Hostname: page-component-6b989bf9dc-476zt Total loading time: 0 Render date: 2024-04-12T13:40:21.443Z Has data issue: false hasContentIssue false

Can Stimulating Demand Drive Costs Down? World War II as a Natural Experiment

Published online by Cambridge University Press:  11 July 2022

François Lafond*
Affiliation:
Senior Research Associate, Institute for New Economic Thinking at the Oxford Martin School and Mathematical Institute, University of Oxford, INET, Manor Road Building, Manor Road, Oxford, OX1 3UQ. E-mail: francois.lafond@inet.ox.ac.uk.
Diana Greenwald
Affiliation:
Assistant Curator, Isabella Stewart Gardner Museum, Boston, 25 Evans Way, Boston, MA. E-mail: dgreenwald@isgm.org.
J. Doyne Farmer
Affiliation:
Professor, Institute for New Economic Thinking at the Oxford Martin School and Mathematical Institute, University of Oxford, and Santa Fe Institute, INET, Manor Road Building, Manor Road, Oxford, OX1 3UQ. E-mail: doyne.farmer@inet.ox.ac.uk.

Abstract

U.S. military production during World War II increased at an impressive rate and led to large declines in unit costs. However, the literature has focused on elucidating detailed mechanisms behind this relationship, using small datasets on specific products. Here we take a step back and, looking at an unprecedently large collection of data, we show that both exogenous technological progress and endogenous effects from increasing production experience were important, in roughly similar proportions. The demand for military products was largely exogenous, and the correlation between production, cumulative production, and time was weak, limiting issues of reverse causality and multicollinearity.

Type
Article
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Economic History Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This work was supported by the EU grant FP7-ICT-2013-611272 (GROWTHCOM), Partners for a New Economy, Baillie Gifford, the EU grant 730427 (COP-21 RIPPLES), the Rebuilding Macroeconomics project (which is supported by the Economic and Social Research Council), and the Institute for New Economic Thinking at the Oxford Martin School. We would like to thank Kieran Marray for excellent research assistance and Nick Chater, Giovanni Dosi, Cameron Hepburn, David Hendry, Christopher Magee, John Muellbauer, Bill Nordhaus, Matteo Richiardi, our INET colleagues as well as audiences at the CCS 2016, EHS 2018, EEA-ESEM 2019, Singapore NUS, Oxford, MIT, LSE, OECD, CONCORDi 2019, and Waterloo for comments. The usual disclaimer applies.

