On the Economics of War
On the Economics of War
Originally published in the Spring 2019 issue of the Austro Libertarian magazine, Pickering considers the question: what can Austrians contribute to the debate on global interventionism?
Contrary to one of the favorite objections of our critics, the libertarian movement has, over the past decade or so, been able to list an increasing number of positive real-world changes alongside its theoretical accomplishments. Given the spread of concealed carry and “constitutional carry” laws, the slow advance of secessionist and nullificationist ideas, and the gradual legitimization of homeschooling, it is becoming increasingly difficult to regurgitate the same old argument that libertarians, and those influenced by libertarian ideas, are incapable of advancing our ideas beyond the armchair. However, the American political landscape has changed in another, arguably far more significant sense over the past few years, and it is a change with libertarian fingerprints all over it: the re-emergence of the anti-war right, thanks in no small part to the efforts of Ron Paul.
As positive as this development may be, it nevertheless leaves a lingering question in its wake: Now that Austrians will hopefully no longer be the only free market economists turning a skeptical eye toward the warfare state, what is the value of a specifically Austrian perspective on the economics of war? What unique insights can the grand framework of Austrian theories offer into this broadest and most gravely important of topics? And upon which specific issues should we focus our firepower, leaving the rest to the common-sense analysis of other war-skeptical free marketeers?
The Economics of War as The Economics of State
In a certain sense, it can be said that the economics of war is almost as broad a topic as the economic analysis of state activity in general. In pursuing what most regard as their most indispensable function, states face little internal opposition to their exploitation of every tool of economic intervention within their power. During wars, especially the kind of total wars which characterised the twentieth century, states not only regularly practice all three of the sub-classes of intervention highlighted by Murray Rothbard’s Man, Economy, and State — binary interventions such as taxation and conscription, triangular interventions such as rationing and trade sanctions, and of course autistic interventions such as murder and property destruction — but also aspects of all three patterns of State hegemony emphasized by Mises: interventionism in the form of price controls and inflation, ‘socialism of the German pattern’ in the contracting of putatively private companies to provide military services and materiel, and ‘socialism of the Russian pattern’ in the State’s direct control and supplying of its armed forces.
Furthermore, the perceived urgency of the situation leads states to employ all of these tools with even greater brazenness, and even less regard for cost or consequence, than during their peacetime activities. The result is that the economics of war appears like a political caricaturist’s take on the economics of the State in general; all the essential features are recognizably present, yet all are expanded and exaggerated to grotesque and horrifying proportions. It is in this sense that libertarian writers have so often regarded war as the purest distillation of statism, its most characteristic expression. As Rothbard wrote in his 1963 essay War, Peace, and the State, “It is in war that the State really comes into its own: swelling in power, in number, in pride, in absolute dominion over the economy and the society.” In war, all of the abstract and intangible qualities which libertarians regard as defining the State and setting it apart as a fundamentally different and illegitimate form of social organization, are condensed and concretized into a single tangible type of activity.
State Warfare: The Seen and the Unseen
In approaching a topic as enormous as the economics of war, the question arises as to how Austrians should divide and evaluate its constituent parts, that we might direct our scarce resources toward the areas in which we can offer unique insights and applications of specifically Austrian theories. While this problem could doubtless be approached from a number of directions, one possible dividing line can be found in the famous dictum of the proto-Austrian economist and scintillating centerpiece of the French laissez-faire school, Frédéric Bastiat. In his 1850 essay That Which Is Seen and That Which Is Not Seen, Bastiat emphasized that, when judging an act or phenomenon, the economist should consider not only its obvious first consequence but also its more distant and intangible later consequences. This Seen vs. Unseen dichotomy can, with a little imagination, be retooled to apply to the economics of war in a way that provides a worthwhile distinction between two sub-fields of inquiry for economists.
On the one hand lies ‘the seen’: direct, purposeful State interventions into the economy, aimed at the goal of conducting and/or winning the war. While the specific array of interventions imposed may vary somewhat between different historical examples, typical policies of this category would include taxation, inflation of the money supply for the purposes of war finance, and regulation or outright government control of industry.
On the other hand lies ‘the unseen’: the more-or-less indirect consequences of State actions and economic interventions during wartime, and of the very fact that states engage in warfare at all. This category could conceivably include a great number of different economic phenomena, depending on how far the economist wishes to take their analysis into the increasingly distant and indirect consequences-of-consequences stemming from State warfare. However, some key phenomena which would fall into this category might include the systematic allocation of resources away from consumer preferences, the distortion and diminution of the structure of production by wartime capital consumption, and the stifling of an effective private market for security.
