Articles of Interest

The Economics of War

[Rothbard wrote this in 1950.]

Whether the American war effort remains “partial” or eventually becomes “total,” methods of mobilization are rapidly becoming our most pressing economic problem. Obviously, mobilization for war inevitably involves hardships for the populace, and lowered standards of living for the duration of the war effort. The public still has a responsibility, however, to choose critically among possible different methods of economic mobilization. Simply because a technique had been adopted in World War II, does not imply that the technique should be followed again. It may have hampered, not furthered, the war effort.

The criteria of choice are two-fold (1) does the proposed method promote the war effort with the maximum efficiency, and (2) does it preserve as much as possible of the liberty of American citizens? The former criterion must be the major one, but the latter should not be neglected in the decision.

The fundamental problem of economic mobilization is to produce sufficient quantities of military supplies for the armed forces, and the production of these supplies at the maximum possible efficiency and speed. Mobilization means that large quantities of resources must be shifted from the peace-time production of consumers’ goods to the production of military goods. Factors of production, machine-tool factories, capital equipment, land, and labor force must be shifted from consumers’ to war industries. The more quickly and the more efficiently this gigantic shift takes place, the better for the nations’ war effort. How, then, to effect this rapid transfer of resources?

The most efficient way is to make the fullest possible use of the free market. If the profit-and-loss signposts of the free market direct businessmen in the shift of production, the process will be incomparably swift and more efficient than a shift clumsily imposed by direct government controls, decreed by a vast, unproductive army of bureaucrats.

Making use of the free market is not a difficult problem. Business production is guided by expected profits, and expected profits depend on the strength of expected demand for the product. Businessmen constantly strive to produce for their market at the lowest possible cost, i.e., the greatest efficiency. If purchasing power is shifted from the consuming public to the government, businessmen will perform the same notable service for the government in its purchases of military equipment. Thus, if the government takes funds from the public, and uses them to place orders for military supplies with businessmen, profits in these war industries increase. Businessmen hasten to abandon the dwindling consumer market and shift production to the war products. Their increased demand in the war industries, accompanied by the lowered demand for factors of production in the consumer goods industries, leads to a rapid shift of these factors — land, labor, and capital — to the war-industries. If the government wishes to step up military production, it takes more of the public funds, places more buying orders as compared to the civilians, and causes a further shift from civilian to military production.

Thus, the government can best promote the war effort — to say nothing of individual liberty — by leaving business and the market as free as possible. The clumsy apparatus of compulsory priorities, allocations, prohibitions, etc., are unnecessary.

The problem, then, is: how best to transfer the requisite purchasing power from the citizens to the government? Different methods of transferring purchasing power will have very different economic effects. The best method is one that restricts civilian spending on consumer goods proportionately with the government acquisition of funds. Thus, if the government obtains $20 billion worth of funds from the public, it is best for the war effort if all those $20 billion come from funds which would have been spent for consumption. Thus, contraction of resources of consumer goods proceeds as rapidly as needed to expand the production of war goods.

The economic effects are highly undesirable if these funds were those that would have been saved and invested in capital goods. Private savings do not conflict with military requirements, as do private expenditures on consumers’ goods; furthermore private savings are highly necessary for production of war goods. As funds shift from consumers to government, private savings flow into the war goods industries. The greater the flow of private savings, the higher the productivity of the war-goods industries, as more and more capital goods are invested in war production. The more savings that flow into investment in the armament industries, the greater the benefit for the war effort. Thus, it is sheer folly for the government to acquire any of their funds from would-be savings that could otherwise flow into the production of military goods, and which in no way compete with government purchases in the market.

