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Mises on War and the Economy

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The Review of Austrian Economics
https://doi.org/10.1007/s11138-019-0433-z
Ludwig von Mises on war and the economy
Christopher J. Coyne 1 & Anne R. Bradley 2
# Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract
In 1919, in the wake of the Central Power’s defeat in World War I, Ludwig von
Mises published his second book, Nation, State, and Economy. The book explores
the consequences of war and the type of political and economic arrangements likely
to generate a lasting peace in the future. This paper reviews the book’s key themes
regarding the relationship between war and the economy. We make connections
between Mises’ insights and contemporary literature in order to demonstrate the
continuing relevance of Nation, State, and Economy a century after its publication.
Keywords Liberal peace . Ludwig von Mises . War economy . War socialism
JEL classification B13 . B53 . F50
BWe are now about to accept the gage [the challenge] of battle with this natural
foe to liberty and shall, if necessary, spend the whole force of the nation to check
and nullify its pretensions and its power. We are glad, now that we see the facts
with no veil of false pretense about them, to fight thus for the ultimate peace of
the world and for the liberation of its peoples, the German peoples included: for
the rights of nations great and small and the privilege of men everywhere to
choose their way of life and of obedience. The world must be made safe for
democracy. Its peace must be planted upon the tested foundations of political
liberty.^
President Woodrow Wilson, April 2, 1917
* Christopher J. Coyne
[email protected]
1
Department of Economics, George Mason University, MS 3G4, Fairfax, VA 22030, USA
2
Washington, DC, USA
C. J. Coyne, A. R. Bradley
BAmericans are asking: How will we fight and win this war? We will direct every
resource at our command - every means of diplomacy, every tool of intelligence,
every instrument of law enforcement, every financial influence, and every necessary
weapon of war - to the disruption and to the defeat of the global terror network. This
war will not be like the war against Iraq a decade ago, with a decisive liberation of
territory and a swift conclusion. It will not look like the air war above Kosovo two
years ago, where no ground troops were used and not a single American was lost in
combat. Our response involves far more than instant retaliation and isolated strikes.
Americans should not expect one battle, but a lengthy campaign, unlike any other
we have everseen.^
President George W. Bush, September 21, 2001
1 Introduction
In 1919, in the wake of the Central Power’s defeat in World War I, Ludwig von Mises
published his second book, Nation, State, and Economy. The book explores the consequences of war and the type of political and economic arrangements likely to generate a
lasting peace in the future. Mises’ analysis consists of two distinct, but related, parts.
The first part focuses on the concepts of nation and nationality (see Yeager 1999).
Here Mises explores the relationship between the individual and the nation, arguing
that national identities, which are closely tied to language, precede political orders. He
also argues for the right of individuals to freely secede to align with the political order
of their choosing. Mises also presents a defense of liberal, or pacifist, nationalism
against militaristic, or imperialistic, nationalism. The former is grounded in individual
autonomy, self-determination, and a fundamental respect for individuals belonging to
other societies. The latter is focused on territorial conquest to enrich those in positions
of political power. Militaristic nationalism places political and military institutions on a
pedestal, elevating them above the interests of the individual citizen who is viewed as a
cog in the political and military machinery. In Mises’ estimation, liberal nationalism
offers a pathway to sustainable peace while militaristic nationalism, by its very nature,
is intertwined with perpetual conflict.
The second portion of the book focuses on the relationship between war and the
economy. Mises explores the various aspects of the war economy during World War I
and considers the broader implications both for human welfare and for lasting peace.
This analysis of the war economy also contains Mises’ first systematic exploration of
the nature and consequences of socialism as an economic system, a topic he would
revisit throughout the rest of his career (Mises 1920, 1922, 1940, 1949). Mises’
analysis of socialism includes two aspects. The first focuses on the nature of the war
economy and its equivalence to socialism as a general economic system. The second
explores the nature and operation of socialism as a general system of economic
organization and its implications for domestic and international peace. Mises concludes
that liberalism fosters social cooperation, peace, and cosmopolitan attitudes while
socialism creates economic chaos resulting in conflict and attitudes of nationalistic
territorialism.
