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Does Capitalism Require War?

April 7, 2003D.W. MacKenzie

Tags War and Foreign PolicyCapital and Interest TheoryOther Schools of Thought

Of all the false charges leveled against capitalism, the indictment of promoting or requiring imperialism and warfare is most certainly the least deserved. Given recent events, this proposition has received much undeserved attention, but is by no means new. This claim has a long legacy, tracing back at least to 19th century critics of Political Economy.

J.A. Hobson claimed that capitalism concentrates too much wealth into too few hands. Capitalists employ the smallest number of workers so as to keep wages low. This leads to oversaving and underconsumption in capitalist nations, as the rich can consume only so much. The supposed capitalist solution to this alleged problem is aggressive imperialist expansion. Hobson sought third-way reforms of capitalism as an alternative to perceived capitalist imperialism.

Karl Marx claimed that capitalism keeps wages at a subsistence level with a reserve army of the unemployed. Followers of Marx, like Lenin and Bukharin, claimed the profits of capitalism 'cannot' be invested domestically. Capitalists even conspire to promote war, as a means of reaping grim profits from armaments production.

Earlier last century, J.M. Keynes established greater respectability for the notion that capitalism underemploys workers. His Principle of Effective Demand enamored a generation of economists, and still has a few ardent parishioners. For instance, Paul Krugman claims that the Second World War has had positive effects. WWII spending supposedly got us out of the Great Depression by removing our inhibitions towards public spending. Krugman has also claimed (in the New York Times) that the September 11th attacks might improve economic conditions by stimulating business investment. Krugman seems to believe in a kind of destructive creation where prosperity emerges from devastation.

Perhaps the oddest aspect of these various, but similar, claims is that their proponents appeal so often to historical examples. They often claim that history shows how capitalism is imperialistic and warlike or at least benefits from war. Capitalism supposedly needs a boost from some war spending from time to time, and history shows this. Robert Higgs demonstrated that the wartime prosperity during the Second World War was illusory1. This should come to no surprise to those who lived through the deprivations of wartime rationing. We do not need wars for prosperity, but does capitalism breed war and imperialism anyway?

History is rife with examples of imperialism. The Romans, Alexander, and many others of the ancient world waged imperialistic wars. The Incan Empire and the empire of Ancient China stand as examples of the universal character of imperialism. Who could possibly claim that imperialism grew out of the prosperity of these ancient civilizations? Imperialism precedes modern industrial capitalism by many centuries. Uneven wealth distribution or underconsumption under capitalism obviously did not cause these instances of imperialism. Of course, this fact does not prove that modern capitalism lacks its own imperialistic tendencies.

The notion that income gets underspent or maldistributed lies at the heart of most claims that capitalism either needs or produces imperialistic wars. As J.B. Say argued, supply creates its own demand through payments to factors of production. Demand Side economists Hobson and Keynes argued that there would be too little consumption and too little investment for continuous full employment. We save too much to have peace and prosperity.

The difficulty we face is not in oversaving, but in underestimating the workings of markets and the desires of consumers. Doomsayers have been downplaying consumer demand for ages. As demand side economist J.K. Galbraith claimed, we live in an affluent society, where most private demands have been met. Of course, Hobson made the same claim much earlier. Earlier and stranger still, mercantilists claimed that 'wasteful acts' such as tea drinking, gathering at alehouses, taking snuff, and the wearing of ribbons were unnecessary luxuries that detracted from productive endeavors.

The prognostications of esteemed opponents of capitalism have consistently failed to predict consumer demand. Today, consumers consume at levels that few long ago could have imagined possible. There is no reason to doubt that consumers will continue to press for ever higher levels of consumption. Though it is only a movie, Brewster's Millions illustrates how creative people can be at spending money. People who do actually inherit, win, or earn large sums of money have little trouble spending it. Indeed, wealthy individuals usually have more trouble holding on to their fortunes than in finding ways to spend them. We are never going to run out of ways to spend money.

Many of the complaints about capitalism center on how people save too much. One should remember that there really is no such thing as saving. Consumers defer consumption to the future only. As economist Eugen Böhm-Bawerk demonstrated, people save according to time preference. Savings diverts resources into capital formation. This increases future production. Interest enhanced savings then can purchase these goods as some consumers cease to defer their consumption.

Keynes' claim that animal spirits drive investment has no rational basis. Consumer preferences are the basis for investment. Investors forecast future consumer demand. Interest rates convey knowledge of these demands. The intertemporal coordination of production through capital markets and interest rates is not a simple matter. But Keynes' marginal propensities to save and Hobson's concentration of wealth arguments fail to account for the real determinants of production through time.

Say's Law of Markets holds precisely because people always want a better life for themselves and those close to them. Falling interest rates deter saving and increase investment. Rising interest rates induce saving and deter investment. This simple logic of supply and demand derives from a quite basic notion of self interest. Keynes denied that the world worked this way. Instead, he claimed that bond holders hoard money outside of the banking system, investment periodically collapses from 'the dark forces of time and uncertainty, and consumers save income in a mechanical fashion according to marginal propensities to save. None of these propositions hold up to scrutiny, either deductive or empirical.

Speculators do not hoard cash outside of banks. To do this means a loss of interest on assets. People do move assets from one part of the financial system to another. This does not cause deficient aggregate demand. Most money exists in the banking system, and is always available for lending.

