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Sunday, June 12, 2011

How US Economists Won World War II

David Warsh:

Kept from All Thoughtful Men, by David Warsh: Peter Diamond ... last week withdrew his candidacy to be a Governor of the Federal Reserve Board. You know the story. His nomination had been blocked last year by Sen. Richard Shelby, of Alabama, the leading Republican member of the Banking Committee, who objected that Diamond ... wasn’t an expert in monetary policy. It was just another skirmish in the GOP opposition to the administration’s economic policies. Then last fall Diamond won the Nobel Prize ... for his analysis of search costs, in labor markets in particular. The White House resubmitted his nomination.

This time the Senate Republicans blocked it even more strenuously...

The incident reminded me of another collision between professional expertise and political authority – in this case military authority. Keep From All Thoughtful Men: How U.S. Economists Won World War II, by Jim Lacey...

An important difference of opinion with respect to organizing war production shaped up between Lt. Gen. Brehon Somervell, commander of Army Services Forces, and Simon Kuznets and his former student-turned-boss, Robert Nathan, at the civilian War Production Board.

Since 1924, the official plan if war broke out had been, first, put the military in charge of civilian production. But, as Lacey writes, “despite years of planning and having sent hundreds of senior officers to the Industrial Staff College, [the military] had absolutely no idea on the eve of the war what services would be needed to fight,” much less how to ramp up production to the astronomical levels required by a desperate war.

So in the first weeks after Pearl Harbor, President Franklin Roosevelt signed an executive order creating a civilian War Production Board, consolidating various existing agencies and charging it with coordinating all aspects of the mobilization. In charge would be Donald Nelson, a former Sears, Roebuck executive (that is, after Supreme Court Justice William O. Douglas briefly ran the show). Nelson hired Nathan for his all-important planning committee, who in turn hired Kuznets as chief statistician (as economists were often identified in those days). A few weeks later, the War Department (as today’s Defense Department was known then) restructured itself, as well, establishing three broad chains of command: air force, ground force and supply, all of them under Marshall. In charge of supply would be Lt. General Somervell, best remembered today for his “brainchild,” the Pentagon building.

Born in Little Rock, in 1892, a professed “country boy from Arkansas,” “Bill” Somervell had been in charge of the Work Project Administration for New York (while remaining on active duty), where he had been a favorite of WPA administrator (and Roosevelt political counselor) Harry Hopkins. Like most career officers, he was deeply loyal to General Marshall. Lacey thinks that his bulldog optimism stemmed from a desire to please the Chief, who, on the basis of what he previously had been told was possible, intended to invade Europe sometime in 1943. Somervell was also convinced that the American civilian population was being coddled by its political leaders. According to Nathan, Somervell felt the US war effort had two enemies: Germany, Italy and Japan on the battlefield; and the War Production Board at home.

Kuznets ... was more theoretically-oriented than his mentor, Wesley Clair Mitchell; but more empirical than theorists who preferred geometry exercises to the collection of facts. He soon moved to the faculty of the National Bureau of Economic Research, beginning the work that eventually would become the national income and products accounts (GNP and all that). By 1930, he was teaching at the University of Pennsylvania, as well, where his students included Robert Nathan. In 1971, Kuznets would win the third Nobel Prize for economics. His reputation as the founder of modern empirical economics has been growing ever since. But in 1942, he was simply a professor with no relevant military experience, at least in Bill Somervell’s eyes.

For six tense months in 1942, a battle simmered between the civilian planners and the generals (and the admirals, too). Was the Army expecting too much? Somervell grumbled, “We have the Combined Chiefs, Joint Chiefs, the Combined Production and Resources Board, the Munitions Assignment Board, the Army and Navy Munitions Board, and the War Production Board. What good would be a board composed of an economist, a politician and a soldier who does not know production?”

The contest between the two came to a head in October 1942 in a battle over the “Feasibility Study” prepared by Kuznets, in which he argued that individual goals compiled by the services were, overall, unrealistic and unattainable. Commanders would have to capitulate to a slower timetable, especially in the war against Germany. It is from the dueling memos summing up this debate, reproduced (with several others) in an appendix, that Lacey takes his title.

Somervell: The author states that his data are subject to a wide margin of error…. I am in agreement that his data are unreliable …. I am of the opinion that the variations between Mr. Kuznets “probabilities” and production goals are not percentagewise enough to justify a wholesale change in goals …. I do not know Mr. Kuznets’ military background or what weight should be given to his opinions on either the availability or suitability of existing structures for barracks, etc…. I am not impressed with either the character or the judgments expressed in the reports and recommend that they be carefully hidden from the eyes of all thoughtful men.

Nathan: I appreciate your frankness in stating that you are not impressed…. Your conclusions from it, however … [are] a non sequitur. I am obliged to be frank with you in expressing my disappointment in your reply. The problems discussed are important and their intelligent consideration is urgent. The author of the Documents is recognized nationally as one of our ablest and soundest authorities on our national economy and upon its ability to produce for peace or war. I think it would be most unwise to bar these problems, which have been given careful consideration by the staff, and members of the Planning Committee, from people who have responsibility for the success of the war effort and the welfare of this country.

In the end, the Planning Board won its case on the merits. Kuznets’ quantitative approach to the “outer limits” of what could be produced prevailed, and the “production possibility frontier,” today a staple of every introductory text, was born. Goals were reduced, timetables adjusted. The date for D-Day moved back to June of 1944. But the Planning Board was crippled by the effort. Roosevelt replaced Nelson, Kuznets went back to the NBER and Nathan enlisted in the Army. (After the war he established an important consulting firm.) Somervell went on to run Pittsburgh’s Koppers Co. for several years, before dying in 1955. ...

So much for history. I’m more interested in its moral. Kuznets bested Gen. Somervell decisively in the argument in 1942, and the Allies won the war. Diamond, on the other hand, was run off by Sen. Shelby in their argument in 2011, and who knows what will happen next? Just because we’re not engaged in a desperate shooting war doesn’t mean it doesn’t matter. Everyone has his reasons, but it is relatively uncommon to attempt to suppress and exclude opposing points of view. Now as then, to deny expert knowledge its rightful seat at the table is to fiddle with the underpinnings of the nation’s safety.

    Posted by on Sunday, June 12, 2011 at 09:27 AM in Economics | Permalink  Comments (9)


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