Economic Theories of Peace and War

Economic Theories of Peace and War War often comes down to one thing: money. The role of economics in both peace and wa...

Author: Fanny Coulomb

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Economic Theories of Peace and War

War often comes down to one thing: money. The role of economics in both peace and war is arguably the most important single factor when it comes to the study of defence. The aim of this book is to provide a critical overview of the history of economic thought on defence, peace and war from its eighteenth-century origins right up to the present day. Important themes covered within the book include: • • • •

the German historical school classical economics and defence studies socialism through war or peace econometric analyses of military expenditures.

This superb book will be of interest not only to those involved in the burgeoning field of defence economics – it will also be of vital interest to students and academics from international relations, defence studies, philosophy and political science backgrounds. Fanny Coulomb is lecturer in Economic Science at the University Pierre Mendès of Grenoble, France.

© 2004 Fanny Coulomb

Studies in defence economics Edited by Keith Hartley and N. Hooper University of York

1

European Armaments Collaboration Policy, problems and prospects R. Matthews

2

Military Production and Innovation in Spain J. Molas-Gallart

3

Defence Science and Technology Adjusting to change R. Coopey, M. Uttley and G. Spiniardi

4

The Economics of Offsets Defence procurement and countertrade S. Martin

5

The Arms Trade, Security and Conflict Edited by P. Levine and R. Smith

6

Economic Theories of Peace and War F. Coulomb

7

From Defense to Development? International perspectives on realizing the peace dividend A. Markusen, S. DiGiovanna and M. Leary


Economic Theories of Peace and War

Fanny Coulomb


First published 2004 by Routledge 2 Park Square, Milton Park, Abingdon, Oxfordshire OX14 4RN Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2004. © 2004 Fanny Coulomb All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-203-49596-9 Master e-book ISBN

ISBN 0-203-57126-6 (Adobe eReader Format) ISBN 0-415-28408-2 (Print Edition)


Contents

List of illustrations Introduction PART 1

The economy, a factor of peace or war: a theoretical dichotomy which appeared with political economy during the eighteenth century 1

National power benefits from the economy The mercantilist movement and the improbable peace The economic bases of national security, according to List The German historical school: for a pragmatic use of the economic and military power instruments in favour of the national interest

2

The economy as a factor of peace The physiocrats or the desirable peace The classical economists: free trade, a factor of peace and prosperity The triumph of economics as a factor of peace

3

The hesitations and internal differences within each economic perspective as a factor of war and peace The inopportune war The avaricious peace: the pessimistic classical school From James Mill to John Stuart Mill: from classicism to the renewal of the liberal economic analysis of international relations


PART 2

War or peace, resultant of an economic system: new economic analyses on defence-related issues since the mid-nineteenth century 4

War and the threat of war at the heart of the functioning of the capitalism system Socialism through war or peace: Utopians’ pacific reforms versus Marx’s revolutionary war Divergences of Marxist theories about the consequences of militarization on the stability of capitalism

5

‘Turbulence’ inherent to capitalism The heterodoxies of the inter-war years: economists confronted with war The economic study of both world wars and their theoretical repercussions The diversity of post-1945 heterodox analyses on defence and war

PART 3

From new debates opened by economics on peace and war factors to a resurgence of the political economy perspective 6

Peace and war factors revealed by economic science The economic analysis of defence strategies Econometric and formalized analyses of military expenditure and disarmament

7

The strategic dimension of political economy and the concept of ‘economic war’ The economic weapon: what efficiency? The concept of economic war: support for a new definition of national security

8

Conclusion Notes Bibliography


Illustrations

Figures I.1 6.1 6.2 8.1

Great phases of dominant debates on war, peace and defence analysis Resource allocation in Nation J Cone of mutual deterrence Simplified comparison of the debates on the warlike or peaceful nature of the economy at the end of the eighteenth century and at the beginning of the twenty-first century

Tables 6.1 6.2 6.3 6.4 6.5 6.6

6.7 6.8 6.9 6.10

The main results of Richardson’s model Some studies based on Richardson’s model Brito and Intriligator’s ‘strategic’ analyses and the point of conflict outbreak Some studies in the theories of alliances Some studies in the economic foundations of arms-race models Examples of studies of the effect of military expenditure on economic growth, concluding on an absence of relation between economic growth and military expenditure Some studies concluding on a negative relation between economic growth and military expenditure Some studies concluding to a positive relation between economic growth and military expenditure Some studies concluding to different impacts of military expenditure on economic growth on each country Some studies of the relation between military expenditure and investment