Ludwig von Mises on war and the economy
With this context in mind, in what follows we review the key themes discussed by
Mises regarding the relationship between war and the economy. Throughout, we make
connections to contemporary literature in order to demonstrate the continuing relevance
of Nation, State, and Economy a century after its initial publication.
2 Insights on war and the economy
2.1 The liberal peace
A central theme throughout Nation, State, and Economy is that liberalism fosters
international peace through social cooperation and trade. As Mises writes, B[t]he
development of the spatial division of labor, its progress toward a world economy,
works more effectively for peace than all the efforts of the pacifists^ (1919: 112). Later
he notes that, Bwith the progress of the division of labor we see the number of wars and
battles diminishing ever more and more. The spirit of industrialism, which is indefatigably active in the development of trade relations, undermines the warlike spirit^
(1919: 124). As these quotes suggest, for Mises, expansions in the extent of the market
and the division of labor are the driving force of sustained peace.
This idea of the liberal peace predates Mises. Montesquieu (1748: 316) wrote that,
Bcommerce is a cure for the most destructive prejudices; for it is almost a general rule,
that wherever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners.^ And Kant (1795: 42)
noted that Bit is the spirit of commerce that sooner or later takes hold of every nation,
and is incompatible with war.^ Like Mises, these writers suggest that trade facilitates
cooperation and peace between people belonging to different societies.
A contemporary literature has explored the idea of the liberal peace both theoretically
and empirically (see Coyne and Pellillo 2013 for an overview). Theoretically, this literature
identifies three channels through which trade contributes to peace (Gartzke 2007; Dorussen
and Ward 2010; Weede 2011). The first is that countries who already share similar
institutions and policies gain little by trying to change the institutions and policies of their
trading partners through force since they already share a common foundation. Second,
peaceful interaction allows members of different societies to reap immediate material
benefits from increases in the extent of the market and differences in resource endowments
as well as non-material benefits including the exchange of ideas. Third, the future expected
gains from trade reduce the net benefit of engaging in conflict with trading partners in the
present. Other scholars have noted that the process of trade develops virtues which further
reinforce the foundations of peaceful interaction. For example, McCloskey (2006: 413)
notes that, in addition to creating wealth, Bmarket society works as an ethical school^
whereby people develop virtues contributing to coexistence and cooperation with others.
Numerous empirical studies find support for the relationship between trade relationships
and peace (see Polachek 1980, 1992, 1999; Polachek and McDonald 1992; Gartzke and Li
2003; Oneal 2003; Oneal et al. 2004; Gartzke 2005, 2007, 2009; Dorussen 2006; Souva
and Prins 2006; Xiang et al. 2007; McDonald 2009).
Mises’ notion of the liberal peace involves a commitment to both economic and
political liberalism. He argues that Bonly the ideas of liberalism and democracy have
the power^ to prevent conflict (1919: 71). Mises is silent on the specific nature of the
C. J. Coyne, A. R. Bradley
relationship between economic and political freedom. Later, Hayek (1944) and Friedman (1962) would argue that economic freedom is a precondition for political freedom.
Lawson and Clark (2010) find empirical support for the Hayek-Friedman hypothesis.
Mousseau (2000, 2002, 2003, 2005, 2009, 2013) argues that democracy is a descendent
of contract-intensive economies, further highlighting the connection between economic
freedom and democracy. Along similar lines, Weede (2004, 2006) emphasizes the
importance of economic development for the emergence of effective democratic
political institutions. Most recently, Kapás and Czeglédi (forthcoming) find support
for what they call the Bweak interpretation^ of the Hayek-Friedman hypothesis, which
is that economic freedom is a necessary condition for maintaining political freedom
once it is established.
Mises’ emphasis on the importance of trade for international peace remains highly
relevant today. Although international trade has been a key driver in alleviating poverty
and fostering peace, it is continually under attack from a variety of political and social
forces (Irwin 2015). Therefore, continued reiterations of the connection between trade,
wealth creation, and international peace are of the utmost importance.
