Parable of the broken window and 1929 crisis

Parable of the broken window and 1929 crisis

I've read that, in 1938, economic crisis was taking back, and that it's the war effort that finally closed the 1929 crisis.

Is it not a version of the parable of the broken window ? How a war effort could be good for the economy ? (because, as the parable says, spending money in war is the same for the GDP than spending money in other things, but the last is better for the welfare of people)


I'm afraid that I must disagree with @Samuel Russell. Yes, war spending is a case of the broken window fallacy, and I'm inclined to believe that Bastiat is both clearer and more correct than Mr. Russell gives credit. I suspect that I'd like to sit down with Mr. Russell and puzzle out our disagreement over beer, but this is not the place for that discussion.

The Parable of the Broken Window states that not all spending is equally valuable to the economy. Spending that preserves the status quo (repairs to a broken window) or which is externally mandated (war spending), is less valuable than truly voluntary or discretionary spending, because truly voluntary spending transmits signals about the wants and desires of the consumer. Spending to preserve the status quo does not generate as much growth or innovation. (reductio ad absurdium, if all spending is directed to preserving the status quo, you can never ever create apple computer by spending on broken windows. New products require spending that is not restricted to preserving the status quo, and is not regulatory.)

The depression was not a broken window problem. The depression arose (again, grossly oversimplifying) because the economy was performing FAR under anyone's estimate of what was optimal. Consumer demand was low, which resulted in low production, which resulted in layoffs, which resulted in reduced consumer demand in a horrible spiral. If you want to force fit the broken window into the situation, the depression was because people chose not to replace the window, but just to close the shop.

In such a situation, government spending increases production, increased production increases hiring, increased hiring leads to increased demand. I believe the point that Mr. Russell makes well is that the war spending/government spending/mandatory spending is not tied to utility the same way that consumer demand is. For the duraqtion of the war, consumer spending is actually suppressed because of the proportion of production that is diverted from products with intrinsic utility (consumer demand, or "butter") to production of goods where the utility is externally mandated (Military production or "guns"). The surge in demand nevertheless causes a surge in production, which causes hiring, which raises wages, which reverses the downward spiral that transformed a recession into a depression.

This is a book length question - multiple books have been written about it. Many of them disagree, some with great vehemence. I've tried to limit this answer to be extremely brief, and to avoid some of the more controversial assertions. I've probably fallen short of the goal, but I hope I haven't stepped on too many toes.


Bastiat is wrong. Utilitarianism, the idea of subjective valorisations of utility as opposed to price, has been rejected because it is fundamentally incoherent: subjective utilities are incommensurable and thus unvalorisable. The reason for this is that the subjective process of desire is incommensurable between individuals. Even if we both price ice-cream purchases at 50c, the ice-cream gives me a lactose intolerance response but delights you. This is precisely why mainstream economics doesn't present a theory of value, but a theory of price. You can valorise subjective assessments of price based on the model's conception of a price optimising agent with needs.

The point of the broken window fallacy is that it outlines the limits of GDP. Repairing a broken window increases GDP (exchange values in circulation), but reduces actual use-values. One of the reactions of Marxist economists to Fordism was to hypothesise two more Departments of production-III (Waste) and IV (War)-in addition to I (Capital goods) and II (Consumption goods). The only difference with Departments III and IV is that the value doesn't circulate or become embodied in the satisfaction of the desires of labour or capital as such.

The central problem is your misunderstanding of the broken window fallacy: the market doesn't measure useful-values except to the extent they satisfy some need (window repair, murdering central europeans). Whether the "use-values" are deemed to be moral is beside the point, the presence of a use-value allows the commodity to bear and realise exchange-value. Heroin has a going price on the market, and the sale of heroin contributes to the gross product.

(There's a version amenable to mainstream economics of the above critique as well. It runs roughly the same: utilities are not prices.)


The major wars of the 20th century have certain things in common with the .COM boom and the so called 'space race', but are not comparable, in the same respect, to more historical armed conflicts - examples being the Gallic wars of Julius Caesar or, for example, the War of 1812.

The opening question is: what's the difference between building a house and launching a Mars expedition? When one builds a house, much of the infrastructure for construction and materials production is already in place: one has wood, concrete, plumbing, wiring, and appliances available at one's fingertips. The contractors are standing by with bulldozers, concrete trucks, nail guns, and pipe benders.

In comparison, the Mars expedition incurs a huge amount of trial and error improvisation all along the supply chain - one is building a lander, on-planet housing, water purification, food production technology, launch facilities, instrumentation, and so forth. Therefore one has to build infrastructure to build infrastructure. When one observes the progression of the US space program, one sees vast amounts of innovation in electronics, materials, life support, computation, facilities construction, 'food engineering', and so forth. The .COM boom required the production of vast quantities of routers, fiber, servers, network software, browser software, email servers, etc. These put an inordinate demand on the entire global workforce.

What one sees in WW I is innovation in submarines, aircraft, diesel engines, airships, and tanks, and in WW II innovation in nuclear physics, electronics, aircraft, submarines, radar, and codebreaking. This was not merely 'putting a lot of people to work' in factories, as well as on the front, it also demanded all out effort from academics, scientists, engineers, and designers. The distances involved, particularly in the Pacific theater, demanded a lot of work just to ship things around. Someone growing corn and raising chickens wasn't merely feeding troops, but merchant seamen, transport pilots, road builders, truck builders, and so forth.

WW II was a vast waste of human potential and treasure, however what was left over contributed significantly to the economic boom of the 1950s. One can see at least three influences: the first is the production resources created during the war, the second is the new technologies, and the third is the workforce that had learned how to make and operate all this new stuff.

Much of WW II was fought over enormous distances, and in certain respects this meant that a lot of the war effort was logistical rather than belligerent. The United States had to maintain supply lines to Britain, Australia, the Philippines, and China at various stages of the war, including transportation by sea and air. At the end of the war, much of this was immediately pressed into civilian service.


Econoblog101

Here is the latest video from Xavier Sala-i-Martin (in Spanish):

Once again I find that Sala-i-Martin does not understand economic theory. The parable of the broken window, which he explains in the video, says the following. A child smashes a window, and the window is being repaired for 1,000 euros. The new window has to be created, which creates a job and an income. That income is then spent by the person that produced the window, which creates another job and income and so on and so on. Question: why not smash all windows if this seems to create lots of jobs and lots of income?