6.11 7.1 7.2

Study of the relation between military expenditure and employment Positive and negative economic sanctions for David Baldwin The application of economic values as power resources, according to Klaus Knorr


Introduction

There is an extensive literature on the subject of military conflicts, because of their crucial character for humanity, at least because of the induced human and economic losses. Great works have thus been devoted to war and peace issues, notably in literature, philosophy, sociology and politics; in this last field, international relations even became a discipline after the Second World War, with the opposition between Morgenthau’s realist current and Wilson’s idealism. On the other hand, no great work has been published on these issues in the field of economics, except perhaps Guerre et Paix (Peace and War) written by J. Proudhon (1861), but which could just as well be considered as dealing with politics as with economics, or The Economic Consequences of the Peace by J.M. Keynes in 1919, but this deals exclusively with post-war economic policy issues, or a few other works written by less well-known economists of the inter-war period. The economic analysis of international conflicts therefore proves to be weak compared to the numerous studies conducted in other fields, notably in philosophy. However, the study of economic laws has often been integrated into a general theory of economic and strategic interstate relations. Yet, at this level, the economic analysis was much inspired by philosophical theories. Philosophers were the first to link economic issues and conflicts, or to explain international relations which influenced economic thought. In an early conception, defence and power were presented as the superior social objectives, and economy as subordinated. Plato considers that wisdom rather than wealth should be the first aim of the ideal Estate. An important military force must be kept, the class of soldiers coexisting with the ones of producers and philosophers, the latter dominating the social hierarchy. The class of guardians ensures the internal order and also possesses the moral qualities necessary to define a foreign policy in accordance with wisdom. Aristotle defends the moderation of economic needs through virtue and he does not encourage trade; however, the society must be rich enough to ensure its defence. The conduct of a war of aggression can only ruin the guilty State, whose territorial expansion is also, in the long-term, a factor of destruction. Later, Saint Augustine established the bases of what is known today as the theory of the ‘just war’, which tends to legitimate armed conflicts under certain conditions, with regard to © 2004 Fanny Coulomb

their causes and methods. Saint Thomas Aquinas and then the Dutch philosopher Hugo Grotius clarified this theory of the just war. At the beginning of the sixteenth century in Italy, Machiavelli presents war as a decisive factor in public action and he relativizes the importance of the objective of national wealth compared to political stability. The maintenance of a powerful army is essential to guarantee the State’s superiority at the international level. Thus, the maintenance of a powerful army serves the State both at the domestic level (eradication of internal contesting) and the international level (the defence against foreign threats becoming the supreme social aim). Militarization helps to spread the values which reinforce social cohesion and the feeling of belonging to a community. Finally, war also appears as a ‘remedy’ to civil war or internal contesting. However, Machiavelli considers that a peaceful State is, in the absolute, preferable to a warlike state, but is less likely to occur, the wish to dominate being inherent to the State’s nature. In these early conceptions of society, defence is thus perceived as a fundamental need, which guarantees that the ideal Estate works well and economy is considered as a subaltern function. But economy was rehabilitated in the seventeenth century with the adoption of a new philosophical conception of humanity, based on the concept of social contract, in the context of European economic development. Whereas the physiocrat theory outlines a conception of society ruled by harmony among its members’ interests, the political theory evolves towards an anarchical conception of relations between individuals, and therefore between states. In Leviathan (1651), Hobbes considers that man has a warlike nature. The state of war is permanent (because of an insatiable desire, taking different forms and always renewed), even if it doesn’t always develop into an open conflict. Humanity adheres to a social pact because of its instinct of self-preservation, transferring their natural rights to a society ruled by an absolute power, even tyrannical (absolute monarchy), preventing in this way all civil conflict, more dangerous than war. Peace is inevitably artificial; when it lasts, it does not correspond to a state of nature, but on the contrary to a rational calculation, as the most efficient condition of the preservation of human life. Locke, however, states that peace is natural and positive and that man is naturally social. The acknowledgement of the necessity to preserve others as much as oneself derives from human reason, but also from humanity’s natural inclination towards neighbours. War isn’t reasonable, but can, however, temporarily occur, because of the imperfections of human nature, notably ambition and love of oneself. States conquered by force and tyranny do not represent a lasting political community; they can give rise to civil wars. Locke influenced the English philosopher David Hume, but he then went on to reject the concept of social contract. The political institutions ensuring social peace, such as property, result from imagination and habits, i.e. they arise spontaneously, instead of resulting from a voluntary adhesion. They must be adapted to human nature. These reflections directly inspired the liberal economic theories, according to which society is ruled by a natural order, in which the State must not intervene. But Hobbes’ thought dominated the whole political thought until © 2004 Fanny Coulomb

