War Economy

Note: Footnotes have been omitted from this version. For the original text, please visit the Foundation for Economic Education here.

Democracy is the corollary of the market economy in domestic affairs; peace is its corollary in foreign policy. The market economy means peaceful cooperation and peaceful exchange of goods and services. It cannot persist when wholesale killing is the order of the day.

The incompatibility of war with the market economy and civilization has not been fully recognized because the progressing development of the market economy has altered the original character of war itself. It has gradually turned the total war of ancient times into the soldiers’ war of modern times.

Total war is a horde on the move to fight and to loot. The whole tribe, the whole people moves; no one—not even a woman or a child—remains at home unless he has to fulfill duties there essential for the war. The mobilization is total and the people are always ready to go to war. Everyone is a warrior or serves the warriors. Army and nation, army and state, are identical. No difference is made between combatants and noncombatants. The war aim is to annihilate the entire enemy nation. Total war is not terminated by a peace treaty but by a total victory and a total defeat. The defeated—men, women, children—are exterminated; it means clemency if they are merely reduced to slavery. Only the victorious nation survives.

In the soldiers’ war, on the other hand, the army does the fighting while the citizens who are not in the armed services pursue their normal lives. The citizens pay the costs of warfare; they pay for the maintenance and equipment of the army, but otherwise they remain outside of the war events themselves. It may happen that the war actions raze their houses, devastate their land, and destroy their other property; but this, too, is part of the war costs which they have to bear. It may also happen that they are looted and incidentally killed by the warriors—even by those of their “own” army. But these are events which are not inherent in warfare as such; they hinder rather than help the operations of the army leaders and are not tolerated if those in command have full control over their troops. The warring state which has formed, equipped, and maintained the army considers looting by the soldiers an offense; they were hired to fight, not to loot on their own. The state wants to keep civil life as usual because it wants to preserve the tax-​paying ability of its citizens; conquered territories are regarded as its own domain. The system of the market economy is to be maintained during the war to serve the requirements of warfare.

The evolution which led from the total war to the soldiers’ war should have completely eliminated wars. It was an evolution whose final aim could only be eternal peace between the civilized nations. The liberals of the nineteenth century were fully aware of this fact. They considered war a remnant of a dark age which was doomed, just as were institutions of days gone by—slavery, tyranny, intolerance, superstition. They firmly believed that the future would be blessed by eternal peace.

Things have taken a different course. The development which was to bring the pacification of the world has gone into reverse. This complete reversal cannot be understood as an isolated fact. We witness today the rise of an ideology which consciously negates everything that has come to be considered as culture. The “bourgeois” values are to be revalued. The institutions of the “bourgeoisie” are to be replaced by those of the proletariat. And, in like vein, the “bourgeois” ideal of eternal peace is to be displaced by the glorification of force. The French political thinker Georges Sorel, apostle of trade unions and violence, was the godfather of both Bolshevism and Fascism.

It makes little difference that the nationalists want war between nations and that the Marxists want war between classes, i.e., civil war. What is decisive is the fact that both preach the war of annihilation, total war. It is also important if the various anti-​democratic groups work in cooperation, as at present, or if they happen to be fighting each other. In either event, they are virtually always allied when it comes to attacking Western civilization.

Were we to consider as states the hordes of barbarians who descended upon the Roman Empire from the east, we would have to say that they formed total states. The horde was dominated by the political principle which the Nazis now call the Führer principle. Only the will of Attila or Alaric counted. The individual Huns or Goths had no rights and no sphere of private existence. All men, women, and children were simply units in their ruler’s army or in its supply service; they had to obey unconditionally.

It would be an error to assume that these hordes were socialistically organized. Socialism is a system of social production which is based on public ownership of the means of production. These hordes did not have socialist production. Insofar as they did not live on looting the conquered but had to provide for their needs by their own work, the individual families produced with their own resources and on their own account. The ruler did not concern himself with such matters; the individual men and women were on their own. There was no planning and no socialism. The distribution of loot is not socialism.