Moreover, some scholars continue to treat international economic policy (what they call
Bgeoeconomic policy^)—e.g., policies related to trade, investment, the monetary system,
sanctions, cyber, aid, and energy and commodities—as a tool to be strategically utilized by
governments to achieve their international goals (Blackwell and Harris 2016). According to
this view, members of a government can strategically use international economic policy to
engage in Bwar by other means^ or Beconomic statecraft^ which is increasingly popular in
foreign policy debates. If Mises is right, however, this approach will contribute to global
instability and conflict. It is precisely because Mises sheds light on the true nature of calls
for governments to increasingly use geoeconomic policy as a complement to military force
that his work on the liberal peace remains pertinent. The use of economics armaments, just
like the use of military armaments, has real negative consequences on human welfare.
Nation, State, and Economy makes these negative consequences clear by clarifying both
the immediate reductions in human well-being and the longer-term consequences of the
increased likelihood of conflict between societies.
2.2 The nature of the war economy
Nation, State, and Economy contains Mises’ first detailed treatment of socialism as a
means of economic organization, a topic that he would take up in greater detail in
subsequent scholarship (Mises 1920, 1922, 1940, 1949). In 1919, Mises was focused
on socialism in the context of the idea of the war economy. According to Mises, the
phrase Bwar economy^ entered the German lexicon early in the war effort and had
significant implications. BWith this one term,^ Mises notes, Ball economic thought was
put aside; ideas carried over from the ‘peacetime economy’ were said not to hold for the
‘war economy,’ which obeyed other laws^ (1919: 115). The result was that B[a]rmed
with this catchphrase, a few bureaucrats and officers who had gained full power by
exceptional decrees substituted ‘war socialism’ for what state socialism and militarism
had still left of the free economy^ (1919: 115).
Mises documents how war socialism relied on the administrative state not only to
produce war-related goods, but also to shift the production of many consumer goods
from foreign to domestic producers in order to become self-sufficient in the face of war.
Ludwig von Mises on war and the economy
This led to increased government control over economic activity in terms of the
production and the distribution of goods and services. As Mises writes, B[a]ll stocks
had to be regarded as a mass under the control of a unified administration that could be
drawn on for equally meeting the needs of all, and so consumption had to be rationed^
(1919: 118). The result was a reduction in human welfare as the extent of the market
was forcibly curtailed and scarce resources were redirected by government decree to
fulfill the goals of war planners rather than those of private citizens.
Is war socialism the same as true socialism? Mises explores the answer to this
question and concludes that while they are not identical, differences are matters of
degree, not kind. True socialism is defined as the transfer of the means of production
from private ownership to state ownership. By this definition war socialism during
World War I was not true socialism since not all of the means of production were
confiscated by the state. Nonetheless, Mises argues that the war economy places the
economic system on Ba socialistic basis^ (1919: 143). Formally, the means of production remained in the hands of private individuals. But informally, the state severely
curtailed the property rights of the German people. As Mises writes,
By the letter of the law the [private] owner still continued to be the owner of the
means of production. Yet the power of disposal over the enterprise was taken
away from him. It was no longer up to him to determine what should be
produced, to acquire raw materials, to recruit workers, and finally to sell the
product. The goal of production was prescribed to him, the raw materials
delivered to him at definitive prices, the workers were assigned to him and had
to be paid by him at rates on whose determination he had no direct influence. The
product, furthermore, was taken from him at a definite price…^ (1919: 143).
Mises is careful to note that the particulars of war socialism varied across industries
during the war. His more general point, however, is that war socialism involves
significant curtailment of the entrepreneurial market process and is incompatible with
the market economy.
Mises’ discussion of the nature of the war economy foreshadowed his subsequent
analysis of interventionism in a mixed economy (1940, 1949). A mixed economy refers
to an economic system that falls between pure capitalism and pure socialism. The
defining feature of the mixed economy is interventionism, a doctrine which involves
the strategic use of the discretionary power of government to correct perceived
problems with markets. The mixed economy, or Bthird way^ attempts to maintain the
desirable features of the market economy while utilizing the power of government to
correct for the ills of capitalism.