the end of the Second World War, funding the pre-eminent ‘realist’ current in the study of international relations. Karl Von Clausewitz (1818), who was one of its main representatives in the field of the military theory, considers that international relations are fundamentally conflicting, and that peace can only be an interlude. All social situations contain the seeds of hidden conflicts, liable to degenerate into an open war, when the political resources will be exhausted. War also contributes to the disappearance of internal political conflicts. Later, several great philosophical theories considered conflict issues. Emmanuel Kant (1724–1804) developed his analysis in opposition to Hume. Kant resolves the dilemma between the economic materialism and idealism by considering that humanity is free, finding in ourselves the moral law, the categorical imperative guiding our actions. Social institutions (private property, free trade) give rise to a general law harmonizing everyone’s free will. An end, a hidden plan of nature, leads all of humanity. In this way, in the very long term, universal peace should be achieved, after several conflicts. Wars can be morally condemned but they contribute to the progress of societies towards a world federation characterized by a universal and lasting peace. The Kantian theory also strongly participated in the genesis of the German philosopher J.G. Fichte’s thought (1762–1814), who later, like Hegel and Feuerbach, had a great influence on economic thought, and notably on Marxism. However, Fichte adopts a totally idealistic position, in so far as he considers that in the last resort, ideas guide the world. His thinking evolves from the exaltation of the French Revolution towards the defence of the German nation-state, with strong state intervention and a militarization of society. Influenced by Kant and Fichte, Hegel (1770–1831) elaborates a theory of violence, considered as a necessary step in the process of social change and he uses the dialectical method which will also be used by Marx. In the very long term, after a struggle against the existent social institutions, the outcome of the social evolution should be characterized by the settlement of State structures helping each individual to feel freely fulfilled. Revolutions and wars are often necessary steps in this social evolution process, even if one can regret the evils engendered. In opposition to the richness of philosophical analyses on war and peace, orthodox economic science was established on the conviction that the government must withdraw and let individuals act according to their own rationality. Peace should then automatically follow. When political economy became an economic science, it rejected what it did not master, with simplistic hypotheses, such as the non-economic character of wars or their irrationality. Two fundamental hypotheses have been constantly applied by the dominant theory: • •

peace is a normal situation; economic development is the fundamental condition for a lasting peace.

However, dominant theoretical currents have always nourished theories of opposition and of the several heterodox theories developed, most of them have © 2004 Fanny Coulomb