Thinking about the problem applying microeconomic theory you will understand that people have budget constraints. If the boy has no income, the window will not be repaired. If his father is made to pay, like Sala-i-Martin says (I would have preferred the family to pay since the idea of the man as the only wage earner is long past), he will spend 1,000 euros on the window but 1,000 euros less on something else. This explanation by Sala-i-Martin is correct. The parable of the broken glass, says Sala-i-Martin, therefore exposes a logical fallacy: you cannot create more jobs and more income by spending more, therefore you should not break the windows.

Nevertheless there is a problem with this argument. It is based on microeconomic thinking where participants in the economy face budget constraints. The government, however, might not face such a budget constraint. (In the eurozone it does, by the way.) How does a government spend money then?

A sovereign government with its own currency creates money through an interaction with the central bank which more or less goes like this. The government creates a sovereign bond, which is basically a piece of paper saying that at some future date I will pay you some amount of money in the local currency plus an interest rate which is fixed on the paper. The central bank receives this sovereign bond and in return creates money (from nothing, just by keystroke). The government can then spend that money.

The introduction of the government into the parable of the broken windows makes the whole thing more interesting. Now we have a participant with no budget constraint! If the government would spend 1,000 euros more, it would indeed create additional jobs and income of more than 1,000 euros since the money is spend again and again. Here is what Keynes wrote in the General Theory:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like but if there are political and practical difficulties in the way of this, the above would be better than nothing.

But: would this not lead to inflation?

That depends on whether there is already full employment in the economy or not. In the former case, it surely would create inflation (in the short run) as more money is chasing the same amount of things. However, in case there is significant unemployment there will not be a rise of inflation since the additional demand for goods is filled by an increase in supply at the existing wage and price levels. The unemployed are in no position to negotiate higher wages.

Now the question for Sala-i-Martin was how to connect this story – which he did not invent – to the economic situation in Spain. Does Spain have something like full employment or is there significant unemployment? Of course, the latter is the case. That means, that the Spanish government could create more jobs and more incomes by spending more. You might have noticed that the opposite has been true in the last couple of years. The Spanish government cut spending and it destroyed incomes and jobs.

The only problem is that the way the euro is set up the Spanish government cannot create money by interaction with the central bank. Spain has actually ceased to be a sovereign state since its government is depending on finance from the outside, which is the private sector. Only if more euros were invested in Spanish government bonds could the Spanish government spend more. The interest rates it pays on its existing sovereign bonds is already quite high, so this will be very difficult to accomplish.

In order for Spain to move forward it must either introduce a sovereign currency (the new peseta) or the institutions of the euro zone must be changed so that someone in Spain is allowed to spend more money. What will not bring forward is to listen to the economists that do not understand that models have assumptions and that you have to choose your model carefully. One model does not fit all – sometimes you are in a Keynesian world with low interest rates weakness of demand, sometimes you are in a neo-classical world with (almost) full employment and supply problems.

The Spanish newspaper should carefully handpick the economists that they provide a platform for. Xavier Sala-i-Martin and Hans-Werner Sinn (in EL PAIS today) are economists that said nothing when the crisis built up. For some reason, they do not seem to make a lot of sense. On the other hand, some economists said pretty useful things before the crisis, during and after. To find out who makes sense and who doesn’t I propose that newspaper journalist question economists more rigorously and also try to understand what they say. They should get second opinions, too.

The crisis that we are in is the result of intellectual failure. By this I mean that we have abandoned science and philosophy as the principles that guide us and replaced it with neo-classical economics – which is based on a deterministic world of the view – and profit-striving – which is nihilistic – as the personal way of live. Economists like Sala-i-Martin and Sinn, whether they recognize it or not, have played a large part in this.


How a Study on Hurricanes Proved Bastiat’s Broken Window Fallacy

After 6,712 cyclones, typhoons, and hurricanes the evidence is clear: Bastiat was right all along.

In 1850, the economic journalist Frédéric Bastiat introduced the parable of the broken window to illustrate why destruction, and the money spent to recover from destruction, is not actually a net benefit to society (see the video at the end of this post for an explanation of the broken window fallacy). For most people the idea that destruction doesn’t help society would seem too obvious to warrant mentioning. But some liberal economists argue that destruction can lead to an economic boom, mainly because it provides the government with an opportunity to spend more money.

If the liberal economists are right, then we should find that destructive storms lead to economic growth. But a pair of researchers, Solomon M. Hsiang and Amir S. Jina, have recently published a study that shows the exact opposite. Using meteorological data, they reconstructed every country’s exposure to the 6,712 cyclones, typhoons, and hurricanes that occurred during 1950-2008 and then measured the long-term growth:

The data reject hypotheses that disasters stimulate growth or that short-run losses disappear following migrations or transfers of wealth. Instead, we find robust evidence that national incomes decline, relative to their pre-disaster trend, and do not recover within twenty years. Both rich and poor countries exhibit this response, with losses magnified in countries with less historical cyclone experience. Income losses arise from a small but persistent suppression of annual growth rates spread across the fifteen years following disaster, generating large and significant cumulative effects: a 90th percentile event reduces per capita incomes by 7.4% two decades later, effectively undoing 3.7 years of average development. The gradual nature of these losses render them inconspicuous to a casual observer, however simulations indicate that they have dramatic influence over the long-run development of countries that are endowed with regular or continuous exposure to disaster.

“There is no creative destruction,” Jina told The Atlantic. “These disasters hit us and [their effects] sit around for a couple of decades.” He added, “Just demonstrating that that was true was probably the most interesting aspect for me to start with.” Additionally the researchers found,

A cyclone of a magnitude that a country would expect to see once every few years can slow down an economy on par with “a tax increase equal to one percent of GDP, a currency crisis, or a political crisis in which executive constraints are weakened.” For a really bad storm (a magnitude you’d expect to see around the world only once every 10 years), the damage will be similar “to losses from a banking crisis.”

Unfortunately, the researchers tie this to the dubious conclusion that the effect of climate change on cyclones will be “roughly $9.7 trillion larger than previously thought.” That could happen. Or it could be the case that climate change reduces the cost of destructive storms in some areas by keeping them from hitting populated areas. We don’t really know what the effect will be, so we shouldn’t be basing trillion dollar public policy decisions on unreliable climate change models.

But despite their disputable conclusion, the researchers have done an invaluable job of providing support for what Christians should know: wanton destruction is not a net benefit to mankind.

