The Economics of War | Matthew McCaffrey

all right I guess it's about ten so let's get started so thank you all for coming I do have to apologize I know you know I'm I don't think I'm gonna be able to put on as good a show as Judge Napolitano would but hopefully at least I can tell you something interesting about what I think is one of the more intriguing problems in Applied Economics or applied Austrian economics and that is the economics of war and of war making so this is actually a theme that has been studied repeatedly in Austrian economics over the years going back particularly people like Mises and Lionel Robbins we're very interested in it but it's also not one of those topics that you see discussed very often in sort of conventional surveys of Austrian contributions to economics but auctions have been interested in this topic for a very long time and so a little I'm gonna show a little bit of that to you as we go through this this lecture today what I'm mainly going to be talking about is trying to get to to give you a sort of survey of some distinctly Austrian insights into the economics of war right because as I hope to show Austrians do have some unique ways of looking at this problem and some unique ways of answering questions about things like what wars are what makes wars possible the economic causes of war how wars are prosecuted and hopefully something about how Wars end and maybe could be prevented in the future so there's a lot of Austrian writings on this topic as I said and I hope to to get through those in the next few minutes another thing I do have to sort of uh maybe apologize for is that I am taking the the most recent iteration of this lecture in previous year's versions of this talk had been given by people like the late Ralph Reiko and Robert Higgs who are just terrific scholars and were real masters of this subject instead of trying to do was sort of a poor imitation of their work I'm hoping to take a slightly different tack and talk about things about the ideas of Mises and and many of his students who are written on these subjects so hopefully what I have to say will complement their works and their talks on the given at previous Mises you know and if this is something that interests you I really highly commend their both their writings and their lectures to you because they're they're really fascinating and wonderful in any case I'm sticking mainly to the economics though and so I'm not going to talk on about some of the themes that that others have focused on in the past things like the relationship of war with civil liberties this is obviously a very important topic but it's it's outside the scope of what I'm gonna be discussing here so I want to begin by saying a little something about how this topic fits within those broader framework of Austrian economics and to do that I want to draw your attention to this comment from me this this is from human action but you can find many similar comments throughout his works and Mises says that economics at least until now has been the best developed a branch of proxy ology right so you've already you're familiar through your readings and through earlier lectures in this week with the idea of proxy ology and with this Austrian interest in putting action at the center of economics and of social science but when Mises puts it like this he's raising a very I think an interesting question which is okay so sure economics is the best developed branch of proxy ology but what are the other branches right what do those look like exactly what goes into them right sometimes people use economics and proxy ology sort of interchangeably but they're not interchangeable right economics is just one part of this broader method of approaching social science questions so what else might be included within this broad framework and here's one suggested schema from an old article in the American Economic Review and right away you can see that from some of these things what means that says it's correct it does seem like this part be the economic part the specifically economic part of proxy ology this is the most the best of else right it has the most sort of fields and subfields and we have a good idea of what goes in there but then there are also some of these other categories that Rothbard suggests including the theory of war the theory of hostile action so in addition to being a part of economic analysis applied economic now the study of war is also an independent type of investigation that we can do by thinking through the implications of action and social cooperation and conflict and so on right note that for me sis's main interest was in the first type of studying war if you look at human action for instance Mises has a chapter on the economics of war and that is in the last part of the book the part that deals with interventionism right the hampered market economy right and of course you can see why that would be you know why this sort of large-scale violence that's usually prosecuted by states why how that would relate to to more conventional economic intervention ISM right so any case there are at least two ways that you can think about how this how warfare fits within a broader framework of Austrian economics and I'm gonna hope to draw on a little bit of both of those as we go through this so um the first big question is what is war how do we define it from an economic perspective and war is not unlike some other concepts it's not a narrow praxeological concept it's right the idea of war isn't written into the idea of action right instead it's something more anthropological or historical that is we observe these types of conflicts in the real world and we try to categorize them you know come up with common characteristics that we could use to identify them and that's how we get our sort of broad historical understanding of what warfare is and that's where we're gonna be where I'm going to be starting today and in this view we could come up with at least three important characteristics of warfare in the modern era first war is purposeful right this is why fits within a framework of action by the way because that's what action is it's purposeful behavior I'm but it's important to recognize a purpose behind war because historically many wars were treated as inevitable or as somehow outside the realm of human choice right sometimes you know sometimes this was for for devious purposes other times it was simply mistaken ideologies right for instance you know an ideology of class conflict that asserts that you know modern wars are just the logic of the capitalist