been influenced by philosophies which recognize the role of violence in history and integrate it into their analyses. Moreover, in spite of the very few economic analyses which have been specifically devoted to war and peace issues, all great economists have dealt with them. But their thought on these subjects is generally scattered throughout their works, and requires a detailed reading to be reconstituted. This research should be all the more useful as the economic perspective is essential to enlighten the eventual relations between trade and military conflicts. It at least contributes to the study of the influence of international economic competition on the evolution of international relations. But this raises the question of whether our study should include subjects such as economic war, i.e. the definition of defence and peace. Yet, economic theories do not have the same conceptions of defence, war and peace. For the mercantilists, military and economic conflicts are two interdependent facets of a same reality: the competition between two states on the international scene, to establish their power. On the contrary, for the classical or neo-classical economists, interstate conflicts on economic grounds result from a false comprehension by the ruling class of the real economic interest of their country. Only the military conflict can be legitimated but it is excluded from the economic field of analysis, because the logic of war (the destruction of resources) is opposed to economic prosperity. Later, however, neo-classical theory developed analyses of situations of conflict and of military expenditures, notably owing to the new tools provided by game theory. As for the heterodox economic analyses, they generally agreed on a conception of conflicts directly enlarged to the economic sphere: this point of view was notably shared by List and the German historical school, by the Marxists, even by Keynes and his successors. For these economists, the analysis of economic and trading relations between two states is essential to understand their conflicting or pacific relations. Another difficulty in the delimitation of our subject lies in the fact that the borderline between the state of peace and the state of war is not always clear. During the seventeenth and eighteenth centuries, in a context of confrontations between European nations, periods of peace were rather periods without major conflicts: trade disputes replaced for a time armed conflicts, which permanently threatened international relations. On the contrary, after the Second World War, the international strategic evolution, with the nuclear factor, was characterized by the absence of major conflicts. Nevertheless, the competition between the American and Soviet superpowers led to an arms race, with a mobilization of national resources for the military sector comparable to a traditional state of war. One must then distinguish peace without major conflict from an armed peace. This explains how a broader definition of defence was adopted. In its strict sense, defence represents all the means aiming at ensuring the material integrity of a territory against foreign attacks. In its traditional sense, national security, guaranteed by military power, is ensured when no foreign threat – relating to the risk of losing national independence or the surrender in © 2004 Fanny Coulomb

front of foreign exigencies – is credible, and in the absence of war or of its perspective in the short term. Military means are the most commonly evoked, but several kinds of economic measures are also intended to ensure national defence, such as the control of strategic goods or the use of economic weapons. In some respects, foreign economic policy measures aiming at promoting national interests (trade barriers for example) can also concern defence objectives. A clear distinction between war and peace situations can then become problematic, because of the probability of warlike behaviours. Since the end of the Cold War, the concept of security has been widened, at least for the superpowers, the security of which has increased with nuclear weapons (balance of terror). With the world divided between two spheres of influence, military intervention became justified not only in case of a direct attack, but also to protect ‘allied’ countries or national resources located outside the national territory, such as oil fields. The more the military power of the State is important, the more the notion of security will have a broad sense, because values considered as vital are then enlarged. Some economists even link security issues to problems of international trade competition, since they present national security and economic power as interdependent, whereas other economists consider security as a strictly political issue. This division can be compared to the one existing on the methodological level between two distinct currents. On the one hand, ‘pure’ economic theory presents peace as the normal situation and excludes defence from its analyses. This positivist and scientific analysis is based on the idea that the economic system is ruled by some immutable laws and that modern societies are built on science. Utopian economists are also illustrative of this scientific current, as well as Marx, who agrees on the idea of a historical progress which follows an immanent plan and uses the dialectical method. But this triumph of scientism, which began in the eighteenth century and became particularly dominant during the second half of the nineteenth century, has been contested. The dominant theory was attacked on its non-operational concepts, some of which couldn’t be proved. The progresses of economics, which are based on the deductive method and on beginnings which for the most part date back to the nineteenth century, may not be as evident as the ones of physics, which uses the inductive approach and quantitative methods. Some economists, who contested scientism, based their theories on the observation of economic facts and on economic history (List, the German historical school), therefore dealing with interstate power issues. Others integrated the tools of other fields of work, such as sociology (Veblen), notably to explain war in capitalist economies. This dismissal of scientism also contributed to the development of a more ‘pragmatic’ approach of applied economics with, among other subjects, studies advising governments in the management of war and post-war economies. The history of economic thought should contribute to the presentation of former analyses from the point of view of the economists of the time, in order to show to what extent these analyses foreshadowed contemporaneous developments, and so as to lead to a better understanding of our time. The interest in © 2004 Fanny Coulomb

developing thought on the theoretical foundations of defence economics is thus three-fold, since it relates to the following questions: • • •

how did past economists analyse these issues? on which theoretical foundation are the commonly accepted ideas on military expenditures, defence, war and peace based? what lessons can be drawn from past economic analyses so as to explain the present international economic realities (military and economic conflicts, conditions for the maintenance of peace, desirable level of military expenditures, etc.)?