Addendum:
To restate the Christian case against the broken window fallacy:
“God has not just called us to preserve what he has given us, but to increase and grow it,” says Anne Bradley. She explains that our job description as given in Genesis 2 is to:

• Be fruitful and multiply.
• Create rather than destroy.
• Use our ingenuity and talent to increase the sum of flourishing, not just preserve existing levels.

The Christian approach to economic growth — which tends to lead to increased human flourishing — is to be innovative, productive, creative, and responsible stewards of resources. Everyone understands this intuitively, of course, which is why we don’t cheer about how economically fortunate we are to be hit by a hurricane.

As for the parable of the broken window, economist Art Carden explains Bastiat’s reasoning in this video:

Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).


Piston Hurricane, Parable of the Broken Window

An old friend from the Coast Guard visited me over the weekend. He is retired and now works as an emergency planner. If there’s one thing government folks do, it is plan. But many times I’ve seen plans go out the window when emergency strikes and people start to improvise. Or maybe the planned-for emergency never materializes. Maybe you get a different emergency you didn’t plan for. The anarchist in me says that plans are useless. But I agree that it’s good to think about these things ahead of time.

So my friend and I got to talking about hurricanes, which is a specialty of his. He told me that no hurricane has ever scored a direct hit on my piece of the South Carolina coast (I live just a few yards away from the beach). Hurricanes have hit north of me and south of me, but in the recorded history of hurricanes, none have ever hit here, at least, not a direct hit by one of the big ones.

I’m not sure if that makes me feel good or not. If my house did sustain a direct hit, smell you later.

But it got me thinking about when I was working at Lehman Brothers in 2004, when Hurricane Katrina hit. Were you active in the markets back then? If so, you probably remember that stocks ripped to the upside, particularly energy and construction companies that would have to repair all the damage. Of course, the insurance stocks got killed.

I was 30 years old back then and not really steeped in economic thought. None of us were. We were traders, not philosophers. But we were all sitting around wondering why the stock market was ripping when the hurricane was clearly going to wipe out a huge city. Made no sense.

My answer was that the winners from Katrina were probably publicly traded, while the losers weren’t.

But does anybody win from a hurricane in the first place?

The Parable of the Broken Window

You may have heard of the “Broken Window Fallacy,” where a boy throws a rock through a storefront window, breaking it. The shopkeeper must hire the glazier to come fix the window. He pays him 50 bucks, thereby stimulating business in town.

Everyone sees this and says, “Gee whiz, a kid breaks a window and suddenly there’s 50 bucks in circulation. Hey kid, why don’t you run around town and break the rest of the windows?”

If this sounds familiar, it’s because you’ve heard it before—from an economist named Frédéric Bastiat.

Bastiat basically comes up with the ideas of opportunity cost and unintended consequences simultaneously, when he observes that if the shopkeeper did not spend 50 bucks to fix his window, he might have spent it on something else more productive. What, we don’t know. But we can assume that he knows best how to spend the 50 bucks, at least better than the kid who broke his window.

Bastiat is one of the forefathers of libertarian/Austrian economics, and he often talked about the things that are unseen in finance. A good example is the minimum wage debate, which we talked about briefly in last month’s issue of Bull’s Eye Investor.

The layman thinks if you raise the price of labor to $15/hour by fiat—yay, people are making $15! But generally what happens is that some people will see their wages drop to /hour, because the bossman had $150 to spend on labor to begin with, and he can either hire 20 people at $7.50/hour or 10 people at $15/hour.

If you think the bossman should somehow operate at a loss to accommodate everyone at the higher wage, then we can have a nice discussion on the role of profit in society.

Bastiat is the reason I come to work every day, because there are so many people who have believed, and will always believe, that you can fix the price of something at x just because 51% of the voters said so.

Keynesian Stimulus

One of the great tragedies of the financial crisis was the $780 billion we shelled out for the giant stimulus package. Wow, was that bad, for a lot of reasons.

I remember driving around and getting stuck in construction and seeing these stupid signs everywhere:

So back to Bastiat, why was the stimulus bad? We spent $780 billion basically paving the same roads over and over again. It was one step up from digging holes and filling them back in. And just like in the broken window example, sure, some people got rich off it.

But what would the taxpayers have done with $780 billion, aside from paving roads? Probably some pretty interesting stuff. Possibly they could have thought of better things to do with it than paving roads. Even if they had saved it, that’s $780 billion less the government would have had to borrow, which would have lowered interest rates and increased credit availability for private borrowers.

The counterargument is that if you go back to the 1930s when we did all this Keynesian stimulus (the Hoover Dam, etc.), that it worked in getting us out of the Great Depression. Did it? Maybe it made the depression worse. You can’t go back in time and not have the Keynesian stimulus and see what happens.

In US history classes over the years, FDR has generally gotten credit for ending the depression, but more and more scholars are beginning to challenge that idea.

Captain Facepalm

I think these things are pretty obvious. I can’t figure out why people have such a difficult time seeing them. I can’t figure out why Nobel Prize winners can’t see them.

Any economic intervention, no matter how slight, causes unintended consequences. There are things that you cannot see, that the planner cannot anticipate. There are also easy ones. If you cap the price of a good, there will be a shortage. If you put a floor on it, there will be a surplus.

If you make it hard for people to trade swaps, you might reduce liquidity and push people into other, potentially more risky products.


Parable of the broken window and 1929 crisis - History

Many Americans have experienced the adverse consequences of the recent economic downturn: retirement savings wiped out, jobs lost, or at least a general feeling of financial uncertainty. Our leaders in Washington have reacted by enacting a flurry of new government spending initiatives including bailouts, “stimulus packages”, and a vast new federal budget. The ultimate success of these policies–and the security of our economic futures–rest on a single premise, a wager made on a massive scale: that government spending can “stimulate” the economy and spark the renewed creation of wealth.

This idea is not a new one. Over 150 years ago, economist Frederic Bastiat penned his “parable of the broken window,” in which he examines the economic implications of a boy breaking a shopkeeper’s window in a fictional town. The townspeople observe that the shopkeeper will need to pay the glassmaker to fix the window, that the glassmaker might in turn spend those earnings at the bakery, that the baker would then spend that profit somewhere else, and so on. Therefore, they conclude, the broken window turns out to be not a loss, but rather a stimulus that starts a ripple effect of new economic activity. Far from being a problem, the boy’s destructive act seems to be a way to give the fictional economy a boost.

