The Economics of War

It has often been said that war is the health of the State – but the argument could also be made that the reverse is more true: that the State is the health of war. In other words, that war – the greatest of all human evils – is impossible without the State.

The great Austrian economist Ludwig von Mises was once asked what the central defining characteristic of the free market was – i.e. since every economy is more or less a mixture of freedom and State compulsion, what institution truly separated a free market from a controlled economy – and he replied that it was the existence of a stock market. Through a stock market, entrepreneurs can achieve the externalization of risk, or the partial transfer of potential losses from themselves to investors. In the absence of this capacity, business growth is almost impossible.

In other words, when risk is reduced, demand increases. The stagnation of economies in the absence of a stock market is testament to the unwillingness of individuals to take on all the risks of an economic endeavour themselves, even if this were possible. When risk becomes sharable, new possibilities emerge that were not present before – the Industrial Revolution being perhaps the most dramatic example.

Sadly, one of those possibilities – in all its horror, corruption, brutality and genocide – is war. [...] in its capacity to reduce the costs and risks of violence, the State is, in effect, the stock market of war.

[...] We can imagine an unethical window repairman who smashes windows in order to raise demand for his business. This would certainly help his income – and yet we see that this course is almost never pursued in real life in the free market. Why not?

[...]If you want to hire an arsonist to torch the factory of your competitor, you have to become an expert in underworld negotiations. You might pay an arsonist and watch him take off to Hawaii instead of setting the fire. You also face the risk that your arsonist will take your offer to your competitor and ask for more money to not set the fire – or, worse, return the favor and torch your factory! It will certainly cost money to start down the road of vandalism, and there is no guarantee that your investment will pay off in the way you want.

[...]How does this relate to war and the State? Very closely, in fact – but with very opposite effects.

The economics of war are, at bottom, very simple, and contain three major players: those who decide on war, those who profit from war, and those who pay for war. Those who decide on war are the politicians, those who profit from it are those who supply military materials or are paid for military skills, and those who pay for war are the taxpayers. (The first and second groups, of course, overlap.)

In other words, a corporation which profits from supplying arms to the military is paid through a predation on citizens through State taxation – and under no other circumstances could the transaction exist, since the risks associated with destruction outlined above are equal to or greater than any profits that could be made.

Certainly if those who decided on war also paid for it, there would be no such thing as war[...] However, those who decide on war do not pay for it – that unpleasant task is relegated to the taxpayers (both current, in the form of direct taxes and inflation, and future, in the form of national debts).

[...]Those who decide on war and those who profit from war only start wars when there is no real risk of personal destruction. This is a simple historical fact, which can be gleaned from the reality that no nuclear power has ever declared war on another nuclear power. The US gave the USSR money and wheat, and yet invaded Grenada, Haiti and Iraq. (In fact, one of the central reasons it was possible to know in advance that Iraq had no weapons of mass destruction capable of hitting the US was that US leaders were willing to invade it.)

[...]The “risk of retaliation” in economic calculations regarding war should not be taken as a general risk, but rather a specific one – i.e. specific to those who either decide on war or profit from it. For example, Roosevelt knew that blockading Japan in the early 1940s carried a grave risk of retaliation – but only against distant and unknown US personnel in the Pacific, not against his friends and family in Washington. (In fact, the blockading was specifically escalated with the aim of provoking retaliation, in order to bring the US into WWII.)

The power of the State to so fundamentally shift the costs and benefits of violence is one of the most central facts of warfare – and the core reason for its continued existence. [...] if the person who decides to profit through destruction faces the consequences himself, he has almost no economic incentive to do so. However, if he can shift the risks and losses to others – but retain the benefit himself – the economic landscape changes completely! Sadly, it then becomes profitable, say, to tax citizens to pay for 800 US military bases around the world, as long as strangers in New York bear the brunt of the inevitable retaliation. It also becomes profitable to send uneducated youngsters to Iraq to bear the brunt of the insurgency.

[...]Thus the fact that the State externalizes almost all the risks and costs of destruction is a further positive motivation to those who would use the power of State violence for their own ends. Once you throw in endless pro-war propaganda (also called “war-nography”), the emotional benefits of starting and leading wars funded by others can become a definitive positive – which ensures that wars will continue until the State collapses, or the world dies.

[...]If the above is understood, then the hostility of anarchists towards the State should now be at least a little clearer. In the anarchist view, the State is a fundamental moral evil not only because it uses violence to achieve its ends, but also because it is the only social agency capable of making war economically advantageous to those with the power to declare it and profit from it. In other words, it is only through the governmental power of taxation that war can be subsidized to the point where it becomes profitable to certain sections of society. Destruction can only ever be profitable because the costs and risks of violence are shifted to the taxpayers, while the benefits accrue to the few who directly control or influence the State.

This violent distortion of costs, incentives and rewards cannot be controlled or alleviated, since an artificial imbalance of economic incentives will always self-perpetuate and escalate (at least, until the inevitable bankruptcy of the public purse). Or, to put it another way, as long as the State exists, we shall always live with the terror of war. To oppose war is to oppose the State. They can neither be examined in isolation nor opposed separately, since – much more than metaphorically – the State and war are two sides of the same bloody coin.