system or of imperialism playing themselves out and therefore are to some extent inevitable and can't really be controlled these would deny the purposeful element in war making alright and these are provide one good reason why we need to take note of this second warfare is organized right will take place over a period of time sometimes many many years and they require an enormous amount of resources in order to in order to prosecute right and what this means is that there has to be some kind of organizing agency that's responsible for planning and allocating the use of scarce resources right this by the way is going to hint a little bit at some socialist calculation problem which maybe I'll mention a little bit more in a minute but the the basic point is that somebody needs to be doing the wartime planning right however troublesome or inefficient or irrational it might be somebody is going to have to be doing this right and that hints then at the the third characteristic of modern warfare which is that it involves at least one state now an important point to make is that warfare is not unique to States right it existed before you know long before States did and presumably will exist in some form long after the last state becomes dust right so it's not going away anytime soon but nevertheless war states do have a very sort of special relationship with warfare right and the reason is that this massive of this purpose and this massive organization and allocation of resources human and physical this requires something like a state right it requires an extremely powerful agency to do all this organizing and planning usually without the permission of many of the people who are being planned and organized right so it's very difficult to get anything like this especially on a large scale going without some kind of agency that looks like a modern state right and if you look at works in sociology and works on sort of the origin the modern states you can see this special relationship between states and more making you know you have sociologists like Charles Tilly for example who argue that warfare is actually the reason for the creation of the modern state because for you know for millennia practically rulers have been looking for ways to finance these extraordinarily expensive military adventures and it is very difficult to do that unless you have for instance a strong dependable tax base right so people like Tilly argue that the modern state emerged as a way for rulers to finance military expenditures right by creating this geographical political area that they could then systematically tax over time and and develop a more consistent stream of revenue Carl von Clausewitz there's a name that you might be familiar with famously said that war is the continuation of politics by other means and that's what he's kind of getting at with this again this sort of special relationship between states and we're making again this has been known since ancient times in fact some of the ancients put it even better I think this sums it up really nicely Wars the greatest affair of state the basis of life and death the doubt of survival or extinction right this is the logic of states in warfare right warfare is always the last resort of any state when it comes either to defense or for the expansion of its own political power right so moving on to talking about the economic causes of war of course each individual historical war has its own particular causes right but we can't is you know create some groupings and some classifications and different types of cause of war and among these are economic ones right and so of course naturally this is the type that people like Mises tended to focus most on and for Mises when thinking about the cause of international conflict the basic question was economic and it was ideological right economically speaking the major choice that states are always having to May is between what Misa is called autarky or the international division of labor i autarky is economic self-sufficiency it is in a sense the paula the policy of mercantilism of economic nationalism a policy of anti-free trade essentially right and policies that are particularly opposed to the free movement of capital and labor okay so these types of idea of of policies and the ideologies behind them are for Mises not only deeply illiberal but also opposed to economic common sense right because autarky is a recipe essentially for poverty whereas the international division of labor and embracing a global free market economy is the only reliable path to prosperity and also the only reliable path to peace right and I'm sure you can see how the logic of this plays out when you have domestic protectionist policies that are designed to protect domestic producers at the expense of everyone else in the world particularly foreign producers it's only natural that this would create tensions and conflicts in the political realm that could grow and eventually boil over and become actual military conflicts right protectionist policies you know we promote the prosperity of a small number of privileged groups at home while directly damaging the prosperity of other of many other groups abroad right so for example you can understand why if you were you know a poverty-stricken consumer in a foreign country unable to make a living because you can't sell your goods across borders why that would gradually turn into you know a great deal of political dislike and eventually tension and an outright military conflict right so for me says this is the the central economic question right it's not a question of sort of broader class interests or something like that it's really about economic privilege and the people who have it and the conflicts with the people who don't this is a very nice quote from Mises on this topic when he says that economic nationalism necessary complement of domestic intervention Hertz the interest of foreign people's and thus creates international conflict it does this through customs migration barriers foreign exchange controls quantitative trade restrictions and expropriation of foreign investments right in other words the myriad of different types of price and other economic controls that states have at their disposal all of these go into creating a massive potential for global conflict right so this is it for me this is what's behind the economic there's a war now once a war does break out it sets in motion a chain of economic events that not only have a disastrous effect on the economy but they create a whole range of problems that governments have to try