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). 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