A few weeks ago I drove down to Houston to attend the Mises Circle. It’s an annual seminar put on by the Mises Institute, and the topic this year was inflation. It was a really good event, and the audio and video is available on Mises.org for anyone who’s interested.
One of the speakers was Thomas Woods, a libertarian historian with a solid understanding of Austrian economics. Prior to giving his main presentation (drawing from his new book, Meltdown), he spoke briefly about an earlier book that he had edited, called We Who Dared to Say No to War, a collection of anti-war writings from throughout American history. Woods made the point that if you’re an opponent of war and the war machine, then you’re not going to get anywhere unless you go after the money machine. After Woods concluded his presentation, historian Robert Higgs expanded on the connection between the Fed, inflation, and war.
There’s no need for me to expound upon the obvious costs of war in human terms, but there are some interesting economic concepts that are perhaps less obvious. I’ll try to limit myself to these areas.
Two main points should be kept in mind when one considers the economics of war as an enterprise. The first is that war is only profitable to certain special interests that are tied to the government in some way – basically the military-industrial complex Eisenhower warned of. To society as a whole, however, war is not profitable in any way, shape, or form – despite any propaganda to the contrary. War is nothing but the destruction of life, liberty, and property, and it’s the ultimate broken window fallacy to think that war is good for the economy overall. It’s not.
The second key thing to remember when talking about war – particularly the large scale, modern wars with which we are most familiar – is that it requires the government to seize an enormous amount of resources from the productive economy very quickly. Government has two basic tools at its disposal to accomplish this – taxation and inflation.
Taxes have historically gone up in wartime. The problem with taxation, though, is that there’s a limit to how much the government can drain from people directly in the form of taxes. We can see an example of this today, though not necessarily (or at least not exclusively) in the context of war. Taking his cue from President Bush’s free-spending ways, President Obama is now piling on additional trillions in new spending to bail out, rescue, take over, and interfere with various sectors of the economy, thus ensuring that the nation’s economic pain will be deepened and protracted. And even though “the top two percent” of earners will be duly soaked through ever-higher rates of taxation (with the rest of us to follow shortly), not even President Obama suggests that the federal government can raise enough money from taxes to cover it all. He knows that there’s no way we could come up with the money directly, nor any way that we would stand for it. So he’s going to have to print the money he needs.
The same holds true with war. If each American citizen were to receive a bill for the proportional amount of each of the overseas military adventures our government has led over the years, enthusiasm for those adventures would drop precipitously. It might even force our government to heed George Washington’s farewell advice, and avoid entangling alliances. And since there’s no way they’re going to do that, they resort to inflation.
The definition of inflation is an increase in the money supply, and since the government controls the supply of money through the Fed, it follows that government is wholly responsible for inflation. The reason that inflation is the preferred means to finance wars is that its effects are neither uniform nor immediate. The first people to get the newly created money get to buy goods and services at the pre-inflation prices. In the case of war, that’s the government and its selected beneficiaries in the military-industrial complex. The effect on prices in general doesn’t occur until much later, and by that time the government has already bought the guns and tanks and bombs it wanted. It’s the suckers down the line like you and me who find that our money just doesn’t go as far as it used to.
I think this issue is important to understand, particularly for those who come from the left. The so-called Progressives, who often define themselves as being anti-war to varying degrees, would do well to realize that war is only profitable to a few groups who are tied to the government, and even then, it is only profitable to the degree to which those groups can avoid absorbing the costs of war themselves. Inflation allows government to impose the real cost of war on the people indirectly. The cheaper government can make war appear, the more war it can afford. And there’s nothing like a war to increase the scope of government control over a society, so we should always be wary of the government’s incentive to wage war, particularly when combined with an ability to finance it through the central bank’s inflation.
This is why if you really want to constrain the war-making power of the state, you have to constrain the state’s control of the money supply and its ability to inflate. That means opposing the central bank and the fiat monetary system. That’s no small feat, and it requires people to dig into the details of some pretty dry topics like monetary policy.
But beyond the sheer dullness of the whole thing, I think the really sticky part for most people will come from the fact that if we restrict the state’s ability to create money and finance wars, we also restrict the state’s ability to create money to finance other things, like socialized medicine, agricultural and corporate subsidies, bank bailouts, government housing plans, and just about everything else that the federal government has exceeded its constitutional authority to do.
That’s why we libertarians always refer to the “welfare-warfare state” – we understand that these are just two sides of the same coin, and you can’t get rid of one without getting rid of the other. At the risk of over-generalizing, liberals are generally supportive of the welfare state and oppose the warfare state. Conservatives support the warfare state, but object to the welfare state. Since these two areas are really inseparable, the question each camp has to ask is, “What’s it worth?” Are the things they want the government to provide worth accepting the things they hate? Another way of asking this would be, “In order to get rid of the thing you hate, would you be willing to let go of the thing you want?” Personally, I’m more than happy to get rid of both the welfare state and the warfare state, and I think that we would all enjoy a much more peaceful and prosperous society if we did.
And to get back to the original nexus between the war machine and the money machine, this is probably a good moment to remind libertarians to be mindful about how we discuss these economic issues, particularly when talking to people who come more from the left, because there’s always a tendency to mistake the libertarian position on free-market economics with a defense of the status quo. And part of that is a tendency to look at the military-industrial complex as an element of the free market, when in actuality it’s just a form of corporatism or “participatory fascism,” as Robert Higgs describes it.
We always need to clarify that our defense of free-market principles is actually a radical departure from the status quo and a fundamental transformation of the economic system we have today. But the changes we advocate are always in the direction of greater individual liberty, rather than greater state control, which is usually what the left sees as the only alternative to a corporate/fascist system. We should also recognize that many Progressives do have some valid criticisms and we should acknowledge those, while at the same time explaining how their preferred “solution” of more government control will actually exacerbate the very problems that they seek to address, and make everyone materially worse off.
One way to do that is to remind people that without the gun of government behind it, the worst thing a corporation can do is try to sell you something – something that you’re free to refuse if you don’t like it. And no matter what people may think of Wal-Mart, Wal-Mart didn’t kill 100 million people during the last century. Governments did. For that reason alone we should be very skeptical about increasing the role of government in our lives.