But the integration of defence and peace issues into economic analysis is often uncertain. A real gap exists between the reality of economic facts and the development of orthodox economic theory which tended to exclude conflict issues from the field of an economic analysis concerned with the sole ideal market laws. The importance of the resources devoted to national defence sometimes led to accusations of it being responsible for tax increases. But it seems difficult to deal with military expenditures by only seeing them from the point of view of the burden they represent, compared to an economy of welfare totally pacified. Several examples can be given of the close relations between economy and the security or defence of a country: •

•

•

• •

the arms race between the United States and the USSR certainly corresponded to strategic considerations, but it also appeared to be an ‘economic war’. This is attested by the collapse of the Soviet Union, bled white for having sustained a continual military effort for over sixty years. defence is often used as an argument to justify governmental economic measures. In this way, everything which concerns national security is excluded from the rules of the World Trade Organization. for certain countries, the arms sector represents an important part of national production, and decisions in this field have a significant impact. Because of its specific organization, the military-industrial complex also exerts a particular influence on national economic structures. military superiority confers an important role in international relations to great arms-producing countries, including in their economic dimension. economic and military aims are sometimes closely interwoven. In this respect, the current development of information technologies interests both the military and civil sectors.

Outline Historically, there first came a break, which opposed mercantilist analyses to classical ones (Part 1). For the former, economy is an instrument of power in the hands of politicians. For the latter, the development of economic interdependencies owing to the market, outside public action, ineluctably leads to © 2004 Fanny Coulomb

Adhesion to liberalism

Criticism or economic reform

Refusal of capitalism

Economy in the service of politics (mercantilists).

Natural economic order (physiocrats).

Economy as a factor of peace (classicals).

State role decreases.

Peace through institution reforms (Utopian economists). State offensive to develop productive forces. List. German historical school.

Capitalism as a factor of war (Marx, Engels).

A-conflictual economy (neoclassicals).

Critic of militarism (Pareto).

War economy management (Keyes, Pigou).

Capitalism, socialism and war. Liberal analysis (Schumpeter).

Models of conflict. Arms race. Game theory.

Models of military expenditures. Econometry.

Militarism and capitalism institutions (Veblen).

Economic interventionism. Link between war and economic crisis. International pacifism (Keynes).

Theory of imperialism (Interimperialist wars).

Militarism and capitalism inefficiencies (Galbraith). Macroeconomic models. Burden of military expenditure.

Neomarxist analyses. Militarism as support of capitalism. Third World exploitation. Economic war.

Neo-mercantilism. Economic war.

Peace dividend.

Figure I.1 Great phases of dominant debates on war, peace and defence analysis.


international peace. While, for the mercantilists, politics dominate economics, for the classical economists, in the long run, the economy leads to a stationary State in which politics tend to be insignificant, the economic system guaranteeing world peace. Pursuing this analysis, the neo-classical economists of the end of the nineteenth century were concerned with the establishment of a pure economic theory, i.e. exclusively centred on the explanation of economic mechanisms, without any political consideration. But all these analyses do not go further than the confirmation of the necessity for the State to withdraw from the economy and to limit its actions of foreign policy. They go no deeper in the economic analysis of international relations. With these two corpuses of doctrine, the support or the contesting of the theme of international peace owing to economic development becomes the main point of view from which economists study international relations (Chapters 1 and 2). But beyond their systemic opposition, these movements nourished internal divergences, based precisely on the interpretation of the relations between economy and politics. In this respect, some liberal aspects appear in later mercantilist works, while some classical authors moderate the optimism as to the long-term evolution of societies. Indeed, the ‘pessimism’ of some classical economists regarding future economic potentialities influences their thinking on defence issues. Finally, List’s theory confirms the separation between two conceptions of economic analysis. It shouldn’t be satisfied with the enunciation of normative principles which are not directly applicable to the contemporary international environment. Political thought and the analysis of economic mechanisms are interdependent (Chapter 3). At the end of the nineteenth century, the debate on the nature of the ideal society which had to be established opened the way to a new economic point of view on international relations (Part 2). The Marxist movement (and before it, the Utopian economists of the nineteenth century) considered that capitalism would inevitably lead to class struggles and be doomed to disappear more or less violently (depending on the efficiency of the proletarian revolutionary actions) (Chapter 4). But in an international context characterized by the worsening of international conflict, the emergence of a socialist system and the economic crisis, economics could not just express the liberal ideals of laissez-faire and laissez-passer. Some heterodox economists, like Keynes or Schumpeter, then tried to develop a political economy interested in the scientific process as well as in the practical considerations of the governments of the time. Economists then went deeper into their analysis of international relations (Chapter 5). Finally, a new development in the economists’ contribution to the analysis of international relations occurred after the Second World War (Part 3). The increased formalization of the discipline opened new perspectives of analysis of the strategic interactions between two adversary states or of their level of military expenditure. But this did not necessarily lead to a better perception of the influence of economic variables on international relations (Chapter 6). On the other hand, with the new debate between the proponents of globalization and those of economic war, some preoccupations dating back to the origins of © 2004 Fanny Coulomb

