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Learning, Outsourcing, and Investment: Explaining Growth of Output and Labor Productivity in the German Armament Industry during World War II
| It is widely believed that it was armament minister Albert Speer who caused the sudden upswing of the German armament production after 1941 by introducing several rationalization measures and, probably most important, by replacing cost-plus contracts with fixed-price contracts. We question this view by exploring a new set of firm-level data drawn from audit reports of the Deutsche Revisions- und Treuhand AG which are shelved at the Federal Archives in Berlin and cover the economic development of several hundreds of firms for most of the war time. The typical audit report contains not only a comprehensive analysis of the balance sheet and the profit-and-loss-account but also detailed information about sales, prices, costs, and the structure of the work force. In general, both the quantity and the quality of the information delivered increased between 1939 and 1942, which might reflect the National Socialists’ desire to overcome the principal-agent problems of armament production by improving their knowledge about the production technology and the actual costs of the private firms.
We do not assume that we will find a particular explanation for labour productivity growth during World War II which holds for such different armament industries like aircrafts, tanks, ammunition or explosives. Instead, we analyze the economic development of various firms in each of these industries in order to find similarities and differences. To quantify the impact of learning, increasing capital intensity and outsourcing on labor productivity, we follow in a first step Solow’s seminal approach and estimate total factor productivity on basis of firm-specific Cobb-Douglas production functions explaining firms’ output with the help of the three material inputs labor, capital and intermediate goods and an index of Hicks neutral technical progress. In a second step, we re-arrange the equation needed to estimate total factor productivity to apportion labor productivity growth among the three factors: total factor productivity growth, increase in capital-labor ratio, and increase in intermediate goods-labor ratio.
As a preliminary result we find out, that in the German aircraft and gunpowder industries, labor productivity growth was primarily caused by learning-by doing effects and outsourcing, and was therefore rather a continuous microeconomic firm-level phenomena than fostered by pivotal macroeconomic political decisions of the National Socialist rulers.
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