Mises argued that government intervention would generate a range of undesirable
consequences due to limited knowledge. When these consequences emerged planners
would have the option of either retracting the initial intervention or imposing subsequent interventions. Choosing the former option requires the intervener to be able to
identify a clear link between the initial intervention and the undesirable outcome and to
have the incentive to undo the intervention. Choosing the latter option perpetuates the
dynamics of interventionism by generating further unintended consequences.
Mises’ initial treatment of the dynamics of interventionism was subsequently developed and extended by Rothbard (1970), Kirzner (1979), and Ikeda (1996). In the
C. J. Coyne, A. R. Bradley
context of this literature, the war economy can best be understood as one manifestation
of interventionism. As Mises notes, the war economy is not pure socialism and it
certainly is not pure capitalism. Instead, it is a manifestation of the mixed economy and
can be understood within the analytical framework of the dynamics of interventionism.
This remains relevant today as the governments of many countries, such as the United
States, have purposefully adopted a Bpermanent war economy^ which persists in both
times of war and peace and which involves continual preparation for current and future
wars (see Duncan and Coyne 2013). The permanent war economy requires the adoption of
a system of perpetual interventionism whereby the administrative state influences and
directs significant portions of economic activity to achieve the military goals of the
government.
Mises’ insights on the nature of the war economy also pose a broader challenge to
the foundations of a free society. Many see state-provided defense as a necessary
foundation for a free society. Yet as Mises notes, the state’s military apparatus is an
exercise in non-comprehensive planning that places the economy on a socialistic basis.
Lavoie (1985) identifies two fundamental issues with non-comprehensive planning.
First, it suffers from a knowledge problem whereby those in the administrative state
lack access to the requisite knowledge to allocate scarce resources to their highestvalued uses. Second, it suffers from a power problem whereby planners need to be
granted significant discretionary power over the economic and social lives of citizens to
impose their goals and address unanticipated occurrences. Appreciating and resolving
these tensions were challenges posed by Mises in 1919, and ones that remains
important today (see Coyne and Hall forthcoming).
2.3 The costs of war, economic growth, and citizen welfare
In addition to considering the nature of the war economy Mises also offers insight into
the costs of war and the implications for growth and citizen welfare. Mises identifies
several costs of the war economy.
First, war production shifts resources—both capital goods and labor—from producing consumer goods to producing war-related goods via government dictate. This
distorts the structure of production as it otherwise would have evolved absent the
war effort. Second, there are losses associated with the violence of war including the
destruction of physical capital and the maiming and death of citizens who constitute
part the labor force, both domestic and international. Third, the efforts by government
to increase self-sufficiency by replacing foreign production with domestic production
entails substituting inferior, domestic-produced goods for otherwise superior, foreignproduced goods which make citizens poorer.
Mises highlights these costs in several passages of Nation, State, and Economy.
Discussing the substitution of inferior goods for superior goods and the distortion of the
structure of production he writes that,
One can of course use linen instead of cotton and wooden soles instead of leather
soles. However, in the former case one has replaced a cheaper by a dearer
material, that is, by one in whose production more costs must be incurred, and
in the latter case a better by a less usable material. That means, however, that the
meeting of the needs [of consumers] become worse (1919: 122-3).
Ludwig von Mises on war and the economy
And discussing the destruction of capital and subsequent distortions to production he
notes that,
The losses that the national economy suffers from war, apart from the disadvantages that exclusion from world trade entails, consist of the destruction of goods
by military actions, the consumption of war material of all kinds, and the loss of
productive labor that the persons drawn into military service would have rendered
in their civilian activities. Further losses from loss of labor occur insofar as the
number of workers is lastingly reduced by the number of the fallen and as the
survivors become less fit in consequence of injuries suffered, hardships undergone, illness suffered, and worsened nutrition (1919: 125).
