Chapter 34 The Economics of War
1. Total War
The market economy involves peaceful cooperation.
It bursts asunder when the citizens turn into warriors and,
instead of exchanging commodities and services, fight one another.
The wars fought by primitive tribes did not affect cooperation under the Division of Labor.
Such cooperation, by and large, did not exist between the warring parties before the outbreak of hostilities.
These wars were unlimited, or total, wars. They aimed at total victory and total defeat.
The defeated were either exterminated or expelled from their dwelling places, or enslaved.
The idea that a treaty could settle the conflict and make it possible for both parties to live in peaceful neighborly conditions was not present in the minds of the fighters.
The spirit of conquest does not acknowledge restraints other than those imposed by a power which resists successfully.
The principle of empire building is to expand the sphere of supremacy as far as possible.
The great Asiatic conquerors and the Roman imperators were stopped only when they could not march farther.
Then they postponed aggression for later days.
They did not abandon their ambitious plans and did not consider independent foreign states as anything else than targets for later onslaughts.
This philosophy of boundless conquest also animated the rulers of medieval Europe.
Europe.
They, too, aimed first of all at the utmost expansion of the size of their realms.
But the institutions of feudalism provided them with only scanty means for warfare.
Vassals were not obliged to fight for their lord more than a limited time.
The selfishness of the vassals who insisted on their rights checked the king's aggressiveness.
Since the peaceful coexistence of a number of sovereign states originated.
In the 16th century, a Frenchman, Baudin, developed the theory of national sovereignty.
In the 17th century, a Dutchman, Grotius, added to it a theory of international relations
in war and peace.
With the disintegration of feudalism, sovereigns could no longer rely upon summoned vassals.
They nationalized the country's armed forces.
Henceforth the warriors were the king's mercenaries.
The organization, equipment and support of such troops were rather costly and a heavy
burden on the ruler's revenues.
The ambitions of the princes were unbounded, but financial considerations forced them to
moderate their designs.
They no longer planned to conquer a whole country.
All they aimed at was the conquest of a few cities or of a province.
To attain more would also have been unwise politically, for the European powers were
anxious not to let any one of them become too powerful and a menace to their own safety.
A too impetuous conqueror must always fear a coalition of all those whom his bigness
has frightened.
The combined effect of military, financial and political circumstances produced the limited
warfare which prevailed in Europe in the 300 years preceding the French Revolution.
Wars were fought by comparatively small armies of professional soldiers.
War was not an affair of the peoples, it concerned the rulers only.
The citizens detested war, which brought mischief to them and burdened them with taxes and
contributions.
But they considered themselves victims of events in which they did not participate actively.
Even the belligerent armies respected the neutrality of the civilians.
As they saw it, they were fighting the supreme warlord of the hostile forces, but not the
non-combatant subjects of the enemy.
In the wars fought on the European continent, the property of civilians was considered inviolable.
In 1856, the Congress of Paris made an attempt to extend this principle to naval warfare.
More and more, eminent minds began to discuss the possibility of abolishing war altogether.
Looking at conditions as they had developed under the system of limited warfare, philosophers
found wars useless.
Men are killed or maimed.
Wealth is destroyed.
Autocracies are devastated for the sole benefit of kings and ruling oligarchies.
The peoples themselves do not derive any gain from victory.
The individual citizens are not enriched if their rulers expand the size of their realm
by annexing a province.
For the people, wars do not pay.
The only cause of armed conflict is the greed of autocrats.
The substitution of representative government for royal despotism will abolish war altogether.
Democracies are peaceful.
It is no concern of theirs whether their nation's sovereignty stretches over a larger or smaller
territory.
They will treat territorial problems without bias and passion.
They will settle them peacefully.
What is needed to make peace durable is to dethrone the despots.
This of course cannot be achieved peacefully.
It is necessary to crush the mercenaries of the kings.
But this revolutionary war of the peoples against the tyrants will be the last war,
the war to abolish war forever.
This idea was already dimly present in the minds of the French revolutionary leaders
when, after having repelled the invading armies of Prussia and Austria, they embarked upon
on a Campaign of Aggression.
Of course, under the leadership of Napoleon, they themselves very soon adopted the most
ruthless methods of boundless expansion and annexation, until a coalition of all European
powers frustrated their ambitions.
But the idea of a durable peace was soon resurrected.
It was one of the main points in the body of 19th century liberalism, as consistently
These British liberals and their continental friends were keen enough to realize that what can safeguard durable peace is not simply government by the people, but government by the people under unlimited laissez-faire.
In their eyes, free trade, both in domestic affairs and in international relations, was the necessary prerequisite of the preservation of peace.