to solve right about how they allocate resources and about how they continue the conflict and eventually try to win it right with win in quotation marks right so this gets this is the problem of war finance right once again as I said this is an ancient problem it goes back millennia but essentially any government whether in peacetime or wartime has essentially three options for financing any particular venture right and those options are taxation borrowing and inflation and each of these plays an important part in the logic of war making and in the logic of war finance and as you see this is sort of logic to the way that governments change their attitudes towards each of these methods as a conflict goes on so typically governments in peacetime and wartime start with taxation right again this is one of those fundamental characteristics of modern States so it's no prize that governments resort to them very quickly when they need some quick cash right and you will see you know if you look at wars in the last century or so particularly major Wars when they break out they are shortly followed by significant changes in taxes right whether it's a question of who's being taxed or a question of increasing particular tax rates governments use both right the trouble with taxation that governments always face is that is extremely unpopular right despite all the you know the the jingoistic patriotic rhetoric that you might hear around the outbreak of wars once people actually have to start paying money themselves they get a lot more skeptical about the value of the war effort right and the reason for this is simple right people other things equal prefer to keep their money right and if people notice very quickly once their tax rates increase right once you we know you it's very easy to see if you're you know income tax rates suddenly double on that you have less cash in your pocket to spend right and as a result your standards of living are going to fall so taxation is tends to be quite unpopular so even though government's resort to it very quickly and sometimes even invoke extreme increases in taxation during wartime there are some pretty hard limits to what any particular population is going to accept in terms of taxation right so this is a big problem that that governments are always facing right by the way they just as a side note I don't know if you know this but this is the withholding tax was introduced in 1943 in the middle of World War two governments needed to get around this this taxation problem and they they had sort of tried out the withholding tax in some some earlier context but it wasn't very widely used but then in World War two they needed to find a way to increase tax rates but they needed to get past this problem that people you know at that time we're mainly paying their taxes and like little installments throughout the year so when the tax bill came due like any other bill you had to have actually saved the money and you had to be prepared to fork it over right so that's what people were used to and to get around that and around the very obvious increases in taxation other withholding tax was introduced because once tax withholding happens you never get the money to begin with right it's deducted from your paycheck before you ever see it and so it sort of feels like it's not really your money and that you never really owned it so you don't feel the loss of it as much right and that actually produces a profound psychological effect because it means that people are willing to accept much higher tax rates on than they normally would if you first handed them a pile of cash and then said oh yeah by the way now I'm going to take 50% of it back or whatever right another important implication of that is that you'll notice that the withholding tax did not go away after the war was ended right you know it's still with us today and in fact is still used in in most developed countries in some form or other right this gets at what's sometimes called the ratchet effect of government intervention which I'll talk about more as we go right anyway eventually taxation just isn't enough so governments need to find another way to finance the war right so very quickly they turn to borrowing and borrowing can be a very effective method for raising finance in the Second World War I think the United States raised something like a hundred and eighty five billion dollars just from the sale of war bonds mainly to the American general public they were the people who are most buying them so we're not talking trivial sums here right there's a lot of money in this but of course borrowing at you know has its limitations as well right yeah you can only sell so many war bonds to people and war creates some particular circumstances that can make borrowing difficult right you know you can become a bad bad credit risk very easily if the war isn't going your way or if the major centers of finance are geographically separated from you or if they're on the other side of the war right there are all kinds of different reasons why borrowing can become very difficult wartime right and sometimes you know borrowing even continues long after countries are really viable credit risks anymore right think about in the First World War which essentially bankrupted Great Britain in both world wars actually the United States was a major lender to all of its to all of its allies and really helped keep them going and keep them in in both of those wars right even though they really knew that their there wasn't a way for their allies to pay them back after the war was over and that's one reason why very shortly especially after the first world war thoughts began to shift very quickly toward a restitution that could be gained from the different opposing powers right one of the end more interesting anecdotes about borrowing as a method of war finance that I've recently discovered because it's the centenary of the world war right now there's a lot of new research going on about it including some really fascinating stuff coming out of the Bank of England about how Great Britain financed its entry into the First World War and in particular some of the the researchers at the Bank of England have covered this very interesting story about a rather extraordinary deception that the British government and the Bank of England engaged in in order to keep their initial war effort going so in 1914 as the sort of autumn and the winter begin to arrive people start to realize that this war is not going to be over into a couple of months like we thought it's gonna drag out so the British