But this stimulus theory is a fallacy. Bastiat points out that while the spending on new glass is easily observed, there is a corresponding absence of spending that goes unseen. Forced to spend his savings on a replacement window, the hapless shopkeeper is now unable to pay for other things, like a newspaper advertisement or more shelves. The expense of buying a window is thereby a silent, unseen loss of potential business expansion. Thus, while the glassmaker might benefit from the increased business in the short term, it has simply come at the expense of the shopkeeper (and the other businesses he might have frequented). Overall, the total wealth in the economy has been decreased by the cost of a window.

While Bastiat offers an important and true lesson in his broken window parable, he offers something even more valuable in the method by which he reaches it: he carefully studies all the relevant facts in a case, their causes, and all their inevitable effects–in a word, he approaches economics as a science, as a study of principles. Just as the chemist needs to carefully study and understand all of the principles governing the elements in a substance to successfully predict how they will behave when combined with others, the economist must study and understand all the aspects of a given policy to determine what its actual effects will be. Conversely, just as the chemist who fails to consider all the factors in a reaction will fail to achieve his desired outcome (and potentially suffer grave consequences), so too does the shortsighted and unprincipled economist.

Observe the actions of the Bush and Obama administrations, which have been characterized by frenzy and impulse. From the first Sunday-afternoon announcement of the government’s seizure of mortgage giants Fannie and Freddie, to the bailout of AIG (but not Lehman Brothers), to the multiple enormous “economic recovery” spending bills rushed through congress in weeks, it has become clear that our leadership is flying by the seat of its pants–i.e., without reference to any firm principles at all.

Both Presidents Bush and Obama have defended their unpredictable, shifting policies on the basis of urgency: Bush dismissed critics in September, saying, “There will be ample opportunity to discuss the origins of this problem. Now is the time to solve it.” Obama has stressed repeatedly the need to “act boldly and swiftly” to avert economic disaster, brushing aside warnings of the long term economic damage caused by massive deficit spending, more restrictive regulation, and higher taxes.

While a sense of urgency in the face of crisis can be a virtue, it can only be so if it is guided by rational principles. When US Airways Flight 1549 was crippled by a failed engine, the efficacy of the pilot in assessing the damage and analyzing the options against his knowledge of avionic principles was crucial to his life-saving landing in the Hudson River. However, had his measured, rational sense of urgency turned into blind panic, the outcome would almost certainly have been much worse.

The government’s handling of the economic downturn has fallen into the latter category. Rather than analyzing the underlying principles at work, Bush, Obama, and Congress have demonstrated an inclination to do something, anything that seems superficially plausible to try to reverse course. They call this “harnessing the spending power” of government, which means transferring liabilities and losses from the balance sheets of select companies and individuals to the balance sheets of all taxpayers. By simply erasing the financial mistakes of some and handing the cost to others, we are told, the government can end the recession and return us to prosperity.

Given the seriousness of the circumstance, this type of swift action may sound enticing, but will it truly work? There is a telling parallel here between government spending and the fictional broken window. One of the clues to the fallacy inherent in the broken window theory emerges when taking the idea to its consistent implementation: If wealth could somehow be increased by breaking windows, then it would stand to reason that the townspeople should break every window in sight. And why stop there? If a glassmaker’s increased business indicates economic gain, why not destroy the entire town, so that the whole population could be put to work rebuilding what they once had? Obviously, this scenario would represent an enormous and senseless destruction of wealth, despite the resulting “full employment.”

Likewise, we should ask of the current economic policies: If the government can benefit the economy by paying off the debts of a few, why not pay off the debts of all? Why not assume the mortgages and credit card bills of the entire country? If this is the road to prosperity, what are we waiting for?

The answer, of course, was long ago given by Bastiat: spending money, in and of itself, creates no wealth. The “economic activity” we see as a result of government spending is simply the transfer of wealth from the pockets of some to the pockets of others. The result is only a rearrangement of wealth, not its creation (and actually a loss, when the overhead of government bureaucracy is taken into account). While the “improved” financial health of some may seem desirable in the short term, it necessarily comes at a higher cost down the road. Just as the broken window ultimately leaves the fictional town one window poorer, the economic stimulus bills leave us all deeper in an already deep hole of debt that will have to be repaid someday, somehow.

By focusing on the immediate and visible, while evading the long term, as yet unseen effects of their actions, our leaders are committing exactly the error that Bastiat warns us about. They are treating economics not as a science of principles, but as a day-by-day experiment where the rules are subject to change and cost is no object. We have already seen the damaging effects of the resulting climate of uncertainty in our markets, and we will continue to experience the fallout as the true costs emerge.

If we want to retain the standard of living we currently enjoy and see it improve in the future, we must combat this pragmatic, short-term mentality. Economic success requires recognition, not evasion, of the fact that the principle of cause and effect applies just as inexorably in financial policy as it does in the scientist’s lab. Only when we reestablish acceptance of this idea can we hope to reverse course and return to the road of long term prosperity.

First appeared in The Undercurrent — an independent multi-campus college newspaper that features cultural commentary based on Objectivism — the philosophy of Ayn Rand (author of the Classic American #1 bestseller Atlas Shrugged).


T.S. Eliot’s “The Hollow Men”: History & Summary

Thomas Stearns Eliot was born in St. Louis, Missouri of New England descent, on Sept. 26, 1888. He entered Harvard University in 1906, completed his courses in three years, and earned a master’s degree the next year.

After a year at the Sorbonne in Paris, he returned to Harvard. Further study led him to Merton College, Oxford, and he decided to stay in England. He worked first as a teacher and then in Lloyd’s Bank until 1925. Then he joined the London publishing firm of Faber and Gwyer, becoming director when the firm became Faber and Faber in 1929. Eliot won the Nobel prize for literature in 1948 and other major literary awards.

Eliot saw an exhausted poetic mode being employed, that contained no verbal excitement or original craftsmanship, by the Georgian poets who were active when he settled in London. He sought to make poetry more subtle, more suggestive, and at the same time more precise.

He learned the necessity of clear and precise images, and he learned too, to fear romantic softness and to regard the poetic medium rather than the poet’s personality as the important factor. Eliot saw in the French symbolists how an image could be both absolutely precise in what it referred to physically and at the same time endlessly suggestive in the meanings it set up because of its relationship to other images.

Eliot’s real novelty was his deliberate elimination of all merely connective and transitional passages, his building up of the total pattern of meaning through the immediate comparison of images without overt explanation of what they are doing, together with his use of indirect references to other works of literature (some at times quite obscure).