In such a world without trade and migration barriers, no incentives for war and conquest are left.
Fully convinced of the irrefutable persuasiveness of the liberal ideas, they dropped the notion of the last war to abolish all wars.
All peoples will of their own accord recognize the blessings of free trade and peace and
will curb their domestic despots without any aid from abroad.
Most historians entirely fail to recognize the factors which replaced the limited war
of the Ancien Régime by the unlimited war of our age.
As they see it, the change came with the shift from the dynastic to the national form of
state and was a consequence of the French Revolution.
They look only upon attending phenomena and confuse causes and effects.
They speak of the composition of the armies, of strategic and tactical principles, of weapons
and transportation facilities, and of many other matters of military art and administrative
of Technicalities. However, all these things do not explain why modern nations prefer aggression
to peace.
There is perfect agreement with regard to the fact that total war is an offshoot of
aggressive nationalism. But this is merely circular reasoning. We call aggressive nationalism
that ideology which makes for modern total war. Aggressive nationalism is the necessary
is a key derivative of the policies of interventionism and national planning.
While laissez-faire eliminates the causes of international conflict, government interference
with business and socialism create conflicts for which no peaceful solution can be found.
While under free trade and freedom of migration, no individual is concerned about the territorial
The Enlargement of the Territory, subject to the sovereignty of his own government, means material improvement for him, or, at least, relief from restrictions which a foreign government has imposed upon his well-being.
What has transformed the limited war between royal armies into total war, the clash between
peoples, is not technicalities of military art, but the substitution of the welfare state
for the laissez-faire state.
If Napoleon I had reached his goal, the French Empire would have stretched far beyond the
limits of 1815.
Spain and Naples would have been ruled by kings of the house of Bonaparte Murat instead
of kings of another French family, the Bourbons.
The Palace of Kassel would have been occupied by a French playboy instead of one of the
egregious electors of the Hesse family.
All these things would not have made the citizens of France more prosperous.
Neither did the citizens of Prussia win anything from the fact that their king in 1866 evicted
his cousins of Hanover, Hesse-Cassel and Nassau from their luxurious residences.
But if Hitler had realized his plans, the Germans expected to enjoy a higher standard
of living.
They were confident that the annihilation of the French, the Poles and the Czechs would
Under laissez-faire, peaceful coexistence of a multitude of sovereign nations is possible.
Under government control of business, it is impossible.
The tragic error of President Wilson was that he ignored this essential point.
One total war has nothing in common with the limited war of the old dynasties.
It is a war against trade and migration barriers, a war of the comparatively overpopulated countries
against the comparatively underpopulated.
It is a war to abolish those institutions which prevent the emergence of a tendency
toward an equalization of wage rates all over the world.
It is a war of the farmers tilling poor soil against those governments which bar them from
access to much more fertile soil lying fallow.
It is, in short, a war of wage earners and farmers who describe themselves as underprivileged
have-nots against the wage earners and farmers of other nations whom they consider privileged
haves.
The acknowledgement of this fact does not suggest that victorious wars would really
do away with those evils about which the aggressors complain.
Neither does it mean that there can be any question of appeasing the aggressors by removing
migration barriers.
As conditions are today, the Americas and Australia, in admitting German, Italian and
and Japanese immigrants would merely open their doors to the vanguards of hostile armies.
It is futile to place confidence in treaties, conferences and such bureaucratic outfits
as the League of Nations and the United Nations.
Plenipotentiaries, office clerks and experts make a poor show in fighting ideologies.
The spirit of conquest cannot be smothered by red tape.
What is needed is a radical change in ideologies and economic policies.
2. War and the Market Economy
The market economy, say the socialists and the interventionists, is at best a system
that may be tolerated in peacetime.
But when war comes, such indulgence is impermissible.
would jeopardize the vital interests of the nation for the sole benefit of the selfish
concerns of capitalists and entrepreneurs. War, and in any case modern total war, peremptorily
requires government control of business. Hardly anybody has been bold enough to challenge
this dogma. It served in both world wars as a convenient pretext for innumerable measures
of Government Interference with Business, which in many countries, step by step, led
to full war socialism.
When the hostilities ceased, a new slogan was launched.
The period of transition from war to peace and of reconversion, people contended, requires
even more government control than the period of war.
Besides, why should one ever return to a social system, which can work, if at all, only in the interval between two wars?
The most appropriate thing would be to cling permanently to government control in order to be duly prepared for any possible emergency.
An examination of the problems which the United States had to face in the Second World War will clearly show how fallacious this reasoning is.
What America needed in order to win the war was a radical conversion of all its production activities.