The cumulative effect is a reduction in the well-being of citizens due to reductions in
real economic wealth. As Mises argues, B[t]hat we use paper sacks instead of jute sacks
and iron tires on vehicles instead of rubber tires, that we drink ‘war’ coffee instead of
real coffee, shows that we become poorer, not richer^ (p. 123). This reduction in wealth
goes beyond the immediate term and also is felt in the longer-term through the
destruction of capital and labor that would have been used in producing future
consumer goods which would have improved the lives of citizens.
In considering the costs of war Mises also addresses the idea of wartime prosperity,
which is the belief that a war effort directs resources into production, reducing
unemployment and increasing output and consumption. Mises writes about the German
experience during World War I as follows:
Instead of the expected crisis came a period of good business; instead of decline,
boom. People found that war was prosperity…All at once there were no longer
any unsalable products; enterprises that for years had run only at a loss yielded
rich profits. Unemployment, which had assumed a menacing extent in the first
days and weeks of the war, disappeared completely, and wages rose. The entire
economy presented the picture of a gratifying boom (1919: 127).
Mises concludes, however, that this prosperity was a myth. War cannot be the cause of
genuine economic prosperity Bsince an increase in wealth never does result from
destruction of goods^ (1919: 127). He goes on to argue that Bwar does bring good
sales opportunities for all producers of weapons, munitions, and army equipment of
every kind but what these sellers gain is offset on the other hand by losses by other
branches of production…^ (1919: 127). Here Mises emphasizes the fundamental, yet
often overlooked concept of the seen and unseen and how it matters for our understanding of the war economy and the myth of wartime prosperity.
The relevance of Mises’ insights is evident in the work of Higgs (1992) who dispels
the myth of wartime prosperity in the United States during World War II. He reconsiders employment, output, and real consumption in the United States in light of the
government’s war effort to understand the drivers of perceived prosperity. The increase
in employment, he argues, was driven by increased defense employment, not in
genuine private employment involved in the production of value-added consumer
goods. According to the orthodox story output, as measured by Gross National Product
(GNP), increased during the war effort reflecting the associated prosperity of war
C. J. Coyne, A. R. Bradley
production. But Higgs argues that one needs to decompose aggregate output into output
produced for the war effort and output produced for private consumption. This is
because the latter increases consumer welfare by producing value-added outputs while
the former does not.1 When one deducts military outlays from GNP the sharp increase
that is usually used as evidence of war-time prosperity disappears. Government spending is solely a measure of cost while private spending is a measure of value. Finally,
Higgs notes that personal consumption did not increase during the war once one makes
appropriate adjusts for inflation. Moreover, American citizens were subject to an array
of government-imposed price controls and rationing mandates which reduced their
ability to consume, harming their well-being.
Higgs (2004) reconsiders capital investment in America during World War II in light of
the distortions caused by government intervention as part of the war effort. He emphasizes
that there is an important distinction between capital formulation that is undertaken by
private entrepreneurs and that which is undertaken by members of the administrative state
during war. The former reflects the genuine relative scarcities of capital goods, and the
desire of entrepreneurs to satiate consumer wants. The latter, in contrast, reflects the
valuation of government planners and their desire to fulfill wartime plans. Simply comparing aggregate figures regarding capital formation entirely neglects this distinction and the
distortions caused by government intervention. Appreciating the difference between private
and public investment, however, makes it clear that B[c]ontemporaries greatly exaggerated
the heroic achievements of the wartime socialization of investment^ in America during
World War II which further contributed to the myth of prosperity (Higgs 2004: 518).
Taken together, Higgs’ analyses illustrate the relevance of Mises’ core points in
Nation, State, and Economy regarding the relationship between war, economic growth,
and citizen welfare. Under the war economy, Mises argues, Bproduction must be guided
into the channels designated as most suitable by the economic general staff. If the
standard of living of the population thereby suffers, well, in view of the high objective
to be attained, that does not count at all^ (1919: 123). Higgs makes clear that these
insights apply equally to World War II. And beyond that, they apply, in various forms
and manifestations, to all war efforts undertaken by governments.
