The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Author’s Preface
• Interventionism
• Introduction
• 1.: The Problem
• 2.: Capitalism Or Market Economy
• 3.: The Socialist Economy
• 4.: The Capitalist State and the Socialist State
• 5.: The Interventionist State
• 6.: The Plea For Moral Reform
• I.: Interference By Restriction
• 1.: The Nature of Restrictive Measures
• 2.: Costs and Benefits of Restrictive Measures
• 3.: The Restrictive Measure As a Privilege
• 4.: Restrictive Measures As Expenditures
• II.: Interference By Price Control
• 1.: The Alternative: Statutory Law Versus Economic Law
• 2.: The Reaction of the Market
• 3.: Minimum Wages and Unemployment
• 4.: The Political Consequences of Unemployment
• III.: Inflation and Credit Expansion
• 1.: Inflation
• 2.: Credit Expansion
• 3.: Foreign Exchange Control
• 4.: The Flight of Capital and the Problem of “hot Money”
• IV.: Confiscation and Subsidies
• 1.: Confiscation
• 2.: The Procurement of Funds For Public Expenditure
• 3.: Unprofitable Public Works and Subsidies
• 4.: “altruistic” Entrepreneurship
• V.: Corporativism and Syndicalism
• 1.: Corporativism
• 2.: Syndicalism
• VI.: War Economy
• 1.: War and the Market Economy
• 2.: Total War and War Socialism
• 3.: Market Economy and National Defense
• VII.: The Economic, Social, and Political Consequences of Interventionism
• 1.: The Economic Consequences
• 2.: Parliamentary Government and Interventionism
• 3.: Freedom and the Economic System
• 4.: The Great Delusion
• 5.: The Source of Hitler’s Success
• VIII.: Conclusions
• Reading References

3.

Market Economy and National Defense

Today the world is divided into two camps. The totalitarian hordes are attacking the nations which seek to maintain the market economy and democracy; they are bent on destroying the “decadent” Western civilization, and to replace it by a new order.

It is believed that this aggression forces the attacked to adjust their social system to the requirements of this total war, that is to give up the market economy for socialism, and democracy for dictatorship. Despairingly one group says: “War inevitably leads to socialism and dictatorship. While we are attempting to defend democracy and to repel the attack of the enemy, we ourselves are accepting his economic order and political system.” In the United States this argument is the main support for isolation. The isolationists believe that freedom can only be preserved by nonparticipation in the war.*

Exultingly the “progressives” express the same opinion. They welcome the struggle against Hitler because they are convinced that the war must bring socialism. They want American participation in the war to defeat Hitler and to introduce his system in the United States.

Is this necessarily true? Must a nation defending itself against the aggression of totalitarian countries itself become totalitarian? Is a state, which enjoyed democracy and the social system of a market economy, unable to fight a totalitarian and socialist enemy successfully?

It is widely believed that the experience of the present war proves that the socialist production is in a better position to supply arms and other war material than is a market economy. The German army has an enormous superiority in every type of equipment that a fighting army requires. The armies of France and of the British Empire, which had at their disposal the resources of the whole world, entered the conflict poorly armed and equipped and they have been unable to overcome this inferiority. These facts are undeniable, but we have to interpret them correctly.

Even at the time when the Nazis came to power the German Reich was by far better prepared for a new war than the English and French experts assumed. Since 1933 the Reich has concentrated all its efforts on preparation for war. Hitler has transformed the Reich into an armed camp. War production was expanded to the limit. The production of goods for private consumption was cut to the minimum. Hitler openly prepared for a war of annihilation against France and England. The English and the French stood by as if it did not concern them at all.

During those critical years which preceded the outbreak of the second World War, there were in Europe outside of the totalitarian countries only two parties: the anti-communists and the anti-fascists. These are not names which were given to them by others or by their opponents; the parties themselves adopted these designations.

The anti-fascists—in England primarily the Labour Party, in France mainly the front populaire—used strong language against the Nazis. But they opposed every improvement in the armament of their own countries; in every proposal to expand the armed forces they suspected fascism. They were relying on the Soviet army, of whose strength, superior equipment, and invincibility they were convinced. What seemed to them necessary was an alliance with the Soviets. In order to win Stalin’s favor, they argued, it was necessary to pursue an internal policy leaning towards Communism.

The anti-communists—the English Conservatives and the French “Right”—saw in Hitler the Siegfried who would destroy the dragon Communism. Consequently, they took a sympathetic view of Nazism. They branded as a “Jewish” lie the assertion that Hitler was planning war to annihilate France and the British Empire and aspiring to a complete domination of Europe.

The result of this policy was that England and France tumbled into the war unprepared. But still it was not too late to make good these omissions. The eight months that elapsed between the outbreak of the war and the German offensive of May 1940 would have sufficed to secure the equipment for the Allied forces which would have enabled them successfully to defend the French eastern frontier. They could have and should have utilized the powers of their industries. That they failed to do so cannot be blamed on capitalism.

One of the most popular anti-capitalist legends wants us to believe that the machinations of the munitions industry have brought about the resurgence of the war spirit. Modern imperialism and total war supposedly are the results of the war propaganda carried on by writers hired by the munitions makers. The first World War is thought to have started because Krupp, Schneider-Creuzot, DuPont, and J. P. Morgan wanted big profits. In order to avoid the recurrence of such a catastrophe, it is believed necessary to prevent the munitions industry from making profits.