All not absolutely indispensable civilian consumption was to be eliminated.
The plants and farms were henceforth to turn out only a minimum of goods for non-military use.
For the rest, they were to devote themselves completely to the task of supplying the armed forces.
The realization of this program did not require the establishment of controls and priorities.
If the government had raised all the funds needed for the conduct of war by taxing the citizens and by borrowing from them,
everybody would have been forced to cut down his consumption drastically.
The entrepreneurs and farmers would have turned toward production for the government
The Government, now by virtue of the inflow of taxes and borrowed money, the biggest buyer on the market, would have been in a position to obtain all it wanted.
Even the fact that the Government chose to finance a considerable part of the war expenditure by increasing the quantity of money in circulation and by borrowing from the commercial banks
would not have altered this state of affairs. The inflation must, of course, bring about
a marked tendency toward a rise in the prices of all goods and services. The government
would have had to pay higher nominal prices, but it would still have been the most solvent
buyer on the market. It would have been possible for it to outbid the citizens who, on the
The government deliberately adopted a policy which was bound to make it impossible for
it to rely upon the operation of the unhampered market.
It resorted to price control and made it illegal to raise commodity prices.
Furthermore, it was very slow in taxing the income swollen by the inflation.
It surrendered to the claim of the unions that the workers' real take-home wages should
be kept at a height which would enable them to preserve in the war their pre-war standard
of living.
In fact, the most numerous class of the nation, the class which in peacetime consumed the
The greatest part of the total amount of goods consumed had so much more money in their pockets
that their power to buy and to consume was greater than in peacetime.
The wage earners, and to some extent also the farmers and the owners of plants producing
for the government, would have frustrated the government's endeavors to direct industries
toward the production of war materials.
They would have induced business to produce more, not less, of those goods which in wartime
are considered superfluous luxuries.
It was this circumstance that forced the administration to resort to the systems of priorities and
of rationing.
The shortcomings of the methods adopted for financing war expenditure made government
control of business necessary.
If no inflation had been made, and if taxation had cut down the income after taxes of all
citizens, not only of those enjoying higher incomes, to a fraction of their peacetime
revenues, these controls would have been supererogatory.
The endorsement of the doctrine that the wage earner's real income must in wartime be even
higher than in peacetime made them unavoidable.
Not government decrees and the paperwork of hosts of people on the government's payroll,
but the efforts of private enterprise produced those goods which enabled the American armed
forces to win the war, and to provide all the material equipment its allies needed for
their cooperation.
The economist does not infer anything from these historical facts, but it is expedient
to mention them as the interventionists would have us believe that a decree prohibiting
the employment of steel for the construction of apartment houses automatically produces
airplanes and battleships.
The adjustment of production activities to a change in the demand of consumers is the
source of profits.
The greater the discrepancy between the previous state of production activities and that agreeing
with the new structure of demand, the greater adjustments are required and the greater profits
are earned by those who succeed best in accomplishing these adjustments.
The sudden transition from peace to war revolutionizes the structure of the market, makes radical
readjustments indispensable and thus becomes for many a source of high profits.
The planners and interventionists regard such profits as a scandal.
As they see it, the first duty of government in time of war is to prevent the emergence
of new millionaires.
It is, they say, unfair to let some people become richer while other people are killed
or maimed.
Nothing is fair in war.
It is not just that God is for the big battalions and that those who are better equipped defeat
It is not just that those in the front line shed their life blood in obscurity while the commanders, comfortably located in headquarters hundreds of miles behind the trenches, gain glory and fame.
It is not just that John is killed and Mark crippled for the rest of his life while Paul returns home safe and sound and enjoys all the privileges accorded to veterans.
It may be admitted that it is not fair that war enhances the profits of those entrepreneurs
who contribute best to the equipment of the fighting forces.
But it would be foolish to deny that the profit system produces the best weapons.
It was not socialist Russia that aided capitalist America with land lease.
The Russians were lamentably defeated before American-made bombs fell on Germany and before
Before they got the arms manufactured by American big business.
The most important thing in war is not to avoid the emergence of high profits, but to
give the best equipment to one's own country's soldiers and sailors.
The worst enemies of a nation are those malicious demagogues who would give their envy precedents
over the vital interests of their nation's cause.
Of course, in the long run, war and the preservation of the market economy are incompatible. Capitalism
is essentially a scheme for peaceful Nations. But this does not mean that a nation which
is forced to repel foreign aggressors must substitute government control for private
enterprise. If it were to do this, it would deprive itself of the most efficient means
There is no record of a socialist nation which defeated a capitalist nation.
