The Post-War Boom as a Cycle

Page 84-87: THE POST-WAR BOOM AS A CYCLE:

A second major change had taken place during wartime, with the state taking control over innovation, By 1945, national bureaucracies had become adept in the use of state ownership and control — and indeed mass communication — to shape private-sector behaviour. Perfectly ordinary managers, under the ultimate pressure of 'you lose, you die', had fine-tuned technocracy. Even in the Axis powers, where the state was dismantled in 1945, this culture of innovation and a large part of the technocratic system survuved the war.

The case of General Motors is instructive. In 1940, the US government hired GM's president, Alfred Knudsen, to run its Office of Production Management, which coordinated the whole war economy. He proceeded to place $14 billion-worth of contract with GM during the war. The corporation converted all its 200 factories to war production, making — among other things — 38000 tanks, 206000 aircraft engines and 119 million shells. It became, in other words, a massive arms company with a single customer. Within this and other segments of American industry management effectively operated like a profit-driven state-planning bureau. Nothing like it had been seen before — or since.

At the federal level, research and development was centralized and industrialized by the Office of Scientific Research and Development. Key to the whole deal was the prohibition of profit directly from research. 'Profit is a function of the production activities of an industrial establishment, not of a research department', the OSRD decreed. Contracts were placed where skills were high, where the danger of mass-production overload was least and 'spread among as many organizations as possible'. Only when all these criteria were equal could the lowest cost be brought into consideration. Competition and patent ownership were put on hold.

These were remarkable things to achieve within capitalism: to treat research as a public property, to suppress competition and to plan not just production but the direction of research. And though the USA perfected it, all major combatant states attempted it. The result was to stimulate an unprecedented culture of cross-fertilization in strategic disciplines. The new approach inserted math and science into political decision-making.

It was the OSRD that took Claude Shannon, the founder of information theory out of princeton and put him into Bell Labs to design algorithms for anti-aircraft guns. There, he would meet Alan Turing and discuss the possibility of 'thinking machines'. Turing, too, had been scooped out of academia by the British government to run the Enigma codebreaking operation at Bletchley Park.

The culture of innovation survived the transition to peacetime, even as individual corporations tried to monopolize the results and scrapped over patents righhts. And it was not limited to technical innovation.

In 1942, GM gave management theorist Peter Drucker open access to study its operations. Drucker went on to write The Concept of the Corporation, arguably the first modern management book, which advocated the breakup of command structures and the decentralization of control. Though GM rejected his advice, thousands of other firms did not; the post-war Japanese auto industry adopted them in full. Management theory became a generalized discipline, not secret knowledge, with a whole cohort of consulting firms dedicated to sprreading successful techniques rather than hoarding them.

In this sense, the wartime economy gave birth to one of the most fundamental reflexes within the capitalism of the long boom: to solve problems through audacious technological leaps, pulling experts from across disciplines, spreading best practice in a sector, and changing business as the product itself changed.

The role of the state in all this contrasts with the magre role of finance. In all normative models of long cycles, it is finance that fuels innovation and helps capital flow into new, more productive areas. But finance had been effectively flattened during the 1930s.

What emerged from the war was a very different capitalism. All it needed was a raft of new technologies — and these were plentiful: the jet engine, the integrated circuit, nuclear energy and synthetic materials. After 1945, the world suddenly smelled of nylon, plastic and vinyl, and buzzed with electrified processes.

But one key technology was invisible: information. Though the 'information economy' lay decades in the future, the post-war economies saw information used on an industrial scale. It flowed as science, as management theory, as data, as mass communications and even — in a few hallowed places — out of a computer and into a tray of folding paper.

A transistor is simply a switch with no moving parts. Information theory plus transistors gives you the ability to automate physical processes. So factories of the West were re-tooled with semi-automatic machinery: pneumatic presses, drills, cutters, latches, sewing machines and production lines. What they lacked was sophisticated feedback mechanisms: electronic sensors and automatic logic systems were so crude the latter used compressed air to do what we now do with iPhone apps. But human beings were plentiful — and for many work became the act of controlling a semi-automatic process.

The Cambridge economist Andrew Glyn believed the extraordinary success of the post-war boom could only be explained by 'a unique economic regime'. he described this regime as a mixture of economic, social and geopolitical factors, which operated benignly throughout the upswing until they began to clash and grind in the late 1960s.

State direction produced a culture of science-led innovation. Innovation stimulates high productivity. Productivity allowed high wages, and consumption kept pace with production for twenty-five years. An explicit global rules system amplified the upside. Fractional reserve banking stimulated a 'benign' inflation which, combined with financial repression forced capital into productive sectors and kept speculative finance marginal. The use of fertilizers and mechanization in the developed world boosted land productivity, keeping the cost of inputs cheap. Energy inputs were, at the time, also cheap.

As a result, the perion 1948-73 unfolded as a Kondratieff upswing on steroids.