In the light of this criterion, what are the best means for the government to acquire funds:

(1) The best method is that of voluntary contributions by the patriotic public. There is no surer way of demonstrating home-front support of the war effort than by voluntary abstinence from consumption, and contributions to the government. This is not to be confused with the purchasing of savings — or other types of government bonds. There is nothing very patriotic about buying a bond, with the assurances that the principal will be returned, and that you will obtain a safe interest income out of the already burdened taxpayers. Moreover, these funds would mainly come out of savings, funds which others would have invested in industry. True patriotism implies contributions to the government without expectation of or desire for the return of interest or principal.

(2) If voluntary sources are not enough, the next best alternative is to reduce the present non-military expenditures of governments, and to use these released funds for war expenditures. Alleged “welfare” spending by government must be cut drastically. Certainly, thoroughgoing pruning could cut our present non-military expenditures by at least $10 billion.

(3) For a large-scale mobilization, it is unlikely that the above two sources will provide enough money for the government. Increased tax revenue must furnish the major source of funds. Here it is necessary to proceed with great care. Taxes are already very high, and great increases in certain types of taxes may have disastrous effects on the economy, and hence on the war effort. Furthermore, different types of taxes have very different effects on the economic system.

The best type of tax for this purpose is one (and about the only one) which the federal government completely neglected in the last war, and in the postwar period. It would provide a vast amount of funds swiftly and easily, and it would have the great advantage of tapping funds from private consumption expenditures. Such a tax is a general federal sales tax at retail on all products sold. It is a tax difficult to evade, and continually in process of collection; a tax that would be a flat percentage on value of sales, and set at whatever amount necessary. For a total war effort, for example, a 20 percent sales tax would be most effective in restricting civilian consumer spending and would probably furnish $30 billion in new taxes.

If further taxes are necessary, the government might effectively use specific excise taxes, to restrict consumer spending of particular commodities needed for war production. Thus, there might be special excise taxes on durable consumer goods, such as automobiles, radios, houses, etc., that use material particularly needed for war goods. Some such excises were imposed during the war, but only to a very limited extent. Moreover, the emphasis was misplaced. There were heavy taxes on luxuries, such as motion pictures, night clubs, jewelry, etc., and none on goods such as clothing, foods, etc. Yet the former luxury spending diverts almost no factors from war uses, whereas a good deal of food, clothing, etc., must be diverted from civilian use for the use of the troops. Therefore, excise taxes would be necessary on food and clothing, but not on night club prices.

These sources should be more than enough to finance any war effort. General sales taxes, in particular, are powerful and beneficial methods to obtain funds. In the last year, however, the government relied mainly on individual and corporate income taxes for increased revenue. Although these taxes are now close to their high wartime level, indications are that new tax revenues will be derived from even further increases in income taxes.

Individual income taxes have proved effective sources of funds, but they present many drawbacks. They can be easily evaded, particularly by self-employed professionals and small businessmen. And, they expropriate funds that would otherwise be saved, as well as those otherwise consumed. The “progressive” nature of our income tax system makes matters worse, by discriminating against the upper brackets who usually save more. Savings should be encouraged to promote the war effort, and, to this end, individual income taxes should be reduced, rather than increased, especially and drastically in the upper income brackets. The difference can easily be made up by taxing consumption, i.e., by sales and excise taxes.

Corporate income and excise taxes, favorite devices in political circles, are even more pernicious in their effects.

Since there is no such thing as a “corporation” which receives, and uses income, these taxes actually fall as discriminatory income taxes on the owners or corporations. This double taxation penalizes efficient corporations, in favor of incorporated firms. It is particularly important for the war effort, to make use of all the superior efficiency of our mighty “big business” corporations. To penalize efficient firms is economic absurdity in any time; in wartime it may be suicide. Corporation income taxes should be completely repealed.