In spite of their much glorified war socialism, the Germans were defeated in both world wars.
What the incompatibility of war and capitalism really means is that war and high civilization
are incompatible.
If the efficiency of capitalism is directed by governments toward the output of instruments
of destruction, the ingenuity of private business turns out weapons which are powerful enough
to destroy everything.
What makes war and capitalism incompatible with one another is precisely the unparalleled
efficiency of the capitalist mode of production.
The market economy, subject to the sovereignty of the individual consumers, turns out products
which make the individual's life more agreeable.
It caters to the individual's demand for more comfort.
It is this that made capitalism despicable in the eyes of the apostles of violence.
They worshipped the hero, the destroyer and killer, and despised the bourgeois and his
peddler mentality.
Now mankind is reaping the fruits which ripened from the seeds sown by these men.
3. War and Autarky
If an economically self-sufficient man starts a feud against another autarkic man, no specific
problems of war economy arise.
But if the tailor goes to war against the baker, he must henceforth produce his bread
for Himself.
If he neglects to do this, he will be in distress sooner than his adversary, the baker.
For the baker can wait longer for a new suit than the tailor can for fresh bread.
The economic problem of making war is therefore different for the baker and for the tailor.
The International Division of Labor was developed under the assumption that there would no longer
be wars.
In the philosophy of the Manchester School, free trade and peace were seen as mutually
conditioning one another.
The businessmen who made trade international did not consider the possibility of new wars.
Nor did general staffs and students of the art of warfare pay any attention to the change
in conditions which international division of labor brought about.
The method of military science consists in examining the experience of wars fought in
the past and in abstracting general rules from it.
Even the most scrupulous occupation with the campaigns of Turan and Napoleon I could not
suggest the existence of a problem which was not present in ages in which there was practically
no international division of labor.
The European military experts slighted the study of the American Civil War.
In their eyes, this war was not instructive.
It was fought by armies of irregulars led by non-professional commanders.
Civilians like Lincoln interfered with the conduct of the operations.
Little, they believed, could be learned from this experience.
But it was in the Civil War that, for the first time, problems of the inter-regional
division of labor played the decisive role.
The South was predominantly agricultural.
Its processing industries were negligible.
The Confederates depended on the supply of manufacturers from Europe.
As the naval forces of the Union were strong enough to blockade their coast, they soon
One began to lack needed equipment.
The Germans in both world wars had to face the same situation.
They depended on the supply of foodstuffs and raw materials from overseas.
But they could not run the British blockade.
In both wars the outcome was decided by the battles of the Atlantic.
The Germans lost because they failed in their efforts to cut off the British Isles from
The German war mongers were intent upon adopting policies which, as they hoped, could make it possible for Germany to wage a war in spite of the handicap of the foreign trade situation.
Their panacea was ersatz, the substitute.
A substitute is a good which is either less suitable or more expensive or both less suitable
and more expensive than the proper good which it is designed to replace.
Whenever technology succeeds in manufacturing or discovering something which is either more
are suitable or cheaper than the thing previously used.
This new thing represents a technological innovation.
It is improvement and not ersatz.
The essential feature of ersatz as this term is employed
in the economico-military doctrine is inferior
quality or higher costs or both together.
In this sense wheat produced under the protection
The collection of an import duty within the Reich's territory is ersatz 2.
It is produced at higher costs than foreign wheat.
The notion of ersatz is a catallactic notion and must not be defined with regard to technological
and physical properties of the articles.
The Wehrwirtschaftslehre, the German doctrine of the economics of war, contends that neither
Neither cost of production nor quality are important in matters of warfare.
Profit-seeking business is concerned with costs of production and with the quality of
the products.
But the heroic spirit of a superior race does not care about such specters of the acquisitive
mind.
What counts alone is war-preparedness.
A warlike nation must aim at autarky in order to be independent of foreign trade.
It must foster the production of substitutes irrespective of mammonist considerations.
It cannot do without full government control of production because the selfishness of the
individual citizens would thwart the plans of the leader.
Even in peacetime, the commander-in-chief must be entrusted with economic dictatorship.
Both theorems of the ersatz doctrine are fallacious.
First, it is not true that the quality and suitability of the substitute are of no importance.
If soldiers are sent into battle badly nourished and equipped with weapons made of inferior
material, the chances for victory are impaired.
Their action will be less successful and they will suffer heavier casualties.
The awareness of their technical inferiority will weigh on their minds.
Erzots jeopardizes both the material strength and the morale of an army.
No less incorrect is the theorem that the higher costs of production of the substitutes
do not count.