2.4 The innovations of war
In addition to analyzing war spending and economic growth, Mises also makes mention
of the widely held belief that government spending for war leads to innovations which
improve citizen welfare. Specifically, he writes that "[i]t should not be disputed that war
needs can beget and, in fact, have begotten many useful inventions. How much they
represent a lasting enrichment of the German economy can be known only later^ (1919:
123). Mises does not go into further detail about how the value of war innovations will
be judged, but his subsequent scholarship on the importance of economic calculation
offers guidance as how to think through the issue (Mises 1920, 1922, 1949).
At the core of the issue is the distinction between increases in output and economic
progress (see Coyne 2013: 71–79). Output simply refers to the final state of production
whereby a final good or service is produced. Increasing output is relatively simple. It
1
Interestingly, a majority of the studies looking at the effect of military spending on economic growth, as
measured by standard aggregate figures, find either no effect or a negative effect (see Dunne and Tian 2013).
Ludwig von Mises on war and the economy
involves investing more resources in the production of some good or service and, as a
result, getting more of it. For example, if more resources are spent producing guns, this
will result in more guns, all else being constant. Greater output, however, is not
necessarily the same thing as economic progress, which requires discovering a solution
to the economic problem of how to best allocate scarce resources among an array of
competing, technologically feasible, alternatives (Hayek 1945: 519–20).
Economic progress requires adapting to changing conditions through adjustment
and innovation. This process takes place through markets, wherein economic calculation provides feedback regarding changing conditions and the lure of profit provides
the incentive for people to adapt in response to that feedback (Mises 1920, 1922, 1949;
Kirzner 1992). The market process is at the core of society-wide economic progress.
Continual innovation and resource reallocation results in greater productivity, more
production using fewer resources. The saved resources can then be redirected to
produce additional goods and services people value. The result is higher standards of
living as people are able to accumulate a widening array of tangible and intangible
goods they value. This matters for understanding the nature of war-related innovations.
As Mises points out, there can be no question that war-related spending will result in
inventions. This is the logical outcome of the government directing more resources toward
war-related research and production. This will increase output and it is to be expected that
some of the war-related research and production will have spillovers into civilian life. From
an economic perspective, however, the question is not whether war-related spending
generates observable outcomes related to outputs or civilian use, but, rather, the opportunity
cost of the resources used to produce those outcomes (see Coyne and Bills 2018). Warrelated inventions redirect resources from how they otherwise would have been employed.
These forgone alternatives need to be appreciated because identifying observable outcomes, by itself, says nothing about the opportunity cost of the resources used to produce
those outcomes. To understand why this is important, consider the following questions
related to war-related spending on research, innovation, and innovation.
How do we know that the value of resources employed in producing an invention
was maximized compared to other uses of those same resources? How do we know that
the same invention that emerged from government spending would not have occurred
absent that spending? How do we know that the inventions that emerged did not crowd
out superior inventions that would have emerged absent government spending? Finally,
how does one gauge waste associated with war-related spending? Waste occurs both in
government producing inventions widely used by civilians and in cases where efforts to
invent fail to produce anything civilians find useful. In both cases scarce resources
could have been used to produce other, value-added outputs. Answering these questions is difficult because there is no market test to determine the genuine value of
resources employed and outputs produced.2
The issue is a microcosm of the problem plaguing other efforts of government to
control economic activity. Absent the market mechanism, decisions regarding the
allocation of scarce resources are made by bureaucratic rules. This is not how innovation occurs in the market economy where people experiment with different resource
combinations and subject that experiment to the market test to determine if they have
2
For other treatments of issues with state sponsored research see Kealey 1997, Butos and McQuade 2006, and
Klein 2013.
C. J. Coyne, A. R. Bradley
used scarce resources in a manner which best satisfies consumer wants. Based on the
market feedback, resource owners make adjustments to the allocation of resources.