government set out on this campaign to raise an extraordinary amount of money right through the sale of war bonds of about three hundred and fifty million pounds worth right in nineteen fourteen pounds right so an extraordinary amount of money and the plan was for the British banks to pick up some of those arms sort of enough to get the ball rolling and then the vast majority of the the bond sales would be to the British general public right and they assumed that of course you know people are very you know nationalistic and patriotic so of course they're gonna pick up the tab for all of this but the plan ended up being kind of a disaster right because basically nobody bought the war bonds there was very little interest in this among the general public and what interest there was tended to come from things like groups like shipping companies who were suddenly booming because they were involved in the the war industries right but the the private interest that the the government had hoped to to provoke never really materialized right so they had this huge problem right they would have been there were sort of poised for disaster because if they hadn't been able to sell all of these bonds and you know get the revenue from that not only would it have hampered the war effort but it would have driven the the prices of the outstanding bonds down because people would seen there was no interest in them it would have made them more difficult to raise money in the future and just in general it would have been a PR disaster right because then the Germans would have been able to say look England you might as well just quit now it's obvious that your heart's not in it you can't you don't even want to finance the war so just step out and you know make a separate piece something like that right so the government was poised for disaster and and thus also the war effort and so what the banker the Bank of England came up with this with this scheme to make it all to make it all work so what they did was they they essentially took a massive amount of their own money a couple hundred million pounds worth and they advanced it to two or three of the executives at the Bank of England right and then those executives went out and bought all of the war bonds in their own names right as private individuals right and in their own name so that nobody would know that they were actually being effectively bought by the bank right so they they did this and then the bank just held the bonds on its own balance sheet right as as its assets but they didn't put them under the usual category of government bonds right because again people would have got wise so they just put them over on some sort of like miscellaneous assets you know which suddenly increased by you know like a couple of hundred million pounds but nobody noticed right and then the British government was able to say look you know look at the extraordinary success of this bond sale this is why we know like clearly everybody wants to be involved in this fight right so it ended up working out very well for them Keynes who was working in the Bank of England and you won't be surprised to learn was one of the people who was sort of in the know about this he called this a masterly manipulation of public policy and in public opinion right so anyway I just I find that that story to be quite interesting in any case borrowing has its limitations you can only do it for so long right so that gets us to the third factor in in war finance which is inflation and I will come back and talk about this more specifically because it's sort of a topic in his own right but again as you can see in peacetime as in wartime inflation is very a very easy choice for governments right it seems like it's costless yes people are sort of aware that over the long term you know prices might rise and you might have some bad effect but you know for for politicians who are you're ramping up a war effort these concerns seem to be very very distant right it seemed you know this is something that somebody years down the road they can worry about so government's very easily resort to inflation and there are many many cases of this the famous one I think that's in all the money in banking textbooks you know if the the Continentals right the the paper money issued during the American Revolution to try and finance that right it was very quickly inflated and and became worthless and there are many more cases that you can point to throughout history so inflation it seems like a really good idea at the time but it has these short and long term effects that can actually end up being kind of disastrous in any case none of these methods is really workable or is really a stable method for governments to finance a large-scale war over a large period of time right they all have their limitations and so in wartime governments tend to be involved in this complicated dance where they're constantly trying to figure out which the you know what method they should lean on most right now you know which is the less likely the least likely to of to lead to a collapse of the war effort because that is what happens if you try to you know any one of these too much right and so governments are constantly shifting back and forth between emphasis on different one method and you're usually using some form of them all at the same time so um once governments find it figure out a way to finance the war once the war actually gets going um they need to mobilize right suddenly governments are in desperate need of a massive amount of physical and human resources that they can pour into the war effort right you know troops need to be outfitted armies need to be put into the field or what you know whatever variation of that you know technologically you know Gerome fleets need to be assembled or whatever people use these days defenses need to be strengthened but the point is a massive infrastructure needs to be in place for a war effort to really get off the ground okay and because of this it's a the whole process of war planning is this big logistical nightmare right and it is it's a problem that is very much subject to the socialist calculation you probably know or you've figured out the economic calculation problem isn't just about socialism right it's about any kind of resource allocation that occurs without access to a system of market prices right and so it's very much a problem of ordinary public policy as well including military operations right for which there you know there aren't market you know true market prices for any of the goods that that are involved in these