Eliot starts his poem “The Hollow Men” with a quote from Joseph Conrad’s novel the Heart of Darkness. The line “Mistah Kurtz-he dead” refers to a Mr. Kurtz who was a European trader who had gone into the “the heart of darkness” by traveling into the central African jungle, with European standards of life and conduct. Because he has no moral or spiritual strength to sustain him, he was soon turned into a barbarian.

He differs, however, from Eliot’s “hollow men” as he is not paralyzed as they are, but on his death catches a glimpse of the nature of his actions when he claims “The horror! the Horror!” Kurtz is thus one of the “lost /Violent souls” mentioned in lines 15-16. Eliot next continues with “A penny for the Old Guy”. This is a reference to the cry of English children soliciting money for fireworks to commemorate Guy Fawkes day, November 5 which commemorates the “gunpowder plot” of 1605 in which Guy Fawkes and other conspirators planned to blow up both houses of Parliament.

On this day, which commemorates the failure of the explosion, the likes of Fawkes are burned in effigy and mock explosions using fireworks are produced. The relation of this custom to the poem suggests another inference: as the children make a game of make-believe out of Guy Fawkes, so do we make a game out of religion.

The first lines bring the title and theme into a critical relationship. We are like the “Old Guy”, effigies stuffed with straw. It may also be noticed that the first and last part of the poem indicates a church service and the ritual service throughout. This is indicated in the passages “Leaning together…whisper together”, and the voices “quiet and meaningless” as the service drones on.

The erstwhile worshippers disappear in a blur of shape, shade gesture, to which normality is attached. Then the crucial orientation is developed, towards “death’s other Kingdom.” We know that we are in the Kingdom of death, not as “violent souls” but as empty effigies, “filled with straw”, of this religious service.

Part two defines the hollow men in relation to the reality with those “direct eyes have met”. “Direct eyes” symbolizing those who represent something positive (direct). Fortunately, the eyes he dare not meet even in dreams do not appear in “death’s dream kingdom.” They are only reflected through broken light and shadows, all is perceived indirectly. He would not be any nearer, any more direct, in this twilight kingdom. He fears the ultimate vision.

Part three defines the representation of death’s kingdom in relation to the worship of the hollow men. A dead, arid land, like its people, it raises stone images of the spiritual, which are implored by the dead. And again the “fading star” establishes a sense of remoteness from reality. The image of frustrated love which follows is a moment of anguished illumination suspended between the two kingdoms of death. Lips that would adore, pray instead to a broken image. The “broken stone” unites the “stone images” and the broken column,” which bent the sunlight.

Part four explores this impulse in relation to the land, which now darkens progressively as the valley of the shadow of death. Now there are not even hints of the eyes (of the positive), and the “fading” becomes the “dying” star. In action, the hollow men now “grope together / And avoid speech”, gathered on the banks of the swollen river which must be crossed to get to “death’s other kingdom”.

The contrast with Part I is clear. Without any eyes, at all, they are without any vision, unless “the eyes” return as the “perpetual”, not a fading or dying star. But for empty men, this is only a hope. As the star becomes a rose, so the rose becomes the rose windows of the church the rose is an image of the church and multifoliate. Which is a reference to Dante’s Divine Comedy, where the multifoliate rose is a symbol of paradise, in which the saints are the petals of the rose.

But Part Five develops the reality, not the hope of the empty men the cactus not the rose. The nursery level make-believe mocks the hope of empty men. In desire, they “go round the prickly pear” but are frustrated by the prickles. The poem now develops the frustration of impulse. At various levels, and in various aspects of life, there falls the frustrating shadow of fear, the essential shadow of this land. Yet the shadow is more than fear: it concentrates the valley of shadow into a shape of horror, almost a personification of its negative character.

The passage from the Lord’s Prayer relates the Shadow to religion, with irony in the attribution. Next, the response about the length of life relates it to the burden of life. Lastly, the Lord’s Prayer again relates the Shadow to the Kingdom that is so hard. This repetition follows the conflict of the series that produces life itself, frustrating the essence from descent to being.

This is the essential irony of their impaired lives. The end comes by way of ironic completion as the nursery rhyme again takes up its repetitive round, and terminates with the line that characterizes the evasive excuse. They are the whimpers of fear with which the hollow men end, neither the bang of Guy Fawkes day nor the “lost violent soul.”

In part Five the frustration of reality is described by the abstractions introduced in Part I life is frustrated at every level, and this accounts for the nature of the land and the character of its people. By placing God in a causal relation to this condition, the poem develops an irony which results in the “whimper”. But the most devastating irony is formal: the extension of game ritual in liturgical form.

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Like so many of his colleagues, Beckert lacks an appreciation of the parable of the broken window. New historians of capitalism can identify the ostensible economic prowess of slavery, but they have not seen the costs imposed by slave economies. Contra the claims of these writers, as a pollutant slavery retarded America’s economic development in three ways. Let us explore the channels through which slavery polluted the economy.

One: Slavery Deprived Americans of Blacks’ Ingenuity

Since slaves were classified as property, they were precluded from exploiting their inventive capabilities. Therefore, patents were inaccessible to entrepreneurial slaves. In a normal economy, creators irrespective of their race are provided with an incentive to innovate in the form of the patent system. Innovators often reap large sums due to the licensing of their inventions. As such the rewards for inventing spur further novelties. Although the injustice of intellectual property law did not hinder slaves like Benjamin Montgomery and an individual only known as Ned from exercising their creativity, they were obstructed from exploiting the full benefits of the patent system. Furthermore, the efforts of many slaves were appropriated by their owners, who amassed large fortunes. Another insidious feature of slavery is that it hampered the ambition of blacks. The burden of enslavement resulted in talented individuals working as slaves when they should have been adding to the knowledge base of civilization. For example, Thomas Fuller had superb mathematical skills, but they were never usefully employed in an industrial setting. Had Fuller been a free man maybe he would have achieved success as an entrepreneur or an academic.

Moreover, slavery limited the participation of blacks in the economy. Though some slaves were major players in the internal marketing system, the majority of enslaved blacks had no access to an income, hence their ability to purchase consumption goods was meager. Without slavery, entrepreneurs would have been encouraged to cater to the demands of a larger group of black consumers. Innovation in product development would have been a logical consequence of engaging blacks in the market as consumers due to their eclectic preferences. For example, by 1876 the spending power of 5 million black Southerners was $300 million. So, one can imagine the losses suffered by entrepreneurs as a result of slavery. Meanwhile, there is no doubt that in the absence of slavery Americans would have been enriched by the dynamism of black entrepreneurs. Today, we reflect on the legacies of Rockefeller and Carnegie, but slavery robbed us of their black counterparts.