These issues remain relevant today as many continue to argue that war-related
spending results in welfare-enhancing inventions (see, for example, Ruttan 2006,
Cowen 2014). Cowen (2014) captures the essence of these arguments when he writes,
B[f]undamental innovations such as nuclear power, the computer and the modern aircraft
were all pushed along by an American government eager to defeat the Axis powers or,
later, to win the Cold War.^ This is not to deny that government spending influenced the
evolution of these technologies, and other, war-related outputs or that these innovations
generated spillover benefits for civilians. However, the net effects of government spending on overall societal welfare are indeterminate because of the inability to judge the
opportunity cost of the resources employed. This point is often neglected in discussions of
war-related research and innovation which tend to select on the dependent variable by first
choosing cases where military innovations had positive effects on society and then using
those cases as evidence of the positive societal effects of war-spending.
2.5 War financing
Preparing for and engaging in war requires resources. Mises discusses several sources
for the state to acquire those resources. One method entails the confiscation of goods and
labor—either with no compensation or with compensation below what would have been
accepted voluntarily—from private parties. A second method involves raising existing
taxes or imposing new taxes. A third alternative is the issuance of debt. Whether the state
imposes taxes or issues debt, Mises makes clear that it impacts the wealth of the present
generation and future generations. BFrom the economic point of view,^ he writes, Bthe
present generation wages war and it must also bear all material costs of war. Future
generations are also affected only insofar as they are our heirs and we leave less to them
than we would have been able to leave without the war’s intervening^ (1919: 139).
Inflation is another avenue through which government can obtain money to purchase the resources necessary for war (Salerno 1999). As Mises indicates, this method
was employed by the Central Powers during World War I. BThe longer war continued,^
he notes, Bthe more actively was the printing press put into the service of the financial
administration^ (1919:129). This had numerous effects including raising the price of
goods and services, and imposing costs on creditors while benefiting debtors. Mises
notes that the price increase does not happen in a uniform manner across all goods and
services. Instead, those who first receive the newly printed money benefit since they are
able to make purchases prior to the price of goods and services increasing. During war,
those involved in war production typically are the first recipients of the newly printed
money. Discussing World War I, Mises writes that B[t]he war suppliers in the broadest
sense of the word (also including workers in war industries and military personnel who
received increased war incomes) have therefore gained not only from enjoying good
business in the ordinary sense of the word but also from the fact that the additional
quantity of money flowed first to them^ (1919: 130). This further reinforced the
perceived prosperity of the war effort even though, in reality, it was simply a shifting
of wealth and income from ordinary citizens to those in the war industry.
Mises traces the effects of war-time inflation on economic activity, noting that it
distorts economic calculation and the capital structure. Capital is rearranged to satisfy
Ludwig von Mises on war and the economy
government demand. The result is that capital goods that would have otherwise been
used to produce consumer goods—for either present or future consumption by private
people—are shifted into producing goods demanded by the government for current
consumption as part of the war effort. This distorts capital allocation, maintenance, and
expansion as the plans of war administrators replace those of private actors. The
inflation-driven war boom during World War I masked this loss of capital and the
implications for the welfare of the German people. As Mises writes,
All fell into ecstasy. Whoever took in more money than earlier—and that was true of
most entrepreneurs and wage earners, and finally, with the further progress of the
depreciation of money, of all persons except capitalists receiving fixed
incomes—was happy about his apparent profits. While the entire economy was
consuming its capital and while even stocks of goods ready for consumption held in
individual households were dwindling, all were happy about prosperity (1919: 135).
The dynamics of inflation extend beyond World War I (Salerno 1999). BIn all great
wars,^ Mises writes, Bmonetary calculation was disrupted by inflation. Earlier it was
the debasement of coin; today it is paper-money inflation. The economic behavior of
the belligerents was thereby led astray; the true consequences of the war were removed
from their view^ (1919: 135). This has important implications because inflation, by
serving as a veil that masks the true costs of war, is a central mechanism for
perpetuating militarism and lowering the cost of governments engaging in war. As
Mises argues, Binflation is an indispensable intellectual means of militarism. Without it,
the repercussions of war on welfare would become obvious much more quickly and
penetratingly; war-weariness would set in much earlier^ (1919: 135).