References

REFERENCES

Alchian, Armen. “Reliability of Progress Curves in Airframe Production.” Econometrica 31, no. 4 (1963): 679–93.CrossRefGoogle Scholar
Argote, Linda, Beckman, Sara L., and Epple, Dennis. “The Persistence and Transfer of Learning in Industrial Settings.” Management Science 36, no. 2 (1990): 140–54.CrossRefGoogle Scholar
Argote, Linda, and Epple, Dennis. “Learning Curves in Manufacturing.” Science 247, no. 4945 (1990): 920–24.CrossRefGoogle ScholarPubMed
Army Air Forces. The Source Book of World War II Basic Data. Airframe Industry, Vol. I, Direct Man-Hours - Progress Curves. Washington, DC: Office of Air Force, 1947.Google Scholar
Asher, Harold. Cost-Quantity Relationships in the Airframe Industry. Santa Monica, CA: RAND Corporation, 1956. Available at https://www.rand.org/pubs/reports/R291.html.Google Scholar
Bahk, Byong-Hyong, and Gort, Michael. “Decomposing Learning by Doing in New Plants.” Journal of Political Economy 101, no. 4 (1993): 561–83.CrossRefGoogle Scholar
Baime, Albert J. The Arsenal of Democracy: FDR, Detroit, and an Epic Quest to Arm an America at War. New York: Houghton Mifflin Harcourt, 2014.Google Scholar
Bajari, Patrick, and Tadelis, Steven. “Incentives Versus Transaction Costs: A Theory of Procurement Contracts.” RAND Journal of Economics 32, no. 3 (2001): 387407.CrossRefGoogle Scholar
Benkard, C. Lanier. “Learning and Forgetting: The Dynamics of Aircraft Production.” American Economic Review 90, no. 4 (2000): 1034–54.CrossRefGoogle Scholar
Best, Michael H. How Growth Really Happens: The Making of Economic Miracles Through Production, Governance, and Skills. Princeton, NJ: Princeton University Press, 2018.Google Scholar
Budrass, Lutz, Scherner, Jonas, and Streb, Jochen. “Fixed-Price Contracts, Learning, and Outsourcing: Explaining the Continuous Growth of Output and Labour Productivity in the German Aircraft Industry during the Second World War 1.” Economic History Review 63, no. 1 (2010): 107–36.CrossRefGoogle Scholar
Carew, Michael G. Becoming the Arsenal: The American Industrial Mobilization for World War II, 1938–1942. Lanham, MD: University Press of America, 2009.Google Scholar
Civilian Production Administration. Official Munitions Production of the United States. Washington, DC: CPA, 1947.Google Scholar
Crawford, Richard H., and Cook Lindsey, F.. US Army in World War II: Statistics – Procurement. Fort Leavenworth, KA: Archives Section–Library Services, 1952. Available at http://www.alternatewars.com/BBOW/Stats/USA_in_WW2_Stats-Procure_9-APR-52.PDF.Google Scholar
David, Paul A. “The ‘Horndal Effect’ in Lowell, 1834–1856: A Short-Run Learning Curve for Integrated Cotton Textile Mills.” Explorations in Economic History 10, no. 2 (1974): 131–50.CrossRefGoogle Scholar
Dosi, Giovanni, Grazzi, Marco, and Mathew, Nanditha. “The Cost-Quantity Relations and the Diverse Patterns of ‘Learning by Doing’: Evidence from India.” Research Policy 46, no. 10 (2017): 1873–86.CrossRefGoogle Scholar
Fishback, Price V. “The Second World War in America: Spending, Deficits, Multipliers, and Sacrifice.” In The Economics of the Second World War: Eighty Years On, 53–57. VoxEU, ebook, 2020.Google Scholar
Foster, Lucia, Haltiwanger, John, and Syverson, Chad. “Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?American Economic Review 98, no. 1 (2008): 394425.CrossRefGoogle Scholar
Funk, Jeffrey L., and Magee, Christopher L.. “Rapid Improvements with No Commercial Production: How Do the Improvements Occur?Research Policy 44, no. 3 (2015): 777–88.CrossRefGoogle Scholar
Gordon, Robert J.$45 Billion of US Private Investment Has Been Mislaid.” American Economic Review 59, no. 3 (1969): 221–38.Google Scholar
Gross, Daniel P., and Sampat, Bhaven N.. “Inventing the Endless Frontier: The Effects of the World War II Research Effort on Post-War Innovation.” NBER Working Paper No. 27375, Cambridge, MA, 2020.Google Scholar
Hall, Robert E.By How Much Does GDP Rise If the Government Buys More Output?Brookings Papers on Economic Activity, no. 2 (2009): 183231.CrossRefGoogle Scholar
Heathcote, Andrew, Brown, Scott, and Mewhort, D.J.K.. “The Power Law Repealed: The Case for an Exponential Law of Practice.” Psychonomic Bulletin & Review 7, no. 2 (2000): 185207.CrossRefGoogle Scholar