Two: Slavery Deterred Economic Dynamism

Even ardent critics of the New History of Capitalism (NHC) admit that slave societies can enable short-term innovations to bolster efficiency. Like capitalists, plantation owners also invested in schemes to lower operational expenses. For example, historian Robert W. Slenes offers insightful commentary on the capacity of slave economies for organizational innovation:

Andrew Carnegie, founder of a company that eventually became part of U.S. Steel[,] embodied capitalist rationality. Carnegie was particularly famous for the “vertical integration” of his industrial activities. By investing in iron ore and coal mines, as well as in railroads to transport the ore and coal to his steel mills, he was able to reduce dramatically the cost of the final product and win market share from competitors. In Brazil, recent studies by Thiago Campos Pessoa highlight similar paragons of vertical integration: the Breves brothers, coffee planters who, between them, owned perhaps the largest slave labor force in Brazil in the post-1850 period, spread over several properties in the Paraíba Valley.

But despite their propensity for incremental innovations slave societies are innately conservative. Invariably, slave owners are more comparable to aristocrats than capitalists. Capitalists acknowledge that markets are competitive and that hence their businesses are vulnerable to disruptions. In contrast, slave owners feared radical transformations because they uproot the status quo. Under slavery, elites are far less inclined to support Schumpeterian innovations. Radical changes may create lucrative opportunities, but they often produce the effect of displacing labor. Therefore, any alternative that sought to make labor redundant was dismissed by slave owners. Planters recognized that transformative developments could make them wealthier, however they were more driven by a desire to preserve status than to accumulate wealth.

Similarly, Charles Post in disputing the notion that slavery is congruent with capitalism provides compelling evidence that planters lacked a capitalist mindset:

In sum, while capitalists have and do attempt to intensify the labour of wage workers through speed-up and lengthening working hours, the most effective means of increasing output and reducing costs—the mechanization of production—is available to capitalists, but not to slave-owners. The status of slaves as a form of “fixed capital” provided few opportunities for slave-owning planters to introduce new labour-saving technology even when such innovation would allow planters to cut costs in response to market imperatives.

Clearly, the business model of slavery was expensive. If planters had been inspired by capitalist sentiments, they would have jettisoned slavery for a less burdensome enterprise. In short, economic dynamism makes slavery irrelevant since dynamic economies are unpredictable and slavery requires conservatism to succeed.

Three: The Rent-Seeking institution of Slavery Imposed Deadweight Losses on the Economy

To escape brutality slaves usually fled plantations. Planters refused to lose their property, so fugitives were apprehended. However, the onerous costs of slavery’s enforcement percolated throughout the population, thus non–slave owners incurred expenses. Jeffrey Hummel acutely explicates the rent-seeking nature of slavery: “Slaveholders were a minority, even within the southern states. Only one–fourth of white households owned slaves, and about half of those owned fewer than five. This elite was very successful at getting governments at all levels, from local through national, to subsidize slavery’s enforcement.” Unfortunately, in pursuit of its rent-seeking agenda slavery inflicted deadweight losses on the American economy. For example, time invested to obtain runaway slaves might have been spent doing something productive. Hummel expounds on the deadweight losses caused by slavery in greater detail: “Enforcing the slave system required labor and capital. Every dollar that Southerners spent this way, beyond what they would have spent otherwise to protect life and property, was added deadweight loss. This reduction in welfare, moreover, translates unambiguously into a fall in output. In real terms, slavery’s enforcement inefficiency made the entire southern economy, including both whites and blacks, less prosperous.”

The New History of Capitalism is astoundingly popular. Yet the assumption that slavery made a significant economic contribution to America’s development is untenable. Slavery performed exceptionally as a pollutant during its heyday. Instead of energizing the economy, it created an environment that induced stagnation and inefficiency. Left-wing historians are fascinated by slavery, so they should study it objectively. Then they will admit that the unseen costs of slavery exceed its perceived economic contributions.


Irene’s Broken Windows

G et ready for a bunch of demand-side economists to tell you that the post-Hurricane Irene rebuilding phase is actually a good thing for future economic growth. But don’t believe it.

Joshua Shapiro, chief U.S. economist at MFR, Inc., delivered my favorite quote on the subject to the New York Times: “If you’re in the middle of recession, you just wander around blowing up buildings, and that would be your path to prosperity. And clearly that’s not the case. It’s not the case with a natural disaster either.”

Echoing this thought, Ian Shepherdson, the chief U.S. economist at High Frequency Economics, bluntly noted on CNBC’s website that “no one is made better off by the destruction of their home or workplace.” He acknowledged the benefits of reconstruction work, but he dismissed the idea that somehow this is a net win for the economy.

It sounds to me like both of these gentlemen are recalling the parable of the broken window, introduced by French free-market philosopher Frederic Bastiat in an 1850 essay called “That Which Is Seen, and That Which Is Unseen.” While Bastiat agrees that repairing broken windows is a good thing, encouraging the glazier’s trade and income, he argues that it is quite different from the idea that breaking windows is a good thing, in that it would cause money to circulate and encourage industry in general.

Why? Because a shopkeeper who spends money to fix broken windows cannot spend or invest that money on new ventures.

“It’s not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library,” wrote Bastiat. “In short, he would have employed his six francs in some way, which this accident has prevented.”

In other words, the business people who are spending to fix the damage of Hurricane Irene are not spending or investing that money on brand-new ventures or start-ups, or on ordinary goods and services. That’s the real economics of Hurricane Irene.

There was a lot of damage incurred along 1,100 miles of U.S. coastline. Tragically, 28 deaths have been reported so far. There were toppled trees, power-line disruptions, and flooding on damaged roads. Homes, commercial buildings, and factories all stopped for at least a couple of days. In some sense, the human distress has been even greater than the economic distress.

On the other hand, lost sales, foregone consumer spending, and temporary stoppages of production and employment will all be recouped in a relatively short period of time. Mark Zandi of Moody’s Analytics suggests that the economic toll will be in the billions, but not the tens of billions. (Remember, total U.S. GDP is roughly $15 trillion.) So there’s no black-swan event here that will throw our fragile economy into a double-dip recession.