Contemporary research illustrates and extends many of the Mises’ insights regarding the
state’s methods for financing war. Higgs (1987) documents how the growth in the scale—
spending, taxation, number of regulations—and scope—the range of activities undertaken
by the state—of government in twentieth century America is associated with major crises,
including the two World Wars. He documents how government grew during these crises
and failed to return its pre-crisis level at their conclusion. This has long-term effects
regarding both the number and nature of activities undertaken by the state, as well as the
cost of those activities. Eland (2013) documents how wars have led to increased taxation in
the United States and how many of these taxes remain permanent after war ends.
Research has also explored the various aspects of the relationship between the
different types of war financing. For example, Zielinski (2016) provides a comprehensive analysis of various forms of war financing—taxation, borrowing, inflation, external funding— focusing on how leaders must continually balance securing resources for
war with remaining in power. She explores a range of conditions and constraints under
which political leaders are likely to rely on different methods of war financing.
Rockoff (2016) examines war financing by the U.S. government from the Revolutionary War to the Persian Gulf War. He finds that, historically, during conflicts against
minor powers the U.S. government largely relied on taxes and debt to finance the war.
Against major powers, however, the U.S. government has, historically, turned to
inflating the money supply to finance the war effort. This shift in war financing toward
inflation, he argues, can be explained by the limits on taxation—for both political and
administrative reasons—and on the issuance of debt—due to increases in the interest
C. J. Coyne, A. R. Bradley
rate—during major conflicts. Like Mises, Rockoff (2016: 162–3) contends that one of
the benefits of relying on inflation is that it hides the costs of war, which tend to be
greater in wars against major powers, because the causal connection between war
inflation and economic outcomes is difficult for ordinary citizens to make.
As this research suggests, the nuances of selecting the type of war financing, as well
as the effects of different forms of financing, remain relevant both for understanding
history and for appreciating the full costs of current and future wars. Nation, State, and
Economy provides a foundation for considering some of the key economic and political
issues associated with war financing which extend beyond the time Mises was writing.
Among his unique contributions that remain especially relevant is Mises’ focus on how
war-related inflation adversely affects economic calculation and the capital structure,
and the implications of these distortions for human welfare (Salerno 1999).
3 Conclusion
Nation, State, and Economy offers numerous insights into the realities of the war
economy which remain important today. As Mises makes clear, the war economy is at odds
with human welfare. While we are living in an era which has not experienced another major
world war, perpetual warfare remains the norm (see Dudziak 2013). The United
States government continues to be involved in the wars in Iraq and Afghanistan which fall
under the global BWar on Terror^ which has bipartisan support and no end in sight. Warfare
in the twenty-first century may take a different form from that the major world wars of the
twentieth century, but the same destructive and distortionary effects revealed by Mises in
1919 apply today.
As Mises made clear, the costs of war are long and variable and a full appreciation of
these costs requires an appreciation of the seen and unseen. Avoiding the significant
costs of the war economy ultimately means avoiding war. This, in turn, requires the
adoption of what Mises terms Bliberal pacifism^ (70–80). Liberal pacifism, according
to Mises, is grounded in Bthe Enlightenment philosophy of natural law, of economic
liberalism, and of political democracy, which has been cultivated since the eighteenth
century^ (1919: 71). The person committed to lasting peace, Mises contends, must Bbe
a free-trader and a democrat and work with decisiveness for the removal of all political
rule over colonies by a mother country and fight for the full freedom of movement of
persons and goods. Those and no others are the preconditions of eternal peace^ (1919:
71). This notion of liberal pacifism is the overarching, meta-theme of Nation, State, and
Economy, and it is one that remains as pertinent to global peace and human flourishing
today as when Mises first presented it a century ago.
Publisher’s note Springer Nature remains neutral with regard to jurisdictional claims in published maps and
institutional affiliations.
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