On the basis of such reasoning the Blum* government nationalized the French armament industry. When the war broke out and it became imperative to place the productive power of all French plants into the service of the rearmament effort, the French authorities considered it more important to block war profits than to win the war. From September 1939 until June 1940, France in actuality did not fight the war against the Nazis, but in fact it fought a war against war profiteering. In this one respect, they were successful.

In England, too, the government was concerned primarily with preventing war profiteering, rather than with the procurement of the best possible equipment for the armed forces. For example, the 100 percent war profits tax might be cited. Even more disastrous for the Allies was the fact that in the United States, too, steps were taken to block war profits and still stronger measures of this sort were announced. This was the reason why American industry had contributed but a small part of what assistance it might have given to England and France.

The anti-capitalist says, “This is precisely the point. Business is un-patriotic. The rest of us are told to leave our families and to give up our jobs; we are placed in the army and have to risk our lives. The capitalists, however, demand their profits even in time of war. They ought to be forced to work unselfishly for the country, if we are forced to fight for it.” Such arguments shift the problem into the sphere of ethics. This, however, is not a matter of ethics but of expediency.

Those who detest war on moral grounds because they consider the killing and maiming of people as inhumane should attempt to replace the ideology which leads to war by an ideology which would secure permanent peace. However, if a peaceful nation is attacked and has to defend itself, only one thing counts: The defense must be organized as quickly and as efficiently as possible; the soldiers must be given the best weapons and equipment. This can only be accomplished if the working of the market economy is not interfered with. The munitions industry, which made large profits, equipped and provisioned the armies so well in the past that they were able to win. It was due to the experiences in actual combat in the nineteenth century that the production of armament directly by the governments was largely discontinued. At no other time has the efficiency and productive capacity of the entrepreneurs been proved more effectively than during the first World War. It is only envy and unthinking resentment that cause people to fight against the profits of the entrepreneurs, whose efficiency makes possible the winning of the war.

When the capitalist nations in time of war give up the industrial superiority which their economic system provides them, their power to resist and their chances to win are considerably reduced. That some incidental consequences of warfare are regarded as unjust can readily be understood. The fact that entrepreneurs get rich on armament production is but one of many unsatisfactory and unjust conditions which war creates. But the soldiers risk their lives and health. That they die unknown and without reward in the front line, while the army leaders and staff remain safe and secure to win glory and to further their careers, is “unjust” too. The demand to eliminate war profits is not any more reasonable than the demand that the army leaders, their staff, the surgeons, and the men on the home front should do their work under the privations and dangers to which the fighting soldier is exposed. It is not the war profits of the entrepreneurs that are objectionable. War itself is objectionable!

These views on war profits also disclose many errors about the nature of the market economy. All those enterprises, which in peacetime already had all the necessary equipment to produce armaments and other war supplies, work from the first day of the war on government orders. But even working at full capacity, these plants can only produce a small part of the war needs. It is a question, therefore, of devoting plants to war production which previously did not produce armaments, and of actually building new factories. Both require considerable new investments. Whether or not these investments will pay depends not only on the prices realized on the first contracts but also on those contracts fulfilled during the war. Should the war end before these investments can be fully written off out of gross earnings, the owners will not only fail to realize profits, but they will even suffer capital losses. The popular argument in favor of a profitless armaments industry overlooks among other things the fact that the enterprises, which have to embark on production in a field hitherto underdeveloped by them, must obtain the capital needed from banks or in the capital market. They cannot secure it if its intended use raises no expectation of profits but only the risk of losses. How can a conscientious entrepreneur persuade a banker or a capitalist to lend him money if he himself cannot see any prospect of a profitable return on his investment? In the market economy, where the debtor has the responsibility for the repayment of the loan, there is no room for transactions which do not compensate for the risk of loss by the prospect of a gain. It is only the expectation of profit which enables an entrepreneur to promise payment of interest and repayment of principal. By eliminating the hope of profit one makes impossible the functioning of the entire system of entrepreneurship.

What is demanded of industry then is this. Give up the line in which you producers have worked successfully up to now. Do not think of the loss of your regular customers and of the depreciation of your idle equipment. Invest new capital in a line with which you are not familiar. But bear in mind, we shall pay prices which will not make it possible for you to charge off the new investment in a short time. Should you nevertheless make profits, we will tax them away. Besides, we shall publicly expose you as “merchants of death.”

In war, too, there is only the choice between the market economy and socialism. The third alternative, interventionism, is not even possible in war. At the outbreak of the present war it may have been possible to nationalize the whole of industry, but there is no doubt that this would have led to a complete failure. If one did not want to adopt that method, the market economy should have been accepted with all its implications. Had the market method been chosen, the Hitler onslaught would have been stopped on the eastern borders of France. The defeat of France and the destruction of English cities was the first price paid for the interventionist suppression of war profits.

As long as the war was in progress, there should have been no place for a discussion of measures against war profits. After victory was won and a world order established in which new aggression did not have to be feared, there still would have been ample time to confiscate war profits. At any rate, before the war is over and the investments are written off, it is impossible to ascertain whether an enterprise has actually realized war profits or not.

VII.

The Economic, Social, and Political Consequences of Interventionism

[* ][Remember Mises was writing in 1940, before the Japanese attacked Pearl Harbor on December 7, 1941.—Editor]

[* ][Léon Blum (1872–1950), French Socialist statesman who in 1936 brought about a coalition of Radical Socialists, Socialists, and Communists in the Popular Front (front populaire).—Editor]