Yes, the economic blow from Irene is noticeable, but it’s temporary. In fact, what makes this economic setback even less worrisome is that it occurred over a weekend. You really didn’t even lose two days of economic activity.


Irene's Broken Windows

Get ready for a bunch of demand-side economists to tell you that the post-Hurricane Irene rebuilding phase is actually a good thing for future economic growth. But don’t believe it.

Joshua Shapiro, chief U.S. economist at MFR, Inc., delivered my favorite quote on the subject to the New York Times: “If you’re in the middle of recession, you just wander around blowing up buildings, and that would be your path to prosperity. And clearly that’s not the case. It’s not the case with a natural disaster either.”

Echoing this thought, Ian Shepherdson, the chief U.S. economist at High Frequency Economics, bluntly noted on CNBC’s website that “no one is made better off by the destruction of their home or workplace.” He acknowledged the benefits of reconstruction work, but he dismissed the idea that somehow this is a net win for the economy.

It sounds to me like both of these gentlemen are recalling the parable of the broken window, introduced by French free-market philosopher Frederic Bastiat in an 1850 essay called “That Which Is Seen, and That Which Is Unseen.” While Bastiat agrees that repairing broken windows is a good thing, encouraging the glazier’s trade and income, he argues that it is quite different from the idea that breaking windows is a good thing, in that it would cause money to circulate and encourage industry in general.

Why? Because a shopkeeper who spends money to fix broken windows cannot spend or invest that money on new ventures.

“It’s not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library,” wrote Bastiat. “In short, he would have employed his six francs in some way, which this accident has prevented.”

In other words, the business people who are spending to fix the damage of Hurricane Irene are not spending or investing that money on brand-new ventures or start-ups, or on ordinary goods and services. That’s the real economics of Hurricane Irene.

There was a lot of damage incurred along 1,100 miles of U.S. coastline. Tragically, 28 deaths have been reported so far. There were toppled trees, power-line disruptions, and flooding on damaged roads. Homes, commercial buildings, and factories all stopped for at least a couple of days. In some sense, the human distress has been even greater than the economic distress.

On the other hand, lost sales, foregone consumer spending, and temporary stoppages of production and employment will all be recouped in a relatively short period of time. Mark Zandi of Moody’s Analytics suggests that the economic toll will be in the billions, but not the tens of billions. (Remember, total U.S. GDP is roughly $15 trillion.) So there’s no black-swan event here that will throw our fragile economy into a double-dip recession.

Yes, the economic blow from Irene is noticeable, but it’s temporary. In fact, what makes this economic setback even less worrisome is that it occurred over a weekend. You really didn’t even lose two days of economic activity.

Restaurants, retailers, baseball games, and Broadway shows all shut down, but only for a short bit. And actually, there was a lot of consumer buying in the days leading up to Irene. People went to Home Depot and Lowe’s to find stuff to board up their windows. They went to Costco for food. And they went to Wal-Mart and Dollar General for all sorts of things.

When the final tally is in, Irene may or may not qualify as a top-ten hurricane. But the history of such disasters is that the national economy rebuilds and snaps back shortly thereafter. Nonetheless, the economic rebuilding essentially gets you back to where you were before the storm. Unfortunately, there is virtually no net new investment from all of this.

That said, if President Obama tries to use Hurricane Irene as an excuse to pour tens of billions of new infrastructure dollars into the economy, he’s barking up the wrong tree.

For just as Bastiat’s seen-and-unseen analysis holds for the shopkeeper repairing his window, it also holds for the impact of massive government spending on the whole economy. It’s a huge mistake, and a consequence of our fiscal profligacy, when private money is not spent on new investment because funds are absorbed by big-government borrowing.

If we are to restore strong economic growth and job creation we require measures like pro-growth tax reform or regulatory rollback and repeal. In this sense the new House Republican plan just released by Majority Leader Eric Cantor to repeal job-destroying regulations -- especially on labor and the environment -- makes a lot more sense than throwing money at FEMA for new infrastructure banks.

Breaking fiscal windows is just as ineffective as breaking the shopkeeper’s pane of glass.

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The Falling Rate of Profit

In 1850, classical liberal theoretician Frédéric Bastiat published his landmark essay That Which Is Seen and That Which Is Unseen (Ce qu’on voit et ce qu’on ne voit pas). In it, he introduces his acclaimed scenario — the “parable of the broken window.” The story is a simple one: a shopkeeper’s son accidentally breaks a pane of glass and hire a glazier. And so it goes:

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade – that it encourages that trade to the amount of six francs – I grant it I have not a word to say against it you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child.

But what if windows continue to be broken purposefully what if the child is, by some oddity, conspiring with the glazier to reap the benefit of profit? In short, “destruction is not profit.” The issue of destruction, and its subsequent fixing, is that of which creates no real value. It merely moves moves money from one hand to another (in this case, from the shopkeeper to the glazier).

The opportunity cost of such an action, the repeated breaking of windows, is at the expense of other actions that could add more net benefit to the town. For one, the glacier may be distracted from other necessary tasks by fixing the shopkeeper’s window repeatedly, acting as a negative constraint on his labor, or the shopkeeper might have rather used the money spent on repairs on either investment or consumption. It best can be summed by Bastiat’s phrase: “society loses the value of things which are uselessly destroyed.”

What will you say, disciples of good M. F. Chamans [French politician], who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

Bastiat goes on to use his argument against protectionism (one which the Austrian school of thought uses often), which is, I feel, an incorrect application of the actual parable. Bastiat was functioning within the French colonial economy and he failed to address the difficulty of smaller firms lacking the economies of scale to compete with already-established firms. This is demonstrated by the Hamiltonian “infant industry argument,” and the adoption of protectionism in the United States, allowed for the development of American industry that would have been eaten up by British competitors had they not been protected. However, this is a separate issue entirely — Bastiat’s parable can be properly applied to the opportunity cost of war and those that claim it “brings growth.” Naturally, he actually applied his thinking to the “war economy” and wrote directly of it. He differentiates between what is “seen” and costs that are “not seen.”

A hundred thousand men, costing the tax-payers a hundred millions of money, live and bring to the purveyors as much as a hundred millions can supply. This is that which is seen.

But, a hundred millions taken from the pockets of the tax-payers, cease to maintain these taxpayers and the purveyors, as far as a hundred millions reach. This is that which is not seen. Now make your calculations. Cast up, and tell me what profit there is for the masses?