Market economy and total war are incompatible. In the soldiers’ war only the soldiers fight; for the great majority war is only a passing suffering of evil, not an active pursuit. While the armies are combating each other, the citizens, farmers, and workers try to carry on their normal activities.

The first step which led from the soldiers’ war back to total war was the introduction of compulsory military service. It gradually did away with the difference between soldiers and citizens. The war was no longer to be only a matter of mercenaries; it was to include everyone who had the necessary physical ability. The slogan “a nation in arms” at first expressed only a program which could not be realized completely for financial reasons. Only part of the able-​bodied male population received military training and were placed in the army services. But once this road is entered upon it is not possible to stop at halfway measures. Eventually the mobilization of the army was bound to absorb even the men indispensable to production at home who had the responsibility of feeding and equipping the combatants. It was found necessary to differentiate between essential and nonessential occupations. The men in occupations essential for supplying the army had to be exempted from induction into the combat troops. For this reason disposition of the available manpower was placed in the hands of the military leaders. Compulsory military service proposes putting everyone in the army who is able-​bodied; only the ailing, the physically unfit, the old, the women, and the children are exempted. But when it is realized that a part of the able-​bodied must be used on the industrial front for work which may be performed by the old and the young, the less fit and the women, then there is no reason to differentiate in compulsory service between the able-​bodied and the physically unfit. Compulsory military service thus leads to compulsory labor service of all citizens who are able to work, male and female. The supreme commander exercises power over the entire nation, he replaces the work of the able-​bodied by the work of less fit draftees, and places as many able-​bodied at the front as he can spare at home without endangering the supplies of the army. The supreme commander then decides what is to be produced and how. He also decides how the products are to be used. Mobilization has become total; the nation and the state have been transformed into an army; war socialism has replaced the market economy.

It is irrelevant in this connection whether or not the former entrepreneurs are given a privileged position in this system of war socialism. They may be called managers and have higher positions in the factories, all of which now serve the army. They may receive larger rations than those who formerly were only clerks or laborers. But they are no longer entrepreneurs. They are shop managers who are being told what and how to produce, where and at what prices to purchase the means of production, and to whom and at what prices to sell the products.

If peace is regarded as a mere truce during which the nation has to arm itself for the coming war, it is necessary in peacetime to put production on a war footing just as much as to prepare and organize the army. It would be illogical then to delay the total mobilization until the outbreak of hostilities. The only difference between war and peace in this respect is that in time of peace a number of men, who during the war will be used in the front line, are still employed on the home front. The transition from peace conditions to war conditions is then merely the moving of those men from the home front into the army.

It is apparent that in the final analysis war and the market economy are incompatible. The market economy could only develop because industrialism had pushed militarism into the background and because it made the total war “degenerate” into the soldiers’ war.

We do not need to discuss the question whether socialism necessarily leads to total war. For the subject matter with which we are here concerned such an analysis is not required. It may suffice to state that the aggressors cannot wage total war without introducing socialism.

Today the world is divided into two camps. The totalitarian hordes are attacking the nations which seek to maintain the market economy and democracy; they are bent on destroying the “decadent” Western civilization, and to replace it by a new order.

It is believed that this aggression forces the attacked to adjust their social system to the requirements of this total war, that is to give up the market economy for socialism, and democracy for dictatorship. Despairingly one group says: “War inevitably leads to socialism and dictatorship. While we are attempting to defend democracy and to repel the attack of the enemy, we ourselves are accepting his economic order and political system.” In the United States this argument is the main support for isolation. The isolationists believe that freedom can only be preserved by nonparticipation in the war.

Exultingly the “progressives” express the same opinion. They welcome the struggle against Hitler because they are convinced that the war must bring socialism. They want American participation in the war to defeat Hitler and to introduce his system in the United States.