sorts of military operations right so that's the sort of a background of this but one of the distinctly Austrian ways that you can look at at the way that Wars operate um is by looking at capital and by looking at the idea of the structure of production right that Austrians have been in so in so interested in right this this is sort of delicate interweaving of all these heterogeneous capital goods that make up the the whole structure of the economy right you won't be surprised to learn that war has some pretty have found a profound effects on the structure of production and it distorts it even in some cases destroys it in in several different ways okay so in general you could say that war is a basically a massive diversion of resources away from the paths that they would have taken in peacetime right I mean that's sort of definitionally true of warfare but you can look at its effect on the structure of production in at least a couple of different ways I'll call these a horizontal way and a vertical way right so the first effect is horizontal and this is a shift between different stages of production right so as soon as war breaks out suddenly government needs a massive amount of war goods right you know true you know guns and ammunition and tanks and you know the various other goods that are that go into making up a war right so these need to be produced but Jen most economies aren't usually producing massive amounts of these goods and that means the production has to be shifted right and it has to be shifted from ordinary consumer goods production into war industries right so this is a horizontal shift right the the capital the labor that usually produced just ordinary consumer products consumer services suddenly shift over right they consumer production decrease this or is totally eliminated and everything gets pushed into war production right again you know the sort of ordinary products of war right guns and ammunition and the massive infrastructure and physical supplies and labor and so forth that militaries need to operate and so this priority of war over consumer production the immediate effect of it is that living standards are going to fall right they're going to be shortages of consumer goods and you know all those things that make up sort of quality of life right so living standards are immediately I'm going to fall for people and this is going to happen over time as well right because existing stocks of consumer goods will be shifted over to military use and the production of future consumer goods is also going to decrease right so if you think about this in the case of the US during World War two you had a massive massive decrease in the productions of all things consumer right you know company like a GM for instance completely stopped the production of civilian cars during the Second World War and only produced military vehicles right it only took a few months after Pearl Harbor actually for like the entire civilian auto industry in the United States to essentially disappear and become just one massive war industry by the time by the end of the war there was one Chevy factory was producing all Placement cars for all automobiles in the United States right so that's one good in 1942 the sale the sale of vehicles to non-military personnel was actually outlawed completely right and and you know it became illegal to um to to store new cars outside right so you couldn't put the your existing stock of cars outside like an advertisement you have to store them inside so that people wouldn't be buying them so it wouldn't be you know invoking too much consumer demand so this is what the first very important effect that war has on the structure of production there's a very simple switch from Canada for pursuit for from producing for consumers to producing for the war effort right and this one's a little simpler to see but there's a more difficult more sort of complicated unseen to use Basquiat swerd effect on the structure of production as well and this is when production shifts from what we call the higher stages of production to the lower stages right so if you think about mangers model of the structure of production where you have the the lower stages which are pretty which are like producing small-scale capital goods and consumer goods then you have the higher stages which are the really advanced capital goods and factors of production the outbreak of war is going to tend to shift the structure of production down toward those lower stages right again the reason for this is that war requires resources right now I means this has a great line where he says a war can't be waged with future Goods right it has to be waged with present Goods right so you you need the guns and the ammunition and the patanki and the planes and all of this you need it right now right cuz it's not gonna do you any good in the future right so because of this the entire economy becomes more sort of present oriented right and you have these very high stages capital goods and the higher stages of production goods that are producing you know complex mining equipment and you know very advanced plants and factories very very specialized goods these aren't useful for the war effort right they can't be converted into you know assembly lines for ammunition and small arms and things like that so they're either abandoned or they're simply just not replaced when eventually they were they wear out right they don't support the war effort so they're they're given a lot less focus I am instead in those lower stages every capital good that can be converted to the to war production is right because you're gonna have in the lower stages especially goods that are a little bit more convertible right so you have the car factories and the aircraft factories that simply switch from civilian to military production right there's a cost associated with that but it's smaller right and it and the conversion can be done so everyone starts shifting towards these these lower stages because that's where the resources are that are needed to keep the military effort going the punchline of all this is capital consumption right so hopefully throughout this week you've already learned a little bit about how delicate the structure of production is and just how vital it is that human beings build capital and build a consistent coordinated structure of production over time that is the basis of prosperity right that is the explanation of how essentially development can happen and living standards can rise so when you play with that and when you physically destroy it through the