparents worked so hard to build and retreat back to a lifestyle that will not compete with our “betters.” Sorry, but I’m not going for that.
J.C. Carlton, “What Can A Billionaire Buy That Most People Can’t?”, The Arts Mechanical, 2016-03-30.
April 2, 2016
Colby Cosh gently pokes fun at the latest outbreak of manufactured patriotic fervor:
An enterprising Toronto man wants to sell us all “Ketchup Patriot” T-shirts, so that the virtuous among us might assert the correct position on the hot issue of whether it is right to eat products made with dubious foreign tomatoes.
This presents me with a dilemma: I agree with the many words already written in this space, and in the Financial Post, about the preposterousness of tomato isolationism; on the other hand, I am pretty sure our future as a country has less to do with mid-grade agricultural products destined for pureeing than it does to do with insta-auto-robo-printing of faddish social-signalling paraphernalia. You have to admire the spirit of enterprise wherever it emerges. The best answer ever given to Che Guevara’s philosophy was the Che Guevara T-shirt.
The “Ketchup Patriot” view favours French’s brand ketchup, which is now made from tomatoes grown in the area around Leamington, Ont. Leamington is practically a creation of the H.J. Heinz Co., which was a major employer there for decades, but fled to the United States in 2014. Few Canadians are employed in the growing of tomatoes, mind you: migrant workers flown into local dormitories and paid around $10 an hour seem to do most of the hard work on Leamington-area farms and in greenhouses.
French’s, best known for selling mustard, is owned by the Reckitt Benckiser Group PLC of Slough, Berkshire. This “Ketchup Patriotism,” the closer you look at it, becomes more and more a matter solely of dream terroir. Canadians don’t get the profits, don’t pick the tomatoes and don’t even can the ketchup — that happens in Ohio, although French’s, obviously aware that it has a whole country by the tail, has hinted at plans to open a new cannery somewhere in Ontario. All we do, for the moment, is own the land. This ketchup has a mystical Canadian essence, one I defy anyone to detect in a blind taste test.
One may not detect the “distinctive Canadian ‘terroir'”, but having actually tasted Heinz and French’s products, there’s a reason that Heinz is the default ketchup for most people.
March 30, 2016
Published on 7 Apr 2015
Bundling refers to when two or more goods are sold together as a package. Microsoft Office, Cable TV, Lexis-Nexis, and Spotify all provide examples of bundling. What if there were no bundling and you had to pay for Cable TV by channel rather than purchasing channels in bundles? Would you end up paying more or less? We explore this question and others in this video.