Herman, Arthur. Freedom’s Forge: How American Business Produced Victory in World War II. New York: Random House, 2012.Google Scholar
Hirsch, Werner Z.Firm Progress Ratios.” Econometrica 24, no. 2 (1956): 136–43.CrossRefGoogle Scholar
Holley, Irving Brinton. Buying Aircraft: Materiel Procurement for the Army Air Forces. Washington, DC: Office of the Chief of Military History, Department of the Army, 1964.Google Scholar
Ilzetzki, Ethan. “Learning by Necessity: Government Demand, Capacity Constraints, and Productivity Growth.” LSE Working Paper, London, UK, March 2022.Google Scholar
Irwin, Douglas A., and Klenow, Peter J.. “Learning-by-Doing Spillovers in the Semiconductor Industry.” Journal of Political Economy 102, no. 6 (1994): 1200–27.CrossRefGoogle Scholar
Klette, Tor Jakob, and Griliches, Zvi. “The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous.” Journal of Applied Econometrics 11, no. 4 (1996): 343–61.3.0.CO;2-4>CrossRefGoogle Scholar
Koistinen, Paul A. C. Arsenal of World War II: The Political Economy of American Warfare, 1940–45. Lawrence: University Press of Kansas, 2004.Google Scholar
Lafond, François, Aimee Gotway Bailey, Jan David Bakker, Dylan Rebois, Rubina Zadourian, McSharry, Patrick, and Doyne Farmer, J.. “How Well Do Experience Curves Predict Technological Progress? A Method for Making Distributional Forecasts.” Technological Forecasting and Social Change 128 (2018): 104–17.CrossRefGoogle Scholar
Lafond, François, Greenwald, Diana, and Doyne Farmer, J.. “Can Stimulating Demand Drive Costs Down? World War II as a Natural Experiment.” Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2022-05-21. https://doi.org/10.3886/E170901V1.Google Scholar
Lane, Nathaniel. “The New Empirics of Industrial Policy.” Journal of Industry, Competition and Trade 20, no. 2 (2020): 209–34.CrossRefGoogle Scholar
Lazonick, William, and Brush, Thomas. “The ‘Horndal Effect’ in Early US Manufacturing.” Explorations in Economic History 22, no. 1 (1985): 5396.CrossRefGoogle Scholar
Levitt, Steven D., List, John A., and Syverson, Chad. “Toward an Understanding of Learning by Doing: Evidence from an Automobile Assembly Plant.” Journal of Political Economy 121, no. 4 (2013): 643–81.CrossRefGoogle Scholar
Lieberman, Marvin B.The Learning Curve and Pricing in the Chemical Processing Industries.” The RAND Journal of Economics 15, no. 2 (1984): 213–28.CrossRefGoogle Scholar
McNerney, James, J. Doyne Farmer, Sidney Redner, and Jessika E. Trancik. “Role of Design Complexity in Technology Improvement.” Proceedings of the National Academy of Sciences 108, no. 22 (2011): 9008–13.CrossRefGoogle Scholar
Mishina, Kazuhiro. “Learning by New Experiences: Revisiting the Flying Fortress Learning Curve.” In Learning by Doing in Markets, Firms, and Countries, edited by Naomi, R. Lamoreaux, Daniel, M. G. Raff, and Temin, Peter, 145–84. Chicago: University of Chicago Press, 1999.Google Scholar
Nagy, Béla, J. Doyne Farmer, Quan M. Bui, and Jessika E. Trancik. “Statistical Basis for Predicting Technological Progress.” PloS One 8, no. 2 (2013): e52669.CrossRefGoogle Scholar
Newell, Allen, and Rosenbloom, Paul S.. “Mechanisms of Skill Acquisition and the Law of Practice.” In Cognitive Skills and Their Acquisition, edited by John, R. Anderson, 155. New York: Psychology Press, 1981.Google Scholar
Nordhaus, William D.The Perils of the Learning Model for Modeling Endogenous Technological Change.” Energy Journal 35, no. 1 (2014): 113.CrossRefGoogle Scholar
Okazaki, Tetsuji. “The Supplier Network and Aircraft Production in Wartime Japan.” Economic History Review 64, no. 3 (2011): 973–94.CrossRefGoogle Scholar
Papineau, Maya. “An Economic Perspective on Experience Curves and Dynamic Economies in Renewable Energy Technologies.” Energy Policy 34, no. 4 (2006): 422–32.CrossRefGoogle Scholar
Hashem, Pesaran, M., and Smith, Ronald. “Estimating Long-Run Relationships from Dynamic Heterogeneous Panels.” Journal of Econometrics 68, no. 1 (1995): 79113.Google Scholar
Pozzi, Andrea, and Schivardi, Fabiano. “Demand or Productivity: What Determines Firm Growth?RAND Journal of Economics 47, no. 3 (2016): 608–30.CrossRefGoogle Scholar