The same argument applies, even more forcefully, against the baleful device of the excess-profits taxes. The profit-loss system is the guidepost that induces businesses to produce for the greatest demand at the lowest cost. An excess-profits tax destroys the profit incentive, and leads to staggering inefficiencies and waste, particularly among the most profitable firms — the very ones whose services are most needed for the war effort. Excess profit taxes lead to waste of resources, businesses no longer have the economic incentive to produce war goods at the lowest cost. During the war, there was much wasteful spending by business on customers (entertainment, etc.) due to the destruction of the profit incentive. In a future war, we are not likely to afford the harmful practices of the last one; we shall need all the productive power our system can furnish. There must be no such economic absurdity as an excess-profits tax.

The above is an outline for a rational, effective economic mobilization. Missing are some of the favorite sore points of the last war. Where is the problem of war-time inflation? Where are the spectacular devices of price-control and rationing, of black markets, and “easy money” that seemed to be inevitable corollaries of war? There is no necessity for any of these troublesome problems or devices.

The inflationary pressure in the last war grew out of the government’s inflationary method of war finance. This involved the creation of new purchasing power through borrowing from the banks.

The government printed new bonds and exchanged them for bank deposits in the banking system, these bank deposits operating as newly created purchasing power. The government took these new funds and placed their orders for war supplies, in competition with the existing funds of consumers. As the new funds found their way into the economy, money incomes of consumers increased still further. Prices rose as money expenditures rose, competing for a scarcer supply of consumer goods. Thus, instead of consumer’s spending being restricted, this inflationary method of finance increased consumer incomes and encouraged their spending. Hence the feeling of easy money, and the heavy pressure for spending.

Under the proposed system of meeting government needs from taxing of consumption, prices would not change to any great extent. The fall of consumer demand would tend to lower prices of consumer goods, but this fall would tend to be balanced by the reduced supply of consumer goods. On the other hand, prices of war goods would initially tend to rise in price under the spur of the increased demand. This price rise would tend to be checked as the war continued, by the increased supply of war goods. In general, prices would not change noticeably.

The inflationary method of finance adopted in the last war, on the other hand, tended continually to raise prices, of consumer goods as well as others, and also tended to raise consumer money incomes. Inflation, as a method of finance, creates many other evils. It discriminates against fixed income groups, against those living on income from savings, etc. This inflationary pressure led government to adopt the whole apparatus of price controls and rationing, that bedeviled the nation during and after the war. Price controls called into being a vast army of bureaucrats and snoopers who were taken away from productive employment. It hampered the effective allocation of resources, crippled the market mechanism, and still further intensified the consumers’ demand by setting prices at an artificially low level. Black markets mushroomed, with their evil effects of deterioration of quality, disrespect for the law, and tax evasion. With prices deprived of their customary free market function of rationing available supply in accordance with consumer demand, the rationing function had to be replaced with the clumsy system of coupons, with the familiar and depressing spectacle of lining up in front of the stores, and with blatant favoritism. Moreover, the government’s clumsy efforts to replace the free market were illustrated by sudden, unexpected shortages in commodity after commodity. Suddenly, cigarettes, nylons, etc., would disappear from the counters.

Not only would there be no inflation under the rational system of war finance, there would be no need for price controls or rationing, there would be no sudden shortages, no favoritism, no “queuing up” before the counter, no black markets, no over-spending of easy money.

Neither would there be any necessity for controls in the labor market. Wages and jobs available would increase in the war goods industries, and decline in the consumer goods industries, thus inducing labor to shift from the latter to the former. No labor draft would be necessary to compel the transfer. Of course, any union resistance to the wage declines in the civilian industries would hamper the needed shift of resources.

Such a rational war economy will not appeal to those who are chiefly concerned with pseudo-moral issues. Such ideas as “no one should profit out of war” or “all should suffer equally in war” are absurd. The object of a war economy is to win the war as rapidly as possible. War is, itself, the supreme immorality, and any regime which hampers its successful and swift conclusion is also immoral. Moreover, it is difficult to understand the moral grandeur of, e.g., the excess-profits tax, which expropriates the efficient tax to the benefit of the inefficient. And what could be more moral than preserving the maximum degree of economic freedom?

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