The Reality of War Prosperity

“War prosperity is like the prosperity that an earthquake or a plague brings.” — Ludwig von Mises

Mises’s statement runs counter intuitively to the common opinion held among the popular, and often dominant, Keynesian economic thought and policy. If you were to ask the average American what ended the Great Depression, the response would be essentially uniform across all political parties: World War II. The left will even go so far as to assert that the Great Depression was largely alleviated by President Roosevelt’s New Deal economic policies. The reality of this situation, however, couldn’t be farther from the truth. Contrary to popular belief, war does not contribute to economic growth, but rather decreases net productivity as production shifts from consumer goods to military supplies. In order to understand the truth about so-called “war prosperity,” we must consider the economic lens — school of thought — and the conclusions that are drawn as a result of that lens. Upon closer inspection of the effects of war, it becomes increasingly apparent that the monetary effects which are seen receive most of the attention from economists and the majority of the public while the effect which are unseen go unnoticed and unanalyzed. The goal of this argument is to consider the true cost of war by considering data beyond the conventional measures.

Schools of Economic Thought

Economics is dominated by two schools of economics thought: the Keynesians and the Austrians. These two economic theories are in direct opposition on nearly all topics, including the effect of war on the economy. Keynesianism is characterized by a believing in “aggressive government action to stabilize the economy based on value judgments and on the beliefs that (a) macroeconomic fluctuations significantly reduce economic well-being and (b) the government is knowledgeable and capable enough to improve on the free market.” Paul Krugman, a famous economist and writer exemplifies Keynesianism when he says that World War II, and the enormous amount of government spending that it caused, “has always served as an important positive example for those of us who favor an activist approach to a depressed economy.” It is important to note that Keynesianism is frequently dominant across both political parties (particularly within the Democratic Party) and is, unsurprisingly, reflected in the bulk of our economic policies since the 1930s when it was introduced. The Austrian school, on the other hand, is based on the belief that, “economic analysis is universally applicable and the appropriate unit of analysis is man and his choices. These choices are determined by individual subjective preferences and the margin on which decisions are made.” The choices that individuals make results in “spontaneous” or “emergent” order in the marketplace that is believed to be vastly superior to any artificially engineered economy that a government could create.

The significance of these two schools of thought and the philosophical battle that they are eternally locked in cannot be stressed enough. The growth of a government’s power is directly linked to which economic viewpoint it chooses to adopt: a government can embrace the idea that death and destruction benefit the economy; a government can accept the notion that it can tax itself into prosperity; a government can attempt to act as a mastermind strategist over billions of individual choices; a government can invent increasingly innovative ways to seize private property from some so that it can dispense it to others and call it “stimulus;” a government can claim to be morally superior while simultaneously amassing power with every transgression against civil liberties and property rights; a government can, however, choose the true path to wealth and virtue — it can reject Keynesianism and embrace economic freedom.

That Which is Unseen

The root of the belief that war could possibly cause economic prosperity is directly linked to viewing economic interactions through what is seen instead of what could have occurred. This concept is best illustrated by considering the broken window fallacy. In Frédéric Bastiat’s essay, “The Broken Window,” he tells the story of a shopkeeper whose store window is accidentally broken by his son. The townspeople console the shopkeeper by insisting that “‘It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?’” Based on the townspeople’s observation, one might conjecture that little acts of destruction actually have a silver lining! One might go so far as to say that it is beneficial to destroy property — to go around breaking windows — because it causes money to circulate, thus leading to a general encouragement of industry. This assumption, despite the ostensible benefits, is fundamentally flawed. Only after you’ve taken into account all that the shopkeeper could have bought if the window had not been broken, only after you’ve considered the unseen, can you see the reality of destruction’s economic impact. Frédéric Bastiat puts it simply:

“Now let us consider [the shopkeeper] himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window.
In the second, where we suppose the window not to have been broken, he would have spent six francs on shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window.”

The only conclusion that can be drawn when you consider all potential uses for money, when you consider the unseen as well as the seen, is that war, natural disasters, terrorist attacks — destruction of any kind — has a deleterious effect on the economy. A silver lining simply does not exist.

For a concept that is rather obvious, why do policy makers continually disregard the broken window fallacy? After Paul Krugman discussed the economic benefits of an alien invasion on CNN, leftists were quick to defend him against those who accused him of disregarding the unseen. Robert Murphy explains: “The Keynesians assume that a market economy can get stuck in a “liquidity trap” in which mutually advantageous gains from trade are not occurring.” A Keynesian would claim instances in which a government’s meddling in the money market through artificially lowering interest rates are ineffective indicate that the economy is caught in a “liquidity trap.” Based on this belief, the link between destruction and economic growth can be ascertained. The Austrians assert that in a truly free market all resources would be used efficiently and a “liquidity trap” just doesn’t exist. Another reason why destruction may seem advantageous is that it provides jobs for certain groups. For example, the demolition of a city from a natural disaster increases the demand for construction workers, resulting in greater employment for this group of workers. But what exactly is the point of having a job? People don’t have a job for the sake of having a job — people have jobs so that they are capable of buying other goods and services! Therefore, Murphy is correct in declaring, “Other things equal, we are better off when people have to work less to achieve a given level of wealth or flow of consumption.”

World War II and The Great Depression

It is a truth almost completely acknowledged by everyone that The Great Depression was ended by World War II. It is important, however, to recall that Keynesianism is infinitely more popular than the Austrian school which has long protested this alleged fact. The basis that the war economy, which is characterized by government control of production, can benefit economic growth is toted as a Keynesian triumph. The complexity of the economic situation reveals that the Keynesian assumption is little more than an ongoing myth.