It is certainly true to say that Austrians have offered valuable insights into economic phenomena from both of the above categories in the past, and could no doubt continue to do so in the future. However, if this article is correct in its hopeful assumption that the ranks of war-skeptical non-Austrian free marketeers are beginning to increase, I venture to suggest that Austrians would reap the greatest marginal benefits from our efforts if we focused, for the most part, on spreading sound economic understanding of the ‘unseen’ consequences of war.
This is not to say that there is any lack of valuable and distinctively Austrian things to say about the State’s ‘seen’ wartime interventions; for example, Austrians are well suited to develop and spread understanding of the ill effects of wartime inflation of the money supply, given how closely it is linked to our favorite issue of central banking and fiduciary media creation. I furthermore do not wish to imply that spreading popular understanding of sound economics on important political issues should be the only, or even the most important, pursuit for Austrian economists, and would not wish the strategic concerns of this article to restrain Austrians in their theoretical research and development of the science.
However, the more obvious visibility of the direct ‘seen’ interventions will likely mean that the majority of war-skeptical non-Austrian free marketeers will choose to focus their efforts on this side of our economics-of-war dichotomy. This choice will likely be reinforced by the relative familiarity of the ‘seen’ wartime interventions such as taxation, regulation, and State control of industry; all policies for which a non-Austrian, common-sense free-market critique will generally suffice to fulfill the strategic goal of spreading popular understanding of the economic costs of war. Furthermore, proper understanding of the more subtle and complex ‘unseen’ consequences of war rests on more distinctively Austrian theories and perspectives, such as the ideas of demonstrated preference and the structure of production. All of these factors combine to suggest that the indirect and ‘unseen’ economic consequences of State warfare represent a worthwhile direction in which Austrians could be focusing our efforts, both due to the promising potential for theoretical exploration and development and the strategic merits of directing our own unique perspective toward this sub-field of the economics of war.
Resource Allocation and Demonstrated Preferences
Given the great number of weighty and influential books that Murray Rothbard composed over the course of his extraordinarily productive career, some readers might be surprised to note that one of his most important single contributions to the edifice of Austrian economic theory is contained in an article that remains little read, other than by academically inclined Austrians. Toward a Reconstruction of Utility and Welfare Economics introduced Rothbard’s idea of Demonstrated Preference, which affirms that when a person acts — for example, the action of reading an article about the economics of war — this logically implies that performing the particular action was the most highly preferred option on that person’s value scale at that time. While this idea had already been explored by Mises and Frank A. Fetter, and is in many ways a straightforward implication of Menger’s most fundamental insights, Rothbard gave it a name and established it as one of the essential tenets of contemporary Austrian economics.
The idea of Demonstrated Preference has exerted a particularly significant influence on modern Austrians’ perspectives on whether or not ostensibly benevolent State activities really do make citizens better off from the vantage point of the citizen. Given that individuals are already pursuing their most highly preferred course of action before the State’s intervention, the implication seems to be that State activity necessarily shifts individuals onto less preferred courses of action, making the intervention harmful from the affected individual’s own perspective. The only exception to this rule would be the possible but unlikely circumstance wherein, due to either impotence or coincidence, the State’s intervention results in individuals pursuing the very same course of action they would have pursued anyway, in which case the intervention can at best be described as useless.
The obvious objection to this line of reasoning would be the case in which State intervention creates an entirely new opportunity that would have been the individual’s most highly preferred course of action if it had existed in the absence of the intervention. This objection suffers from numerous shortcomings, however, not least of which being its dubious assumption that the State would actually be able to create such a new opportunity, unobtainable through voluntary activity, and to do so without simply forcing the cost onto some other individual.
The idea of Demonstrated Preference has significant implications for the question of whether or not the reallocation of resources caused by State warfare is beneficial or harmful to consumers, from their own perspectives. It is difficult to escape the implication that the State’s siphoning of resources toward wartime ends cannot be regarded as anything other than a squandering of resources from consumers’ own perspectives, as demonstrated by the fact that they did not themselves choose to voluntarily produce the array of military impedimenta.
This insight into how states reallocate resources away from consumer preferences during wartime represents one of the simplest, but also one of the most important and damaging, ‘unseen’ economic consequences of war, and one which Austrians are uniquely suited to tackle.
Suppression of the Private Security Market
Even though consumers’ demonstrated preferences suggest that they do not value the State’s pursuit of warfare, this seems to run contrary to the common-sense insight that some of the ends attained by some wars clearly are desirable; after all, it is difficult to imagine anyone ranking ‘being killed by an invading army’ as their most highly preferred course of action. Far from undermining the Demonstrated Preferences approach, however, this merely evidences yet another example of the ‘unseen’ in which State warfare causes negative economic consequences: it stifles the development of a fully realized private market for security, through which consumers could voluntarily pursue the highly valued end of their own safety.