Therefore, a war-driven economy does not actually create sustained growth since it takes away necessary labor by enlisting them and deviates capital to military use rather than civilian use.

II. Rapid Growth in the Post-War Era

The Post-WW2 era brought with it a period of unprecedented economy growth. The process of rebuilding Europe was relatively quick and economies sprang back on their feet. Called the “Golden Age of Capitalism,” Western European nations experienced GDP growth rates never seen before in their history and some of the lowest unemployment rates ever recorded. To many, it appeared to be the triumph of capitalism in rebounding from the previous years of carnage and war. Titles were given for each nation’s “recovery miracle” — Wirtschaftswunder in Germany, the Trente Glorieuses in France, and others. However, when placed in context, it was a development consist with capitalism’s short but sporadic history.

Source: The Economics of World War II: Six Great Powers in International Comparison

*Based on Table 1 found in Mark Harrison, The USSR and Total War: Why Didn’t the Soviet Economy Collapse in 1942? from Mark Harrison, “The Economics of World War II: an Overview,” in Mark Harrison, ed., The Economics of World War II: Six Great Powers in International Comparison, Cambridge University Press (1998), 10.

The GDP during the war differed tremendously year by year. The UK economy began feeling the economic consequences of the war after 1943, France after 1939, Italy after 1942, Germany after 1944, and Japan also after 1944. Europe had to be rebuilt — the broken window had to be fixed.

And after the war, the war-torn nations called upon their glaziers: industry. Production soared and is perhaps best demonstrated in automobile production alone, which rose drastically after 1946.

Main sources: WMVD, SMMT, JAMA, IRF, CCFA, OICA

Military spending also increased as military armaments accumulated in the post-war period. In the years between 1950 to 1960, France doubled their military spending from 11 billion to 22 billion, West Germany from 0 to 22 billion, the United Kingdom from 23 to 29 billion, and the United States from 69 to 168 billion [1]. The need for a permanent armament reserve for potential war against the Soviet forces proved to be a constant in the Cold War economies that would arise in the years after World War 2. Likewise, this stirred production levels to meet these new demands. With the increases in production, fresh new labor was needed to sustain it. Luckily, many troops from the war provided such manpower necessary to sustain these new production levels. They were absorbed into the economy with relatively ease and Western Europe experienced unemployment levels that were at historical lows. Deputy Commissioner Robert J. Myers of the Bureau of Labor Statics writes in 1964:

From 1958 to 1962, when joblessness in [France, former West Germany, Great Britain, Italy and Sweden] was hovering around 1, 2, or 3 per cent, [the U.S.] rate never fell below 5 percent and averaged 6 percent.

However, the reason is quite clear — Europe had room to grow. After being devastated by war, its cities ravaged by bombings, it had to be rebuilt. Industry began to grow rapidly and profits accrued as large inflows of labor were coming into these nations from individuals that were once fighting in the front lines. The conditions were set and the growth was focused on repairs and war production with the help of the Marshall Plan put into effect by the United States. Thereby it can be said, had the war not occurred, GDP would be much higher in these Western nations since they would not forgo the opportunities that were missed in focusing on rebuilding repairs. Once again, Bastiat’s argument can be evoked — “society loses the value of things which are uselessly destroyed.”

III. The Inevitable Crisis

As was expected, the economic boom of the post-WW2 era would not last indefinitely. A conglomeration of issues arose with the advent of the 1970s: the end of the Breton Woods Agreement in 1971, the Oil Crisis of 1973, and the policies of liberalization that ensued. The crisis and murky economic future that followed can best be characterized by employing an analysis of the rate of profit of these Western powers. The fluctuations of the rate of profit can help us better understand the crises that set in and its ramifications in the years that followed. The rate of profit can be best explained by the following simple equation:

Whereas S is surplus value, C is constant capital, and V is variable capital. The surplus value can be thought of as undistributed profits, one which do not go towards the costs of the initial labor power and machinery needed to construct the commodity. The difference between constant capital and variable capital is relatively simple — constant capital is machinery, which is relatively constant in the short run, and variable capital is mainly manifested as fluctuating wages. This relationship is crucial because, in a capitalist economy, industrialists want to maximize efficiency in order to better compete. Consequently, the more commodities are produced, the more prices fall. This translates to capital rising and surplus value subsequently falling which causes, in the long run, a tendency of the rate of profit to fall. Granted, this is only a tendency, since there are counter measures to prevent such a phenomenon from occurring (as seen in the neoliberal years of the 1980s).

United States, index numbers: 1960-5 = 100 Source: The Spain-U.S Chamber of Commerce

A crisis was inevitable after the post-WW2 boom since production had exhausted itself. The all-too-common crisis of overproduction soon followed, with the rate of profit dropping sharping starting from 1965 in conjunction with the rise of more radical movements in labor and demands for wage increases and better conditions. The fact that the rate of profit plummeted likely caused the economic malaise and stagflation of the 1970s. And the response was one we are too familiar with today — outsourcing. In order to increase profits, corporate bodies began to move to the Third World to lower their labor costs (variable capital) thus increasing their rate of profit. This is represented by the neoliberal boom of the 1980s with the rise of Reaganomics and Thatcherism

The Rate of profit in the United States Source: The Spain-U.S Chamber of Commerce

The graph above provides us with a different look of the same data. The average rate of profit fluctuates around 24.4% from the period of 1946-1973, drops down to 18.9% from 1974-1983, and finally rises 1.2% to 20.1% from 1984 to 2009. However, bear in mind, the rate of profit begins to drop at the 2006 mark, serving as a precursor to the Great Recession and the current crisis.

Point being — what does this necessarily have to do with the supposed “Golden Age of Capitalism?” Many Keynesian economists point to their policies and argue they spurred the growth of the post-WW2 era. However, with Europe broken and demolished, their economies could only grow. Growth had to follow since so much capital was required to rebuild post-war Europe. As efficiency increased exponentially and production soared, it was safe to assume another crisis would soon follow, since the inherent contradiction of overproduction always brings with it economy calamity. And to curtail these decreasing rate of profits a new economic ideology was introduced — neoliberal doctrine, which worked to cut taxes, deregulate, and cut labor costs through Third World exploitation. The shaky footing that the “Golden Age” brought gave individuals blissful optimism, as they hoped that the policies instated would continue growth indefinitely, however they failed to curtail the inherent contradiction of the profit accrued and capital needed, which would evoke the crisis that would follow in the 1970s.


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