Is this necessarily true? Must a nation defending itself against the aggression of totalitarian countries itself become totalitarian? Is a state, which enjoyed democracy and the social system of a market economy, unable to fight a totalitarian and socialist enemy successfully?

It is widely believed that the experience of the present war proves that the socialist production is in a better position to supply arms and other war material than is a market economy. The German army has an enormous superiority in every type of equipment that a fighting army requires. The armies of France and of the British Empire, which had at their disposal the resources of the whole world, entered the conflict poorly armed and equipped and they have been unable to overcome this inferiority. These facts are undeniable, but we have to interpret them correctly.

Even at the time when the Nazis came to power the German Reich was by far better prepared for a new war than the English and French experts assumed. Since 1933 the Reich has concentrated all its efforts on preparation for war. Hitler has transformed the Reich into an armed camp. War production was expanded to the limit. The production of goods for private consumption was cut to the minimum. Hitler openly prepared for a war of annihilation against France and England. The English and the French stood by as if it did not concern them at all.

During those critical years which preceded the outbreak of the second World War, there were in Europe outside of the totalitarian countries only two parties: the anti-​communists and the anti-​fascists. These are not names which were given to them by others or by their opponents; the parties themselves adopted these designations.

The anti-fascists—in England primarily the Labour Party, in France mainly the front populaire—used strong language against the Nazis. But they opposed every improvement in the armament of their own countries; in every proposal to expand the armed forces they suspected fascism. They were relying on the Soviet army, of whose strength, superior equipment, and invincibility they were convinced. What seemed to them necessary was an alliance with the Soviets. In order to win Stalin’s favor, they argued, it was necessary to pursue an internal policy leaning towards Communism.

The anti-communists—the English Conservatives and the French “Right”—saw in Hitler the Siegfried who would destroy the dragon Communism. Consequently, they took a sympathetic view of Nazism. They branded as a “Jewish” lie the assertion that Hitler was planning war to annihilate France and the British Empire and aspiring to a complete domination of Europe.

The result of this policy was that England and France tumbled into the war unprepared. But still it was not too late to make good these omissions. The eight months that elapsed between the outbreak of the war and the German offensive of May 1940 would have sufficed to secure the equipment for the Allied forces which would have enabled them successfully to defend the French eastern frontier. They could have and should have utilized the powers of their industries. That they failed to do so cannot be blamed on capitalism.

One of the most popular anti-​capitalist legends wants us to believe that the machinations of the munitions industry have brought about the resurgence of the war spirit. Modern imperialism and total war supposedly are the results of the war propaganda carried on by writers hired by the munitions makers. The first World War is thought to have started because Krupp, Schneider-​Creuzot, DuPont, and J. P. Morgan wanted big profits. In order to avoid the recurrence of such a catastrophe, it is believed necessary to prevent the munitions industry from making profits.

On the basis of such reasoning the Blum government nationalized the French armament industry When the war broke out and it became imperative to place the productive power of all French plants into the service of the rearmament effort, the French authorities considered it more important to block war profits than to win the war. From September 1939 until June 1940, France in actuality did not fight the war against the Nazis, but in fact it fought a war against war profiteering. In this one respect, they were successful.

In England, too, the government was concerned primarily with preventing war profiteering, rather than with the procurement of the best possible equipment for the armed forces. For example, the 100 percent war profits tax might be cited. Even more disastrous for the Allies was the fact that in the United States, too, steps were taken to block war profits and still stronger measures of this sort were announced. This was the reason why American industry had contributed but a small part of what assistance it might have given to England and France.

The anti-​capitalist says, “This is precisely the point. Business is unpatriotic. The rest of us are told to leave our families and to give up our jobs; we are placed in the army and have to risk our lives. The capitalists, however, demand their profits even in time of war. They ought to be forced to work unselfishly for the country, if we are forced to fight for it.” Such arguments shift the problem into the sphere of ethics. This, however, is not a matter of ethics but of expediency.