It is certainly true to note that this outcome is partly achieved through direct ‘seen’ interventions, such as State interference in the private ownership of weapons and military hardware, and the suppression of citizens’ rights to pay for alternative, voluntary protection of their property by ceasing their payment of taxes. However, ‘unseen’ economic consequences of war also reinforce this outcome, such as State militaries’ exhaustion of resources that could otherwise be devoted to private security, and the widespread unwillingness of private individuals to seek out voluntary alternatives to State defense, given that it’s a service for which they are already being forced to pay.
Owing to our more-than-incidentally anti-statist political inclinations, Austrians will likely be able to provide a distinctive perspective on this under-emphasized, ‘unseen’ consequence of war.
The Free-Rider Problem
The most common objection to any suggestion that statist militaries might be less preferable than voluntarily organised alternatives, centers around the idea that national defense is supposedly a ‘public good,’ which provides benefits from which non-payers cannot be excluded. This would lead to a ‘market failure’ unless the service is forced on consumers by a compulsory monopolist, so the argument goes, because consumers would otherwise simply ‘free-ride,’ enjoying the benefits of military protection without paying.
A great deal of Austrian attention has already been paid to the many shortcomings of this argument, and it would be beyond the scope of this overview to restate all the different possible counterarguments. One particularly interesting critique can be found in Walter Block’s chapter in Hoppe’s The Myth of National Defense, in which Block convincingly argues not only against the idea that national defense is a non-excludable good, but also against the legitimacy of the very concept of ‘public goods.’
The largely unquestioning support for the ‘free rider’ justification of State defense seems to stem from an implicit assumption that defense has to be provided indiscriminately over a vast, country-sized area, as states currently do. But in a voluntary order, private insurance companies would be incentivised to provide defense services localised and tailored to their own customers, even if those customers were geographically dispersed. Seeing as private providers would not be encumbered by the same economic inefficiencies and calculational blind-spots that result in State militaries spending millions of dollars for a single missile, or hundreds of millions for a single aircraft, it seems perfectly plausible that private providers could supply adequate localised defense without having to force the cost on an entire nation. If nearby non-payers receive some spillover benefits, so be it. Given that more than 50% of the US population currently receives more in welfare than it pays in federal income taxes — even when excluding intangible benefits such as national defense and only counting direct transfer payments such as Medicare, food stamps, and Social Security — the private economy hardly seems to be the primary culprit in creating opportunities for free riders.
When Ludwig von Mises set out to write his much neglected monograph Interventionism: An Economic Analysis in 1940, one of the key points he intended to emphasize was that states cannot finance costly wars without causing widespread capital consumption. The various channels through which modern statist warfare can negatively affect an economy’s capital stock are too numerous to individually itemize in an article of this scope, but include such examples as the purposeful destruction of factories and other productive assets by enemy forces, diminution of the rate of savings (and hence of investment in maintaining the capital stock) due to the burdens of wartime taxation, and redistribution of purchasing power away from productive, capital-investing members of society by wartime inflationism.
Furthermore, what little investment in capital is still being undertaken will, to a great extent, be directed toward war production, which necessarily constitutes a waste of that capital from the perspective of consumers, as we have already seen. This problem is further exacerbated when the State seizes private capital goods and factories, or otherwise compulsorily repurposes them toward wartime production. Although Mises was certainly right to highlight the erosion of capital overall during wartime, disaggregating this to isolate the even smaller portion of the capital stock being directed toward actual consumer goods production lays bare the true scope of the distortion.
The Austrian understanding of the structure of production and the importance of savings in the economy illuminates the true long-term consequences of such wartime capital consumption. The problem is not merely that embattled citizens suffer a shortage of consumer goods for the duration of the war, but that huge portions of the accumulated resources of generations are consumed to finance the war, or wasted away in unproductive endeavors and left unreplenished when they wear out. The result of this gouging of the capital stock is a severe dampening of the economy’s potential production, which may not recover for decades.
When economists approach the problems of their discipline from different theoretical perspectives, they may fail not only to reach the same answer, but even to perceive the same questions. Given the immeasurable scope for inquiry presented by a topic as broad as the economics of war, the hopeful entry into the discussion of new non-Austrian war skeptics should be regarded as a boon, potentially casting light on new questions and frontiers of the subject, as yet unexplored.
Likewise, the long and rich history of the Austrian tradition has left us with a unique set of perspectives and theoretical tools, which lend themselves well to the illumination not only of the State’s direct wartime interventions into the economy, but perhaps even more so of the lurking systemic distortions implied by the very nature and existence of State warfare.
It does not require much straining of the imagination to perceive the role of Austro-libertarian scholars such as Murray Rothbard, by way of Ron Paul, in setting in motion the current political paradigm shift represented by the American Right’s increasing hostility to war and empire. If we are able to channel our efforts toward those aspects of the subject that we are uniquely suited to explain, contemporary scholars of that same tradition may yet contribute our part to the continued growth and flourishing of that benign trend