War is the Health of the… Economy?

Nope, Tyler Cowen is wrong. War is still the health of the state, and the worst sickness that can afflict an economy.


Tyler Cowen recently argued in his New York Times blog that the present stagnation in economic growth may be partially due to the lack of massive wars on the scale of the World Wars and Vietnam.

Before further examining his argument, let us stress what he is not arguing.

He is not arguing that we should therefore want more major wars. His claim is positive, not normative. In fact he ends the article with a good word for the position that it is better to not have massive wars, even at the cost of stagnation. (While this may technically absolve him from holding a pro-war position, he is still providing an argument that is effectively pro-war for anyone who happens to not share Cowen’s professed preference.)

He is also not making a Keynesian argument about war spending boosting the economy by stimulating demand.

Finally, he is not making any kind of argument about the economic benefits of prosecuting such wars, but only of preparing for them. The alleged economic benefit of a massive war comes from the precedent it establishes. The precedent of a past massive war raises the prospect of a future massive war. Cowen argues that such a prospect pressures governments to get basic economic policies “right,” in order to ensure the national economic strength necessary to win such a war. As he puts it, “War brings an urgency that governments otherwise fail to summon.” He partially blames the lack of such urgency for our present economic stagnation, arguing that currently “…nations have very little fear of being taken over militarily, and thus their politicians don’t face extreme penalties for continuing stagnation.”

There are two types of war-induced “right” economic policies that Cowen posits. One is government “investment” in science, technology, and infrastructure. Peter Klein, in the Mises Blog, handily refuted the very notion that this is a worthy goal in the first place. On Facebook, Klein encapsulated, with a dash of humor, his already concise and devastating critique as follows:

Tyler conflates invention and innovation, ignores opportunity costs, confuses selection and treatment effects of government spending, and gets the case studies wrong. Other than that, it was a great column.

The other war-induced “right” economic policy Cowen offers is the general liberalization of the economy. The idea seems to be that governments will liberalize so that the resulting increase in national wealth can later be mobilized in the case of another massive war.

The biggest problem with this argument is that it presupposes that the prevailing ideology among people in the government is such that it is generally accepted that the truly prudential path to increasing national wealth is liberalization. This is an assumption that perhaps has never been true, and certainly has not been true since the fall of 19th century liberalism and the rise of the Progressive Movement: not for the general populace, and especially not for the personnel of the state. Instead, the prevailing ideology, especially in government, is still that “scientific management” of the economy is the path to economic vitality.

Under the actual prevailing ideology that dominates the state, if the “extreme penalties for continuing stagnation” threatened by a prospective massive war were to “focus the attention of government” on anything, it would not be on liberalization, but on “getting serious” about overcoming all remaining obstacles (brutally, if necessary) to its mission of “rationalizing” the economy through planning and regulation, and of centrally “mobilizing” it for war preparedness.

So, Cowen’s incentive/factor analysis is all wrong. And, even if, solely for the sake of argument, we were to take such a false conclusion for granted, it would only have to do with one relevant factor, which is far from the most important one. You can’t have the “beneficial” precedent of a massive war without having the war itself. And Cowen admits that the prosecution of war itself is economically destructive. So, when he blithely characterizes “the persistence and expectation of peace” as being a contributing factor to economic stagnation, he effectively assumes, without argument, that the allegedly growth-boosting effects of the precedent of war outweigh the growth-hampering effects of the war itself.

Cowen versus Higgs

And there are two other major growth-hampering impacts of war that Cowen not only doesn’t factor in, but that he doesn’t even mention: (A) the war-induced increased economic statism that does not directly involve “death and destruction,” and (B) the remainder of that increase that lingers after the war. It is the latter, and not some alleged “focus on liberalization,” that is the chief peacetime legacy of war. The greatest living theorist and historian on this subject is Robert Higgs.

Cowen would have us believe that the “urgency” provided by the threat of war is conducive to liberal reform. However, Higgs, in his work on the “Crisis Hypothesis” showed how “urgency” is actually big government’s best friend. He elucidated and empirically demonstrated with regard to modern America how “national emergencies call forth extensions of governmental control over or outright replacement of the market economy” because they “markedly increase both the demand for and the supply of governmental controls.”

As Higgs showed, this is especially true of that most ancient of national emergencies, war. In his classic book, Crisis and Leviathan, Higgs wrote:

At the outbreak of war a suddenly heightened demand for governmental provision of military activities leads immediately to displacement of market-directed resource allocation, by greater taxation, governmental expenditure, and regulation of the remaining civilian economy.

Cowen would also have us believe that it is more conducive to liberalization and economic growth if the wars we fight are big and involve existential stakes. Again, Higgs would have none of this:

The larger and longer is the war, the greater is the suppression of the market economy. Modern “total” war, widely regarded as jeopardizing the nation’s very survival, also encourages a lowering of the sturdiest barriers—constitutional barriers and adverse public opinion—that normally obstruct the growth of government.

This is a big reason why war, as Randolph Bourne famously said, “is the health of the state.”

