Although this is anathema to most economists, central planning works pretty well at times.
The belief that private markets can generally meet many of society’s needs without government action is at the core of economic theory. U.S. history demonstrates, however, that central planning can succeed at prodigious tasks.
I speak, of course, of wartime. During World War II, we switched from market allocation of resources to a high degree of central planning. Gross domestic product grew tremendously — at rates never seen in peacetime.
During World War II, the government rationed many goods, including gasoline, tires and sugar. It banned production of other products — including automobiles and refrigerators — for civilian use. It controlled wages and prices by government fiat. Despite the fact that such government economic interventions flouted economic doctrine, the results were stupendous.
People forget how short that war was for the United States — only three years and five months passed between the Japanese attack on Pearl Harbor in December 1941 and the surrender of Germany in May 1945. That equals the interval between the Sept. 11, 2001, attacks and now. Defeating Japan took another three months after Germany’s surrender.
Yet, in that short interval called World War II, U.S. industry cranked out prodigious quantities of war materiel. (See accompanying list.) In addition, the Manhattan Project developed the atomic bomb from bare theory to deadly fruition in 34 months. The Oak Ridge Tennessee uranium concentration facilities were among the largest industrial installations ever constructed anywhere.
All this was done with few people and a relatively small economy. The population at the beginning of WWII was less than half of today’s and real output only a tenth of current levels.
All this was done while more than 14 million Americans served in the armed forces, of whom more than 2 million were wounded or killed. The number of people in uniform leapt from 1.6 million in 1941 to nearly 12 million in 1944.
Despite military numbers that were equal to a fourth of the pre-war labor force, civilian employment grew by 6 million during the war. It did so largely because women worked out of the home in unprecedented numbers.
The U.S. economy under wartime central planning was a tremendous success. Two questions arise, however. Why was planning chosen over markets? Moreover, if planning worked so well during the war, why did we revert to a market-driven economy as soon as it was over?
Markets fail during wartime because of what economists call “information problems.” Markets allocate resources efficiently when myriad households indicate their preferences through their willingness to pay for different items. In wartime, government competes with itself to purchase key materials, and demand becomes meaningless as an indicator of importance.
The classic WWII example was the Dresser flexible pipe coupling. The Army needed millions to build the gaseous diffusion plant at Oak Ridge. The Navy needed millions to build the “great swarms of landing craft” needed for the invasion of France.
There was no way markets could resolve such competing needs efficiently. Someone had to make an administrative judgment as to which use was more vital.
We returned to market allocation of resources because planning clearly could not work in the long run. It was good for producing large quantities of specific military goods in the short run. But as Soviet communism demonstrated, planning was terrible at meeting the much more complex needs of households. Moreover, patriotic sentiment bolstered wage and price controls and rationing during wartime, but public support for these measures disappeared in peacetime.
Our World War II experience sheds some light on the administration’s positions on supplying U.S. forces today in Iraq. In December, Defense Secretary Donald Rumsfeld argued that slowness in getting armor to troops in Iraq is “essentially a matter of physics. It isn’t a matter of money. … It’s a matter of production and capability of doing it.” More recently, sources in the administration argued against adding two divisions to the overstretched Army and Marines by asserting that training an additional 40,000 troops would take “two to five years.”
In World War II, we managed to produce more than 200,000 airplanes and 8,000 ships in a period equal to that from 9/11 to now. We trained 12 million troops in two years. We did all this with a population only 40 percent of what we have now. Surely, the administration’s claims that “physics” rather than money or political will limit our military efforts now are preposterous.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.