economic thought reappeared, such as the alternative between liberalism and protectionism, for example. Thus, whereas the economists who assess that ineluctable globalization is a factor of peace defend the development of international economic relations, those who use the concepts of security and national independence reject it. After two centuries of theoretical and scientific constructions denying the role of the interdependencies between politics and economics, we come back today to a debate close to the former break between mercantilism and the classical school. The idea that the economy is an instrument of political power or a factor of peace owing to development is redundant. International relations therefore remain at the core of the alternative between the existence of an economic science and the permanency of a political economy (Chapter 7).


Part 1

The economy, a factor of peace or war A theoretical dichotomy which appeared with political economy during the eighteenth century A first way of presenting the economic analysis of war and peace is to emphasise the existence of two opposite points of view, which both developed before the First World War. •

•

The idea that an economy serves the national power, which closely links political and economic analyses. Several lines of thought developed, notably the mercantilists, F. List or the historical school. They rely on the study of concrete facts, or even on a historical analysis. The idea that an economy generates international peace, through the rise of interdependencies. This point of view is shared by economists who aim to show the validity of free trade and laissez-faire principles. Progressively, this type of economic analysis will stop dealing with political issues such as the international balance of power, war and defence.

This dichotomous presentation isn’t sufficient, however, to grasp all the complexity of these theoretical currents. Indeed, internal divergences on the economic analysis of war exist within each current. They partially show the difficulty in expounding definitive economic principles on issues which don’t exclusively depend on economic factors.


1

National power benefits from the economy

The idea that the economy serves power is present in several analyses, and especially in certain mercantilist texts, in the work of F. List and in the historical school. Their first concern was to give concrete answers to current political problems or to draw lessons from the study of historical facts. These currents give a lot of importance to the issues of defence and war, and thus to national unity, independence and power. Several economic policy principles, which answer political as much as economic objectives, are also developed.

The mercantilist movement and the improbable peace The mercantilist movement developed with modern capitalism, in a context of the political assertion of nations on the international scene and of monarchic centralization. This new doctrine is pragmatic and nationalist. It suggests solutions to increase the level of the national Treasury, by providing the means to lead wars. The theme of war is evident throughout these studies. The interpretation of mercantilist works later gave rise to numerous debates. In fact, the mercantilist analysis raises the essential question of whether the economy is an instrument of power or an end in itself. The rise of mercantilism From the sixteenth to the eighteenth century, the mercantilist doctrine is characterized by its analysis of the State’s role in national economic development. The power of the nation benefits from economic wealth and the nation is associated to the ‘Prince’. Mercantilists share a static conception of international economic relations, which leads them to assert that a country can only progress economically by disadvantaging another country. In this way, they expressed the real theory of economic war. Therefore, the matter of the links between power and national economy is thus central in their argumentation. The development of the mercantilist doctrine occurred during the political formation of the European nations. With the development of the concepts of ‘State’ and ‘natural boundaries’, the sovereigns were confronted with the necessary unification of their political territory, while defending national power with regard to © 2004 Fanny Coulomb