And contrary to Cowen’s claim about war’s legacy of peacetime liberalization, Higgs’s work on the “Ratchet Effect” shows how post-crisis/war retrenchments of state power are virtually never complete. And therefore, as each national emergency passes, it leaves behind a legacy of permanent extensions of state power. Following a thorough examination of the relevant data, Higgs concluded Crisis and Leviathan by writing:

After the ideological transformation that took place during the Progressive Era, each genuine crisis has been the occasion for another ratchet toward Bigger Government.

And of course, that includes the major wars. According to Higgs’s exhaustive research, every major American war since at least the Progressive Era, not only has not engendered liberalization, but has ratcheted up the size of the state and its grip on the economy.

Cowen’s thesis about massive war and the economy is simply untenable, in terms of both incentive analysis and empirical analysis.

Case Study: World War I

Probably the most baleful modern war, in terms of its far-reaching consequences, economic and otherwise, was World War I. It is thus an excellent example of just how wrong Cowen is. The ramifications of this war have received much consideration recently, because this is the centennial year of its inception. Charles Burris’s blog post, “Consequences of the Great War,” is a good collection of links to outstanding resources on this topic, including some classic works by Murray Rothbard.

Rothbard’s most concise survey on the subject, however, is quite unheralded; it can be found in the collection of his memos titled Strictly Confidential, and is embedded in a critique he wrote of an American history textbook. Read on to see just how wrong Cowen’s thesis is for this pivotal war especially:

One of the most important truths about American history is the fateful impact that wars have had in aggrandizing the State and crippling individual liberty, not only during but also as a permanent legacy after the war.
World War I gave the United States an enormous push down the road to socialism, toward the Big State. In the first place, World War I was the first war in which the burgeoning crew of left-wing ideologues and experts (many of whom are still around) were called in to “plan” and mobilize the economy for war. No previous wars required “mobilization” of the economy; but in this war the whole crew of economists, industrial planners, sociologists, etc. were ready: price control, labor control, priorities, production planning, etc.—all had their baptism of fire in World War I. (…)
From then on World War I became the great model and inspiration for the later generations of socialists and planners: “if we can do it for war.”…
Further, World War I saw an enormous increase in the government budget and tax rates, especially income-tax rates. (…)
If there was conscription in the Civil War, World War I was the first war where Americans were drafted to fight in “foreign wars”—an act that many constitutional lawyers (see John W. Burgess) insisted was unconstitutional.
As in previous wars, there was an effectively higher “tariff” which was cemented by a high tariff right after the war. The Army and Navy budgets greatly increased. World War I also led to enormous suppression of civil liberties, including the passage of state and federal antisedition laws, and anti-alien laws. Monetarily, the United States went effectively off the gold standard for the duration, thus going on fiat paper, and multiplying inflation.
And, moreover, World War I was the first era in which the federal government acted to sponsor, favor, and even create labor unions. It was also the initiator of federal public housing.

Higgs also extensively discussed the institutional impacts and legacies of World War I, and how they were, contrary to Cowen’s thesis, virtually all in an extremely deliberalizing and economy-harming direction.

The [two years following 1916]… witnessed an enormous and wholly unprecedented intervention of the federal government in the nation’s economic affairs. By the time of the armistice the government had taken over the ocean shipping, railroad, telephone, and telegraph industries; commandeered hundreds of manufacturing plants; entered into massive economic enterprises on its own account in such varied departments as shipbuilding, wheat trading, and building construction; undertaken to lend huge sums to business directly or indirectly and to regulate the private issuance of securities; established official priorities for the use of transportation facilities, food, fuel, and many raw materials; fixed the prices of dozens of important commodities; intervened in hundreds of labor disputes; and conscripted millions of men for service in the armed forces. It had, in short, extensively distorted or wholly dispelled markets, creating what some contemporaries called “war socialism. (…)
The result was “a marked shift toward corporatism in the nation’s business affairs. Entire industries, even entire economic sectors, as in the case of agriculture, were organized and disciplined as never before, and brought into close and regular relations with counterpart congressional committees, cabinet departments, and executive agencies… From the war can be dated the origins of the modern practice of massive informal collusion between the government and organized private enterprise.
Thus, among the war’s most significant legacies was a heightened politicization of the nation’s economic life.

And just as baleful as the institutional legacy of the Great War was its ideological legacy. Higgs continues:

The associationalism of the 1920s intimates the most pregnant of all the war’s legacies: ideological change. (…) “[T]he experience of war planning,” said Soule, “exerted a permanent influence on the thinking of the economists and engineers who participated in it.
But the economists and engineers were not the only ones affected; many others experienced the same change of views. In particular, business men came away from the war with a new perspective on the relation of government and business. According to Clarkson, who circulated actively in the business community, men who had served as authoritative allocators of the resources during the war “meditated with a sort of intellectual contempt on the huge hit-and-miss confusion of peace-time industry… From their meditations arose dreams of an ordered economic world… They beheld the whole trade of the world carefully computed and registered in Washington, requirements noted, American resources on call, the faucets opened or closed according to the circumstances.” Of course they envisioned their own hands on the faucet handles. (…)