The main evidence used to suggest that the war economy that began with the start of World War II is the increase in GDP and the decrease in unemployment. The issue of unemployment is particularly misleading. If a country was to have the entirety of their unemployed population killed so that unemployment can fall to zero percent, it wouldn’t really be indicative of economic growth. It would be equally ludicrous to assume economic growth if the government was to pay the unemployed to endlessly dig ditches and then fill them up again. While it may seem at first glance that war employment and New Deal programs might have created some value, the true cost for both of these “solutions” should be taken into account. Perhaps the greatest cost of the Great Duration (refers to the Great Depression after 1933 in which the depression was unnecessarily lengthened by harmful policies) was the threat to free markets in the United States. FDR instituted policies that: abandoned the gold standard, broke up some of the strongest banks, placed extremely high taxes on the rich, diverted workers from private employment, increased food prices when millions were starving, pushed affected wages above competitive market levels, and generally subverted property rights. In neither case of either the New Deal or World War II did net productivity increase even as unemployment fell, resulting in no real increase in total economic prosperity. Economic growth can only be considered when real value is added to the economy. When the United States government drafted men for World War II, the result was a decrease in productivity of consumer goods. Economist Henry Hazlitt explains that when soldiers return from war: “…now the taxpayers turn over this part of their funds to them as fellow civilians in return for equivalent goods or services. Total national production, the wealth of everybody, is higher.”

The second issue falls to the way in which we calculate economic growth. Art Carden suggests that there is a critical problem when it comes to considering how the government spending portion of GDP affects the economic data collected at that time:

“A serious problem arises with government spending: How do we assess something not traded in markets? We can assess my computer, my shirt, and my pen because I voluntarily exchanged money for them. How do we assess government purchases? In the national-income accounting they are valued at cost, but at best this only tells us what those resources could have earned in alternative lines of production. The costs don’t indicate the value of what the government has produced.”

Additionally, the true cost of the war is further obscured when you consider the price controls put in place during the war. For example, the cost of maintaining the military with conscripts is greatly underestimated because their wages were artificial — they couldn’t have pursued a higher paying job if available because they were forced to serve; in an unimpeded market, the soldiers could have earned more.

In Robert Higgs’s book, Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity, attention was called to a startling change in gross private investment (GPI). The data presented in the graph showcases a noticeable dip in private investment during World War II and a drastic increase GDP (which is a result of government spending).

Higgs says the following about the data: “Stimulus from the defense buildup increased [private investment] in 1940 and 1941; then wartime controls curtailed it from 1942 through 1945. Only in 1946 and the following years did private investment reach and remain at levels consistent with a prosperous and growing economy.” The lack of private investment suggests that the economy did not fully recover until after World War II — not during it. Financial recovery began when economic conditions finally began to normalize after years of economic uncertainty due to anti-business policies from FDR and the allocation of resources to the development and funding of a major war.

Conclusion

Perhaps the most surprising aspect of the Austrian idea about the economic effects of war is that it is generally unknown and, if it is known, isn’t acted upon. The Keynesian approach regarding war is dominant and will likely continue to be dominant because it results in the concentration of power that would be naturally dispersed within a genuine free market. The massive, ever growing, size of the federal government is a direct reflection of the “military-industrial-congressional-complex” (MICC). With every war we wage, country we inhabit, foreign entanglement we involve ourselves in, we give up a little more of our freedom. The MICC is one of the prime reasons that our government has grown to its current size as powers that are granted during wartime often continue during times of peace. Furthermore, the warping of our mostly capitalistic system to a system that is inundated with cronyism is indicative of society who has let the economic lines blur where they clearly shouldn’t have. The fate of our world lies in recognizing war for what it is: total destruction.


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Bibliography

“Austrian School Of Economics.” : The Concise Encyclopedia of Economics. N.p., n.d. Web. 1 May 2015. <http://www.econlib.org/library/enc/austrianschoolofeconomics.html>

“The Broken-Window Fallacy.” Mises Institute. N.p., n.d. Web. 1 May 2015. <https://mises.org/library/broken-window-fallacy>

“The Great Duration, 1929–41 By Robert Higgs.” The Independent Institute. N.p., n.d. Web. 15 May 2015. <http://www.independent.org/newsroom/article.asp?id=2073>

Hazlitt, Henry. Economics In One Lesson. New York: Arlington House Publishers, 1979. Print.

Higgs, Robert. Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity. Oakland, CA: Independent Institute, 2009. Print.

“Keynesian Economics.” : The Concise Encyclopedia of Economics. N.p., n.d. Web. 1 May 2015. <http://www.econlib.org/library/enc/keynesianeconomics.html>

Mises, Ludwig Von. Nation, State, and Economy: Contributions to the Politics and History of Our Time. New York: New York University Press, 1983. Print.

“Oh! What A Lovely War!” Paul Krugman Oh What A Lovely War Comments. N.p., 2011. Web. 1 May 2015. <http://krugman.blogs.nytimes.com/2011/08/15/oh-what-a-lovely-war/?_r=0>

“That Which Is Seen, and That Which Is Not Seen.” ; by Frederic Bastiat. N.p., n.d. Web. 1 May 2015. <http://bastiat.org/en/twisatwins.html>

“World War II Did Not End The Great Depression.” Mises Institute. N.p., n.d. Web. 1 May 2015. <http://mises.org/library/world-war-ii-did-not-end-great-depression>

Works Conferred

“Archives.” The Goal Is Freedom: Laissez-Faire Anti-Imperialism : Resources : Foundation for Economic Education. N.p., n.d. Web. 15 May 2015. <http://fee.org/library/detail/the-goal-is-freedom-laissez-faire-anti-imperialism>

“Cost Of the Cold War.” Mises Institute. N.p., n.d. Web. 15 May 2015. <http://mises.org/library/cost-cold-war>


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