destruction of war and also destroy it economically by destroying the incentives for entrepreneurs to save and invest and build capital and giving you know a certain group of privileged producers the incentive to adjust massively increase their business by bidding for war contracts and things like that the result is that the capital that ordinary people need in order to maintain that living standards this is going to be consumed their living standards are going to fall right so it produces a war mobilization produce a kind of crisis in the economy if you will that's not all that different from what you might see for instance in a business cycle this is a different kind of example I wanted to give does anybody know who this is no it's Wilfred Owen well well it says it at the bottom I guess so stupid question huh Owens one probably the most famous of the English war poets of the first world war and he has a very nice example I take this from one of the stanzas of one of his poems when he talks about the promise of cheap homes for everybody that we're going to get after the war it's over but we can't build those right now what we don't we don't need homes we need aerodrums right now and this is he's actually without knowing it I'm talking about exactly this structure of production issue right the entire change of the economy to a war footing right the elimination of consumer goods consumer durables the shift of capital to produce these resources that are really only good for the war effort so I happen to like this quite a bit again here's another more ancient example of the same sort of thing punch line is that no country has ever profited from protracted warfare right so we've known this for millennia now we just needed modern economics to come along and and tell us why warfare is actually really a good thing you just didn't realize it this whole time right okay um in any case so if the economic outlook war is so bad right if it does produce a kind of crisis you know how is it possible that war has ever happened let alone carried on over a long period of time how is it possible than anybody could could stand for this right and the answer tends to focus on monetary inflation right I mentioned that I would come back to this before because it really is a sort of a topic in its own right inflation is a time-tested method for not only continuing and supplying a war effort but also for concealing its true costs from consumers and this is the the key element right because people don't stand for this as I said you know no matter what you know your nominal ideology might be once you have to start paying the human and the monetary cost of a war people support for it tends to decrease quite quickly right so one effective way that you can conceal the cost of war through various forms of monetary expansion right and in fact if you expand the money supply its country's very often do right from the beginning of wars you can not only preserve the the illusion of prosperity but you can actually make it seem as if the country is booming right this is one of the great myths you know the myth of wartime prosperity is especially prevalent about the u.s. during World War two um this is something again I'll reference Bob Higgs work because he is the the single economists who was the most just completely demolished this myth that the US was really prosperous because of its entry into World War two and that world war two got America out of the depression and things like that so it's simply not true but monetary expansion is one why people have these wrong ideas about supposed wartime prosperity right I'll stay also historically one of the very first things governments do when war is declared is go off the gold standard right in the First World War all the major belligerents did this immediately upon the outbreak of the war because they realized that you know without you even the presence of say a gold standard or some other limit on the the money monopoly without that limit or with that limit in place it's very very difficult to expand the money supply to the extent that governments need in order to finance their wars right so gold standard or monetary checks tend to be abolished right away as soon as the war breaks out and then there are a couple of other ways that that this monetary expansion has deleterious effects on the economy um the first of course is that they increase nominal prices and wages in the war goods industries they tend to be the first receivers of new money so they benefit from this simply because they have new demand for their products right so the merchants of death do really well from you know the outbreak of war but there's also the the more subtle Austrian flavoured part of the monetary expansion and that is the Kantian effects right because the issuing of new money also creates a wealth redistribution right um in this case it's - the war goods industries right you know the the Lockheed Martin's and so on of the world and away from essentially the consumers in the economy right people in other industries and the further away your business is from the war industries the worst the wealth redistribution is going to be for you right however from an aggregate perspective it can look like the economy is actually booming right because many prices are rising you know businesses are going to especially in the war goods industries they're going to be expanding looking very very prosperous and as a general inflationary effect even all the the Kantian effects process is working out they're still going to be price rises in other areas of the economy as well on the stock market very often boom in response to you know these huge war goods orders and things like that so again it can all look on the surface like it's really good but what's going on beneath the surface is of course there was just a monetary expansion right the real resources in the economy haven't changed and in fact they're actively being destroyed right as the capital structure is being eroded and being shifted into production of war goods that don't actually help consumers consumer goods themselves are being destroyed and their production is being severely curtailed and so on so what's really going on is that real incomes standards of living and so on earth are falling but the the nominal picture the superficial picture of the economy is it actually doing pretty well right and this by the way is just one more reason why it's so vital to talk about all of the costs of war right because at this point I think people are pretty familiar with the human cost of war right we know