3. The Illusion of the War Boom*

Undoubtedly an increasing number of people begin to consider the war boom as a highly beneficial phenomenon. They see in its mechanism a simple remedy, if not the remedy, for most economic difficulties and especially unemployment. “The war has proved that full employment can be created through government spending. It will be hard to convince the American people that what can be done for war cannot be done for peace.” Such ideas have been expressed not only by laymen but also by men who claim to have been trained in economic science.

Nevertheless, the argument is of a typical vulgar-economic character which means that it is based on popular economic misconceptions rather than on a scientific approach.

It has always been considered the chief duty of economic science to unmask and fight popular economic illusions which appeal to the masses because they are simple and, allegedly, panaceas. To fight the “employment through spending” idea has undoubtedly become increasingly difficult in recent times, although its fallacies have been demonstrated by the practical and theoretical experience of centuries. It is indeed easier, more comfortable and popular, to indulge in new spending schemes and to promise the “compensation” of economic difficulties through government spending than to show the basic reasons for these difficulties and to advocate their elimination. I think that it is high time to replace the “compensation idea” by a sound “correction theory.” For not only will the compensation idea, if applied in practice, lead to implications entirely unforeseen by most of its adherents; it will also prove the more ineffective in any severe crisis the more one has relied on the government power to “compensate” existing maladjustments.

Coming back to what may be called the “war boom in peacetime” idea, it seems to us to contain several basic fallacies or illusions.

WARTIME ACTIVITY CONTRA PEACETIME PRODUCTIVITY

If man works he does so not just to be busy but in order to be able to consume, to live. The worker produces goods which he either consumes himself or—as is the rule in modern times—exchanges for goods produced by others. Activity in wartime is only partially for civilian consumption. The other part—and in some countries at war the overwhelming part—is for war purposes. This purpose can be much more important for the sake of the survival of the community than private consumption is. Nevertheless, in a private economy in which goods are produced because the producer ultimately wants to enjoy the results of his effort, war activity is not and cannot be called a productive activity. From a strictly economic point of view, it means being busy, struggling, making efforts, even if and just when these efforts are very hard. In a rich country such as the United States, where the standard of living is high in spite of war production, these facts are not so easily recognized. But an investigation, for instance, into the German war economy shows what war activity really means in an economic sense: there the population is, on the one hand, forced to work so hard and so long, and is, on the other hand, so curtailed in its consumption that a state of forced labor has developed. For it is forced labor if one squeezes out of the worker as much as he can stand without breaking down completely, without leaving him time for leisure, recreation, and pleasure, and gives him only the minimum of food indispensable for mere existence. War production means that people work not for their own well-being but for collective purposes, even if for very important ones. Thus admiring the war boom and war production actually means admiring production for collective purposes.

Taking such a system over into peacetime and making it the backbone of peacetime economy would mean that the individual would no longer have the right to decide if, what, and how much he wants to consume and how much work he is inclined to put into the satisfaction of his needs. This would mean that a communist instead of a free economy has developed.

WAR WORK IS NOT PAID FOR

A further illusion that leads to admiration of the war boom is created by the fact that everybody earns plenty of money and seems to be well paid. But in fact this is just an illusion. As far as the community works for the war effort and not for civilian consumption, the community as a whole does not receive payment. It is true that payment for war work that is not spent on civilian consumption does not evaporate but piles up in the form of savings in the accounts or in the pockets of the individuals. Nevertheless, for the community as a whole, these savings are nonexistent, so that the work through which they have been made was done for nothing. The reason is very simple. As is well known, Professor Alvin Hansen and his followers state that a governmental debt internally held is no debt at all because every new governmental debt is compensated by a new claim against the government in the hands of the population so that, on the balance, the community has not become poorer. The argument which tries to prove the non-existence of a governmental debt can, however, also be used—and more correctly—to prove the non-existence of claims against the government if these claims are internally held. In fact every new war bond held by a member of the community increases the national debt for which the community is responsible. The work put into the war effort is not paid for. It is done free of charge. Never will the community as a whole receive payment for it.

Thus to recommend that the war boom pattern should be continued in peacetime means advocating a national economy in which a good deal of the work is permanently done without payment. Work without payment is again a characteristic of a communist and not of a free economy.