Those who detest war on moral grounds because they consider the killing and maiming of people as inhumane, should attempt to replace the ideology, which leads to war, by an ideology which would secure permanent peace. However, if a peaceful nation is attacked and has to defend itself, only one thing counts: the defense must be organized as quickly and as efficiently as possible; the soldiers must be given the best weapons and equipment. This can only be accomplished if the working of the market economy is not interfered with. The munitions industry, which made large profits, equipped and provisioned the armies so well in the past that they were able to win. It was due to the experiences in actual combat in the nineteenth century that the production of armament directly by the governments was largely discontinued. At no other time has the efficiency and productive capacity of the entrepreneurs been proved more effectively than during the first World War. It is only envy and unthinking resentment that cause people to fight against the profits of the entrepreneurs, whose efficiency makes possible the winning of the war.

When the capitalist nations in time of war give up the industrial superiority which their economic system provides them, their power to resist and their chances to win are considerably reduced. That some incidental consequences of warfare are regarded as unjust can readily be understood. The fact that entrepreneurs get rich on armament production is but one of many unsatisfactory and unjust conditions which war creates. But the soldiers risk their lives and health. That they die unknown and without reward in the front line, while the army leaders and staff remain safe and secure to win glory and to further their careers, is “unjust” too. The demand to eliminate war profits is not any more reasonable than the demand that the army leaders, their staff, the surgeons, and the men on the home front should do their work under the privations and dangers to which the fighting soldier is exposed. It is not the war profits of the entrepreneurs that are objectionable. War itself is objectionable!

These views on war profits also disclose many errors about the nature of the market economy. All those enterprises, which in peace-​time already had all the necessary equipment to produce armaments and other war supplies, work from the first day of the war on government orders. But even working at full capacity, these plants can only produce a small part of the war needs. It is a question, therefore, of devoting plants to war production which previously did not produce armaments, and of actually building new factories. Both require considerable new investments. Whether or not these investments will pay, depends not only on the prices realized on the first contracts but also on those contracts fulfilled during the war. Should the war end before these investments can be fully written off out of gross earnings, the owners will not only fail to realize profits, but they will even suffer capital losses. The popular argument in favor of a profitless armaments industry overlooks among other things the fact that the enterprises, which have to embark on production in a field hitherto underdeveloped by them, must obtain the capital needed from banks or in the capital market. They cannot secure it if its intended use raises no expectation of profits but only the risk of losses. How can a conscientious entrepreneur persuade a banker or a capitalist to lend him money if he himself cannot see any prospect of a profitable return on his investment? In the market economy, where the debtor has the responsibility for the repayment of the loan, there is no room for transactions which do not compensate for the risk of loss by the prospect of a gain. It is only the expectation of profit which enables an entrepreneur to promise payment of interest and repayment of principal. By eliminating the hope of profit one makes impossible the functioning of the entire system of entrepreneurship.

What is demanded of industry then is this. Give up the line in which you producers have worked successfully up to now. Do not think of the loss of your regular customers and of the depreciation of your idle equipment. Invest new capital in a line with which you are not familiar. But bear in mind, we shall pay prices which will not make it possible for you to charge off the new investment in a short time. Should you nevertheless make profits, we will tax them away. Besides, we shall publicly expose you as “merchants of death.”

In war, too, there is only the choice between the market economy and socialism. The third alternative, interventionism, is not even possible in war. At the outbreak of the present war it may have been possible to nationalize the whole of industry, but there is no doubt that this would have led to a complete failure. If one did not want to adopt that method, the market economy should have been accepted with all its implications. Had the market method been chosen, the Hitler onslaught would have been stopped on the eastern borders of France. The defeat of France and the destruction of English cities was the first price paid for the interventionist suppression of war profits.

As long as the war was in progress, there should have been no place for a discussion of measures against war profits. After victory was won and a world order established in which new aggression did not have to be feared, there still would have been ample time to confiscate war profits. At any rate, before the war is over and the investments are written off, it is impossible to ascertain whether an enterprise has actually realized war profits or not.