Ramey, Valerie A.Identifying Government Spending Shocks: It’s All in the Timing.” Quarterly Journal of Economics 126, no. 1 (2011): 150.CrossRefGoogle Scholar
Rapping, Leonard. “Learning and World War II Production Functions.” Review of Economics and Statistics 47, no. 1 (1965): 8186.CrossRefGoogle Scholar
Rogerson, William P.Economic Incentives and the Defense Procurement Process.” Journal of Economic Perspectives 8, no. 4 (1994): 6590.CrossRefGoogle Scholar
Rohlfs, Chris, Sullivan, Ryan, and Kniesner, Thomas J.. “Reducing Risks in Wartime Through Capital-Labor Substitution: Evidence from World War II.” Journal of Risk and Uncertainty 52, no. 2 (2016): 163–90.CrossRefGoogle Scholar
Roosevelt, Franklin D.Fireside Chat 16. On the ‘Arsenal of Democracy’.” Miller Center of Public Affairs, University of Virginia, Presidential Speech Archive 29, Charlottesville, VA, 1940.Google Scholar
Scott-Kemmis, Don, and Bell, Martin. “The Mythology of Learning-by-Doing in World War II Airframe and Ship Production.” International Journal of Technological Learning, Innovation and Development 3, no. 1 (2010): 135.CrossRefGoogle Scholar
Searle, Allan D.Productivity of Labor and Industry.” Monthly Labor Review 61, no. 6 (1945): 1132–47.Google Scholar
Sheshinski, Eytan. “Tests of the ‘Learning by Doing’ Hypothesis.” Review of Economics and Statistics 49 (1967): 568–78.CrossRefGoogle Scholar
Sinclair, Gavin, Klepper, Steven, and Cohen, Wesley. “What’s Experience Got to Do with It? Sources of Cost Reduction in a Large Specialty Chemicals Producer.” Management Science 46, no. 1 (2000): 2845.CrossRefGoogle Scholar
Smith, Ralph Elberton. The Army and Economic Mobilization. Washington, DC: GPO, 1959.CrossRefGoogle Scholar
Söderholm, Patrik, and Sundqvist, Thomas. “Empirical Challenges in the Use of Learning Curves for Assessing the Economic Prospects of Renewable Energy Technologies.” Renewable Energy 32, no. 15 (2007): 2559–78.CrossRefGoogle Scholar
Swamy, P. A.Efficient Inference in a Random Coefficient Regression Model.” Econometrica 38, no. 2 (1970): 311–23.CrossRefGoogle Scholar
The National World War II Museum. By the Numbers: The US Military. New Orleans: The National World War II Museum, 2015. Available at http://www.nationalww2museum.org/learn/education/for-students/ww2-history/ww2-by-the-numbers/us-military.html.Google Scholar
Thompson, Peter. “How Much Did the Liberty Shipbuilders Learn? New Evidence for an Old Case Study.” Journal of Political Economy 109, no. 1 (2001): 103–37.CrossRefGoogle Scholar
Thompson, Peter. “How Much Did the Liberty Shipbuilders Forget?Management Science 53, no. 6 (2007): 908–18.CrossRefGoogle Scholar
Thompson, Peter. “The Relationship Between Unit Cost and Cumulative Quantity and the Evidence for Organizational Learning-by-Doing.” Journal of Economic Perspectives 26, no. 3 (2012): 203–24.CrossRefGoogle Scholar
Thornton, Rebecca Achee, and Thompson, Peter. “Learning from Experience and Learning from Others: An Exploration of Learning and Spillovers in Wartime Shipbuilding.” American Economic Review 91, no. 5 (2001): 1350–68.CrossRefGoogle Scholar
Tooze, J. Adam. “No Room for Miracles. German Industrial Output in World War II Reassessed.” Geschichte und Gesellschaft 31, no. 3 (2005): 439–64.Google Scholar
Tooze, J. Adam. The Wages of Destruction: The Making and Breaking of the Nazi Economy. London and New York: Allen Lane, 2006.Google Scholar
War Production Board. Wartime Production Achievements and the Reconversion Outlook , Report of the Chairman, Washington, DC, 1945.Google Scholar
Witajewski-Baltvilks, Jan, Verdolini, Elena, and Tavoni, Massimo. “Bending the Learning Curve.” Energy Economics 52 (2015): S8699.CrossRefGoogle Scholar
Wooldridge, Jeffrey M. Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press, 2002.Google Scholar
Wright, Theodore P.Factors Affecting the Cost of Airplanes.” Journal of the Aeronautical Sciences 3, no. 4 (1936): 122–28.CrossRefGoogle Scholar
Yelle, Louis E.The Learning Curve: Historical Review and Comprehensive Survey.” Decision Sciences 10, no. 2 (1979): 302–28.CrossRefGoogle Scholar
Supplementary material: PDF

Lafond et al. supplementary material

Online Appendix

Download Lafond et al. supplementary material(PDF)
PDF 493.1 KB