In fact, the advent of e-banking makes such a practice even less sensible. Why hoard cash when you can move money around with your computer? It is common knowledge that people save for homes, education, and other expensive items, not because they have some innate urge to squirrel some portion of their income away. This renders half of the market for credit rational.

Investors do in fact calculate rates of return on investment. This is not a simple matter. Investment entails some speculation. Long term investment projects entail some uncertainty, but investors who want to actually reap profits will estimate the returns on investment using the best available data. Keynes feared that the dark forces of time and uncertainty could scare investors. This possibility, he thought, called for government intervention. However, government intervention (especially warfare) generally serves to increase uncertainty. Private markets have enough uncertainties without throwing politics into the fray. The vagaries of political intervention serve only to darken an already uncertain future. Capital markets are best left to capitalists.

Nor is capital not extracted surplus value. It comes not from exploitation. It is simply a matter of people valuing their future wellbeing. Capitalists will hire workers up to the point where the discounted marginal product of their labor equals the wage rate. To do otherwise would mean a loss of potential profit. Since workers earn the marginal product of labor and capital derives from deferred consumption, Marxist arguments about reserve armies of the unemployed and surplus extraction fail.

It is quite odd to worry about capitalists oversaving when many complain about how the savings rate in the U.S. is too low. Why does the U.S., as the world's 'greatest capitalist/imperialist power', attract so much foreign investment? Many Americans worry about America's international accounts. Fears about foreigners buying up America are unfounded, but not because this does not happen. America does have a relatively low national savings rate. It does attract much foreign investment, precisely because it has relatively secure property rights. Indeed, much of the third world suffers from too little investment. The claims of Marxists, and Hobson, directly contradict the historical record. Sound theory tells us that it should. The Marxist claim that capitalists must find investments overseas fails miserably.

Larry Kudlow has put his own spin on the false connection between capitalism and war. We need the War as shock therapy to get the economy on its feet. Kudlow also endorses massive airline subsidies as a means of restoring economic prosperity.

Kudlow and Krugman both endorse the alleged destructive creation of warfare and terrorism. Kudlow has rechristened the Broken Window fallacy the Broken Window principle. Kudlow claims that may lose money and wealth in one way, but we gain it back many time over when the rebuilding is done. Kudlow and Krugman have quite an affinity for deficits. Krugman sees debt as a sponge to absorb excess saving. Kudlow see debt as a short term nuisance that we can dispel by maximizing growth. One would think that such famous economists would realize that competition does work to achieve the goal of optimum growth based on time preference, but this is not the case.

While these economists have expressed their belief in writing, they could do more. If the destruction of assets leads to increased prosperity, then they should teach this principle by example. Kudlow and Krugman could, for instance, help build the economy by demolishing their own private homes. This would have the immediate effect of stimulating demand for demolition experts, and the longer term affect of stimulating the demand for construction workers. They can create additional wealth by financing the reconstruction of their homes through debt. By borrowing funds, they draw idle resources into use and stimulate financial activity. Of course, they would both initially lose wealth in one way. But if their thinking is sound, they will gain it back many times over as they rebuild.

The truth is that their beliefs are fallacious. Bastiat demonstrated the absurdity of destructive creation in his original explanation of the opportunity costs from repairing broken windows.

Kudlow is quite clear about his intentions. He wants to grow the economy to finance the war. As Kudlow told some students, "The trick here is to grow the economy and let the economic growth raise the revenue for the war effort"2. Kudlow also praises the Reagan Administration for growing the economy to fund national defense. Here Kudlow's attempts to give economic advice cease completely. His argument here is not that capitalism needs a shot in the arm. It is that resources should be redirected towards ends that he sees fit. Kudlow is a war hawk who, obviously, cannot fund this or any war personally. He instead favors using the state to tax others to fund what he wants, but cannot afford. He seems to think that his values matter more than any other's. Why should anyone else agree with this?

Kudlow tarnishes the image of laissez faire economics by parading his faulty reasoning and his claims that his wants should reign supreme as a pro-market stance. Unfortunately, it is sometimes necessary to defend capitalism from alleged advocates of liberty, who employ false dogmas in pursuit of their own militaristic desires.

Capitalism neither requires nor promotes imperialist expansion. Capitalism did not create imperialism or warfare. Warlike societies predate societies with secure private property. The idea that inequity or underspending give rise to militarism lacks any rational basis. Imperialistic tendencies exist due to ethnic and nationalistic bigotries, and the want for power. Prosperity depends upon our ability to prevent destructive acts. The dogma of destructive creation fails as a silver lining to the cloud of warfare. Destructive acts entail real costs that diminish available opportunities.

The idea that we need to find work for idle hands in capitalism at best leads to a kind of Sisyphus economy where unproductive industries garner subsidies from productive people. At worst, it serves as a supporting argument for war. The more recent versions of the false charges against capitalism do nothing to invalidate two simple facts. Capitalism generates prosperity by creating new products. War inflicts poverty by destroying existing wealth. There is no sound reason to think otherwise.

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N. Bukharin and E. Preobrazhensky. The ABC of Communism.

Robert Higgs. 1992. "Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s",  The Journal of Economic History, 52 (1) pp. 41–60.

John A. Hobson. 1902. Imperialism,  James Pott and Co. New York.

Paul Krugman "Stocks and Bombs" New York Times September 13, 2002.

Bombs (already) away Lawrence Kudlow:

Imperialism, the Highest Stage of Capitalism, Lenin, 1916.