I have always meant to address this in a more in-depth piece, but I either never found the time or it just passed my mind. World War II, by some, is considered a natural experiment that disproves Austrian business cycle theory. I have heard this twice, to my recollection: recently by a commentator on Bob Murphy’s blog and when I had the pleasure of speaking to Wladimir Kraus (related: check out the second comment nested after the first by “Iwaaks” on Murphy’s blog for an explanation of the argument).
This will have to be a short post to illustrate the most important differences between an industrial fluctuation and the structural reallocation that occurred after the Second World War. I will have to go into more detail in a future post.
The Austrian theory of intertemporal discoordination is not just about structural readjustment. It describes an industrial fluctuation, where production is thrown into chaos by changes in the pricing process. The task of structural readjustment is fundamentally different here, because industry is facing the consequences of pricing chaos (due, in part, to monetary fluctuations) and the financial sector has to deal with a growing loss in assets. What this requires is a stabilization, from where the structure of production can re-adjust.
What happened after the Second World War is completely different. Industry did not suffer a fluctuation; a mass of entrepreneurs did not suffer sudden losses. Instead, the Second World War represented a long period of massive capital consumption. When the war ended and war controls were eliminated, industry was able to allocate now-free resources towards more productive ends. It was, as Robert Higgs writes, a transition from planning to market allocation. This is a much different transition than that which occurs as a result of industrial fluctuation — one obvious difference is that industry did not find itself in the midst of chaos.
To emphasize the crucial difference: allocating resources in the midst of pricing chaos makes structural re-adjustment difficult. This is what characterizes the bust period of the Austrian business cycle. Following the Second World War, there was no “artificial” lengthening of the structural of production that caused pricing chaos. Capital had been bid away from private allocation by the government towards the production of war material, but this is a different process with different consequences than severe intertemporal discoordination. Both can lead to capital consumption, but the consumption is conducted in two different ways. More broadly, in one case private industry is contracting and has to readjust during and after the structure of production is liquidated of all its malinvestments; in the second case, industry does not have to deal with a contraction.
The most important contribution to economics that the Austrian School has provided is a theory — perhaps incomplete — of the pricing process. The Austrian business cycle theory is a part of this theory, as it explains the consequences of a certain type of price distortion. To differentiate between Austrian business cycles and what occurred following the Second World War you have to understand how each scenario differently affects prices and how this defines the consequences. The structural readjustment that occurred post-1945 is incomparable to that which occurs after an industrial fluctuation.
I will try to differentiate between the two in greater detail in the future, when I have time (and if I remember). But, I hope that this short post at least serves to highlight the crucial difference between the two events.