Fair costs of production mean that more labor and more material factors of production must
be expended in order to achieve the same effect which the adversary producing the proper product
attains with a lower expenditure.
It is tantamount to squandering scarce factors of production, material and manpower.
Such waste under conditions of peace results in lowering the standard of living, and under
and other conditions of war in cutting down the supply of goods needed for the conduct
of operations.
In the present state of technological knowledge, it is only a slight exaggeration to say that
everything can be produced out of anything.
But what matters is to pick out from the great multitude of possible methods those with which
output is highest per unit of input.
Any deviation from this principle penalizes itself.
The consequences in war are as bad as they are in peace.
In a country like the United States, which depends only to a comparatively negligible
extent on the importation of raw materials from abroad, it is possible to improve the
state of war preparedness by resorting to the production of substitutes such as synthetic
rubber.
The disadvantageous effects would be small when weighed against the beneficial effects.
But a country like Germany was badly mistaken in the assumption that it could conquer with
synthetic gasoline, synthetic rubber, ersatz textiles and ersatz fats.
In both world wars, Germany was in the position of the tailor fighting against the man who
supplies him with bread.
With all their brutality, the Nazis could not alter this fact.
4.
The Futility of War
What distinguishes man from animals is the insight into the advantages that can be derived
from cooperation under the division of labor.
Man curbs his innate instinct of aggression in order to cooperate with other human beings.
The more he wants to improve his material well-being, the more he must expand the system of the
division of labor.
Concomitantly, he must more and more restrict the sphere in which he resorts to military
action.
The emergence of the international division of labor requires the total abolition of war.
Such is the essence of the laissez-faire philosophy of Manchester.
This philosophy is, of course, incompatible with statolatry.
In its context, the state, the social apparatus of violent oppression, is entrusted with the
protection of the smooth operation of the market economy against the onslaughts of anti-social
individuals and gangs.
Its function is indispensable and beneficial, but it is an ancillary function only.
There is no reason to idolize the police power and ascribe to it omnipotence and omniscience.
There are things which it can certainly not accomplish.
It cannot conjure away the scarcity of the factors of production.
It cannot make people more prosperous.
It cannot raise the productivity of labor.
All it can achieve is to prevent gangsters from frustrating the efforts of those people
who are intent upon promoting material well-being.
The liberal philosophy of Bentham and Bastiat had not yet completed its work of removing
trade barriers and government meddling with business when the counterfeit theology of
the Divine State began to take effect.
Endeavors to improve the conditions of wage earners and small farmers by government decree
made it necessary to loosen more and more the ties which connected each country's domestic
economy with those of other countries.
Economic nationalism, the necessary complement of domestic interventionism, hurts the interests
of foreign peoples and thus creates international conflict.
It suggests the idea of amending this unsatisfactory state of affairs by war.
Why should a powerful nation tolerate the challenge of a less powerful nation?
Is it not insolence on the part of small Lapputania to injure the citizens of big Ruritania by
customs, migration barriers, foreign exchange control, quantitative trade restrictions and
expropriation of Ruritanian investments in Lapputania?
Would it not be easy for the army of Ruritania to crush Lapputania's contemptible forces?
Such was the ideology of the German, Italian and Japanese war-mongers.
It must be admitted that they were consistent from the point of view of the new unorthodox
teachings.
Interventionism generates economic nationalism, and economic nationalism generates bellicosity.
If men and commodities are prevented from crossing the borderlines, why should not the
armies try to pave the way for them?
From the day when Italy in 1911 fell upon Turkey fighting was continual.
There was almost always shooting somewhere in the world.
The peace treaties concluded were virtually merely armistice agreements.
Moreover, they had to do only with the armies of the great powers.
Some of the smaller nations were always at war. In addition, there were no less pernicious
civil wars and revolutions.
How far we are today from the rules of international law developed in the age of limited warfare.
Modern war is merciless. It does not spare pregnant women or infants. It is indiscriminate
killing and destroying. It does not respect the rights of neutrals. Millions are killed,
This has nothing to do with the atomic bomb.
The root of the evil is not the construction of new, more dreadful weapons.
It is the spirit of conquest.
It is probable that scientists will discover some methods of defense against the atomic
like Bob.
But this will not alter things.
It will merely prolong for a short time the process of the complete destruction of civilization.
Modern civilization is a product of the philosophy of laissez-faire.
It cannot be preserved under the ideology of government omnipotence.
State-olatry owes much to the doctrines of Hegel.
However, one may pass over many of Hegel's inexcusable faults, for Hegel also coined the
phrase the futility of victory.
To defeat the aggressors is not enough to make peace durable.
The main thing is to discard the ideology that generates war.