about the loss of life and the loss of welfare from the direct destruction but what we don't see again it's these basquiat unseen are some of these less obvious economic implications of how the these wars are carried on once more here's Mises one can say without exaggeration that inflation is an indispensable means of militarism without it the repercussions of war on welfare become obvious much more quickly and penetratingly war weariness would set in much earlier okay however the negative effects of war on the economy don't just stop with some of these core issues there's the broader implications as well right again as I was saying Mises all was always stressing this fundamental choice that governments make right is it protectionism is it economic nationalism and so forth or are you going to pursue a policy of laissez-faire right and inevitably if you choose the protectionist policy policies of price controls war time controls over the economy it sets in motion this other economic logic that Mises also analyzed whereby government controls tend to late overtime so if you know Mises his short essay the middle-of-the-road policy leads to socialism one of the examples that he gives in this essay are wartime economies right which start out by trying to control just a few prices here or a few businesses there just to support the war effort but then they rapidly run into shortages and all kinds of other economic problems and so governments are faced with this constant choice right do we try to do we just take a step back abolish the controls and move back towards freer markets or do we add controls to try and mitigate the effects of the first controls that we put on right and unfortunately you'll be shocked to learn governments tend to want to add on price controls right so control over the economy has this sort of cumulative effect whereby over the course of the war the problems get worse and worse so governments are constantly struggling to find new controls new regulations new prohibitions that they can put on consumer goods and on consumer oriented production in order to support the war effort and the result what you get is what's sometimes called war socialism right the war time the true war economy whereby all production essentially is you have a de facto system of central planning that exists with all production being directed toward the war effort right so this is actually what happened in all the major belligerent countries in both of the world wars right even the ones that started out relatively free ended up with extensive systems of central planning by the time the conflict conflicts came to an end okay what's interesting about war socialism is that usually the the system of private property a free exchange free contracting and so forth that existed in this country these countries before the war nominally all of that stays in place right there isn't a revolution you know there isn't you know a new constitution written and a new ear declared instead this happens small a evans ayah piecemeal right a little bit over time it's cumulative and typically even by the end even though by the end of the war there's a de facto centralized control over the economy now all of these property rights and private enterprise and so forth tend to remain in place right and this is what Mises called socialism with the German pattern right de facto socialism but with a sort of a nominal adherence to - to free markets right I also mentioned the ratchet effect again this is something that Bob Higgs has written quite a bit about I'm about this cumulative process of the build-up of government power and government control over the economy the idea is that like a ratchet wartime provides gives governments a great excuse to increase its control over the economy and so governments take on massive war planning powers and so forth after the conflict is over some of those powers get returned right and and are abolished but not all of them there's always something that remains so over time government's control over the economy tends to eat to to increase right it has these huge up surges and then it goes back down but not quite to where it was before and then it goes up again and so forth so the general trend over time is for government to become more and more involved in the economy right again Jesus just puts it best I mean the long-run war in the preservation of the market economy are incompatible right there is no way to preserve for any significant period of time the these two demands right but one on the one hand consumers for high standards of living and on the other hand governments for the poor war production for the military effort ok so if we can say something a little bit about how wars how they start how they're prosecuted and so forth what can we say about the end of war and you know what we could possibly do to sort of prevent wars in the future right so if we think back to one of the first things I said which is the idea of purpose behind war right Mises has put it pretty plainly i think he said look if war is purposeful we that there are war makers out there right if we want to stop or if what we really need to do is eliminate the conditions that make war possible right we need to eliminate those motivations and those purposes that the war makers have if we can do that then we can you know then we have a serious chance at at peace in the long run and for Mises again it's about ideology it's about institutions it's about embracing liberalism you know the the time-honored principles of you know laissez-faire and la se passe that allow for global peace Global Economic Cooperation right that's the key behind this this entire thing and as you said the main thing to do is to discard the idea ideology that generates war right ideologies of conflict right whether it's classical Marxist class analysis or nationalist ideologies racist ideologies all of these different types of ideological views that have that hold conflict to be at the center of their analysis right inevitable conflicts between human groups the only thing we can do to prevent war really in the long run is to discard these ideologies and embrace a more thoroughgoing liberalism and enough more philosophy of peace and of social cooperation and hopefully of prosperity because prosperity um is the last thing that war ever actually creates so I think I'm out of time so thank you for your attention you

Channel: misesmedia

Views: 3,086

Rating: 4.9316239 out of 5

Keywords: War, Economics, McCaffrey

Id: huqkEDGpl08

Length: 47min 55sec (2875 seconds)

Published: Thu Aug 02 2018