The above excerpts do not cover World War I’s long-term baleful impacts on subsequent monetary policy in America (although both Rothbard and Higgs cover that elsewhere; for example, in Rothbard’s America’s Great Depression and A History of Money and Banking in the United States). A fantastic survey of that subtopic can be found in David Stockman’s recent article Sarajevo is the Fulcrum of Modern History. It is often noted how the Federal Reserve helped make America’s entry into, and disastrous exacerbation of, World War I possible. What is less understood is how, in turn, World War I helped create the Federal Reserve as we know it. Stockman redresses this by marvelously explaining how World War I triggered the Fed’s metamorphosis into a fully fledged monetary central planning machine:

“During World War I the US public debt rose from $1.5 billion to $27 billion—an eruption that would have been virtually impossible without wartime amendments which allowed the Fed to own or finance U.S. Treasury debt. These “emergency” amendments—it’s always an emergency in wartime—enabled a fiscal scheme that was ingenious, but turned the Fed’s modus operandi upside down and paved the way for today’s monetary central planning.
As is well known, the Wilson war crusaders conducted massive nationwide campaigns to sell Liberty Bonds to the patriotic masses. What is far less understood is that Uncle Sam’s bond drives were the original case of no savings? No credit? No problem!
What happened was that every national bank in America conducted a land office business advancing loans for virtually 100 percent of the war bond purchase price—with such loans collateralized by Uncle Sam’s guarantee. Accordingly, any patriotic American with enough pulse to sign the loan papers could buy some Liberty Bonds.
And where did the commercial banks obtain the billions they loaned out to patriotic citizens to buy Liberty Bonds? Why the Federal Reserve banks opened their discount loan windows to the now eligible collateral of war bonds.
Additionally, Washington pegged the rates on these loans below the rates on its treasury bonds, thereby providing a no-brainer arbitrage profit to bankers.
Through this backdoor maneuver, the war debt was thus massively monetized. Washington learned that it could unplug the free market interest rate in favor of state administered prices for money, and that credit could be massively expanded without the inconvenience of higher savings out of deferred consumption. Effectively, Washington financed Woodrow Wilson’s crusade with its newly discovered printing press—-turning the innocent “banker’s bank” legislated in 1913 into a dangerously potent new arm of the state.”
It was this wartime transformation of the Fed into an activist central bank that postponed the normal post-war liquidation—-moving the world’s scheduled depression down the road to the 1930s. The Fed’s role in this startling feat is in plain sight in the history books, but its significance has been obfuscated by Keynesian and monetarist doctrinal blinders—that is, the presumption that the state must continuously manage the business cycle and macro-economy.
Having learned during the war that it could arbitrarily peg the price of money, the Fed next discovered it could manage the growth of bank reserves and thereby the expansion of credit and the activity rate of the wider macro-economy. This was accomplished through the conduct of “open market operations” under its new authority to buy and sell government bonds and bills—something which sounds innocuous by today’s lights but was actually the fatal inflection point. It transferred the process of credit creation from the free market to an agency of the state.

One can also find analyses similar to these above of the baleful long-term economic impacts of World War II in the works of Rothbard, Higgs, and others.

Why?

The War Party’s drumbeat for re-escalating American involvement in the Iraq War has just begun. So why, especially now of all times, would Cowen debut, in such a high-profile space, an argument that is so facile and wrong, and yet so potentially dangerous in the hands of warmongers? To give him the benefit of the doubt, he does not strike me as a crypto-warmonger, striving and secretly wishing for a new massive war, even as he exclaims, “perish the thought!”

A more likely explanation is indicated by Cowen’s participation in the fad of “pop economics,” inaugurated by the 2005 bestseller Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven Levitt and Stephen Dubner. A characteristic feature of this fad is the concoction of novel, attention-getting, semi-scandalous, quirky arguments, that are purportedly ironclad in spite of how counter-intuitive they are. Such intellectual curios help burnish the image of pop economists as “rogue” iconoclasts and provide hipness to a profession otherwise generally considered staid and “dismal.” And of course the NPR/New York Times dilettanti go gaga for it. Maybe that’s what this is all about.

Otherwise it is almost unfathomable how someone so widely touted as a preeminent “free market” economist could try so hard to seek out culprits for economic stagnation in such bizarre places, and yet turn such a blind eye to the obviously red-handed state. (When it comes to the state, pop economists tend to be pretty tame for a gallery of “rogues”.) It wouldn’t be original or quirky enough to join the Austrian economists in blaming the gargantuan economic interventions of D.C. and the EU, especially since the post-9/11 wars, the 2008 bailouts, and the inception of QE (it is notable that Cowen’s list of possible stagnation culprits doesn’t even mention the Fed). Better to make a name for himself by whipping up some artful confection about a lack of “technological low-hanging fruit” or this new one about governments getting “scared straight” by the prospect of a massive war.

If the great Austrian economist Eugen von Böhm-Bawerk were still alive, he might have the same compliment and advice for Tyler Cowen as he had for Joseph Schumpeter. As Guido Hülsmann tells it:

Böhm-Bawerk acknowledged Schumpeter’s brilliance but wrote that he wished to see Schumpeter turn to serious work.