WARS DO NOT CREATE WEALTH

One of the reasons why people feel so comfortable during a war boom is that everybody seems to become wealthier. However, this increasing wealth, too, is an illusion. Wars do not enhance the wealth of nations; on the contrary they diminish it, at least in those less fortunate countries in which the natural supplies are limited and become exhausted through the war, and in which equipment is seriously run down. Why is it that in contrast to former times, the impoverishing (or at least the not-enriching) effect of the war is overlooked so often nowadays? Formerly, the population contributed to the conduct of the war by providing horses, weapons, etc., and this without compensation, especially when the citizens went to war with their own equipment. Nowadays, every contribution is paid for, and the total amount of all payments—as far as they are not taxed away—remains with the community in the form of government war bonds. The illusion of the enriching power of modern wars is created by the fact that every individual counts his bonded claims against the government as among his assets, while forgetting that as a member of the community he is liable for the government’s debts. Therefore, financing wars by taxation always meets more resistance than financing by loans. The two methods lead to the same result: purchasing power is drawn away from the individual, whose consumption is curtailed in favor of the war effort. This is also why, in the case of financing through loans, it is really the present and not the future which carries the burden of the war. Not the burden, but the question who ultimately has to be taxed for it, is deferred into the future, and everybody thinks it will not be he but the other fellow who will have to pay for what he himself has received. Hence the popular misconception that in the case of the loan it is not the present but the future generation which has to bear the burden of war. Actually, the burden is carried by the present generation, even though it is unaware of the fact.

Again we see that the war boom is nothing desirable in the long run. It means feverish activity that results not in increasing but in stagnating, or even decreasing, wealth.

GOVERNMENT DEBTS, TOO, HAVE TO BE PAID SOME DAY

The illusion of the wealth growing during wartime has one of its roots in another fallacy: that neither interest nor amortization on government bonds ever has to be met through taxation. Some of Keynes’ more radical followers in this country share this illusion. They assume that government obligations can ever again be met by issuing new government bonds. If this were correct, then indeed a large and increasing government debt would mean large and increasing wealth; on the one hand, the community would have billions of new assets for which, on the other hand, nobody would ever be liable.

Experience proves that the perpetually increasing debt is an illusion. No government conscious of its responsibility has ever relied on the alleged ability of the public to absorb any amount of new government bonds. Diminishing the government debt in peacetime in order to be prepared for the increased needs of wartime has always been the aim of government. It has been felt that there is a limit to government borrowing, because at a certain point the public repudiates new loans; then the deficit has to be met by printing paper money, i.e., open inflation. Throughout history this has happened every time a government debt grew beyond the economic capacity of a country—e.g., in the French Revolution with its famous methods of borrowing. A more recent example was Fascist Italy with her methods of financing the war. Although her national economy was under the strictest control, it was (according to a report by Badoglio’s first Minister of Finance) in such a state, even before the Allied invasion, that the public refused to take over further government debts and the government had to resort to open inflation.

Therefore he who advocates perpetuation of the war boom—or rather the methods through which the war boom is financed—through peacetime, stands for a policy which may lead to the destruction of government credit and ultimately to runaway inflation.

WHAT A WAR BOOM REALLY PROVES

Feverish activities during a war boom do not prove that full employment can be created in peacetime for any length of time through governmental spending—at least not if the economy is supposed to remain a private-capitalist one. It simply proves that any amount of activity, limited only by physical possibilities, can be incited under two conditions: (a) that production is carried on for collective purposes and not for the markets, and that the individual is no longer free to decide what and how many goods he wants to consume; (b) that this production is carried on through individuals who (for the reasons explained above) work partially free of charge and who are no longer free to decide whether they want to work under such conditions. It is self-evident that work done by people who cannot refuse production, for people who cannot refuse consumption, can go on without interruption. Here lies the explanation why unemployment does not exist in a communist economy. But an economy which perpetuates this method into peacetime, and makes it the deciding factor for its working, is no longer a private capitalist economy.

There is only one legitimate means of increasing employment in such an economy, namely, by inciting the enlargement of existing and the establishment of new enterprises. This can be achieved by creating conditions under which new investments seem to be profitable.

It may be difficult to create such conditions because of certain maladjustments in important cost factors which have developed in this country. Nevertheless, there is no other way out than to try to remove these maladjustments. Therefore, the endeavor to counterbalance existing maladjustments through government spending—not during short transitory periods, but in the long run—will lead to disappointment. This is elementary. But it seems that elementary things sometimes have to be said.

^* Appeared first in The Commercial and Financial Chronicle, February 17, 1944.