foreign nations. From 1450 to 1750, the mercantilist doctrine developed, while international relations were marked by numerous wars. At the end of the sixteenth century, England overcame the Spanish domination and supplanted Holland during the seventeenth century, before putting a decisive brake on French hegemony at the beginning of the eighteenth century. The development of mercantilist thought coincided with the progressive confirmation of the British Empire’s domination of all international economic relations. Wars were multiplied as states were initiated. Braudel (1979) defines mercantilism as ‘the insistent, selfish, soon vehement, push of the modern State’. By centralizing power, monarchies established juridical and administrative structures on which traders could rely. Conflicts between European powers occurred for commercial reasons. Their main concerns were the control of colonies and conflicts over commercial monopolies. For example, the commercial rivalry between England and Holland was based on fishing zones. Likewise, European powers were in conflict for the domination of distant territories, particularly when these, following the American example, proved to be abundant in precious metals. In this conflictual context, the mercantilist principles aimed at guiding the Prince’s foreign policy. The development of mercantilist thought was catalysed by great discoveries which led the way to an unprecedented development of maritime trade and to a massive inflow in Europe of gold and silver from South America. These economic upheavals altered the medieval relation between the individual and the State. The Renaissance glorified the search for power and wealth and rehabilitated industry and business. The conception of war in a general sense, i.e. involving military but also economic forces, was already evident throughout mercantilist theory. Economy was indeed an instrument of national power. The study of the mercantilist theories is based on doctrinal works (Mun or Bodin) as well as on concrete measures of economic policy (Colbert). Mercantilism does not provide a unique and unchanging thought; its principles noticeably differ according to countries and periods. This heterogeneity explains that differences remain in the interpretation of this theory, particularly with regard to the importance of the links between power and economic development. In spite of its significant influence, mercantilist thought has never became a formally established theory. Its main representatives were businessmen (especially in England), statesmen (especially in France) or professors (Germany). Foreign trade and the advantages of colonization enabled large national companies to grow rich. To be authorized to expand their activities, they first had to solicit a charter. Under these conditions, maintaining good relations with the King and members of government was essential, all the more so as the competition between various national companies was fierce. This explains that this thinking achieved its global theoretical reflection by stating practical rules of economic policy. The emphasis on the concordance between the interests of traders and the sovereign contributed considerably to the doctrine’s development. Willing to satisfy the objective of national power, this doctrine was based on several theoretical © 2004 Fanny Coulomb

explanations of the way the national economy and its foreign trade functioned. In fact, the mercantilist policy did not exclusively benefit traders or financiers. Sometimes, the military and aggressive commercial policies of the States even went against their short-term economic interests. It is, however, necessary to keep in mind that the main purpose of these public actions was to favour the trading classes, especially those controlling domestic trade. We can’t talk of only one mercantilism, but of several ones, because analyses differed from country to country, and from one period to another. Notably, the most important economic powers of the time (France, England and Spain) each adopted a particular conception of the best way to develop national power, giving more or less importance to the colonial policy, the promotion of foreign trade or the development of national industries. Spanish (notably Orthiz, Olivarès and Botero) but also Genoese or Florentine mercantilists insisted on the necessity for the sovereign to accumulate precious metals, considered as the basis of military and economic power. This was the main purpose of the Spanish colonial policy and is called ‘chryshedonism’, i.e. the search for the maximum of satisfaction in owning gold. Regarding economic policy, the Spanish policy is characterized by the ‘bullionism’, i.e. the prohibition of gold outflows and the overestimation of foreign currencies. This policy contributed to the decline of Spanish power, to the benefit of industrial England. Indeed, the gold inflow generated a price increase, disrupting the entire national economy, notably by reducing the competitiveness of Spanish products. French mercantilists gave priority to industrial development, as well as trade expansion which was supposed to guarantee gold inflows, mines of precious metals being monopolized by Portuguese and Spanish. French economic policy consisted of supporting factories, encouraging exports of manufactured goods and prohibiting imports. However, the economic policy was already subtle, refusing exports of products likely to be used as war instruments (particularly weapons) and by carrying out an import-substitution policy (Prebisch, Furtado). Colbert shaped his economic policy in application of these principles. State interventionism was at the heart of economic development, as underlined by Bodin, Montchrestien and Laffemas. However, their points of view varied more than is usually admitted, although they favoured State interventionism and industrialization. The German Cameralists, who taught in universities, training future public administrators, also favoured industrialization, interventionism and protectionism. English mercantilism (Davenant, Mun and Child) was based on national economic development through trade. Individual initiative was recognized and encouraged. Industry and trade expansion were sought, notably by means of low interest rates. Mercantilism acquired a certain theoretical legitimacy in England, notably concerning the advantages to be gained from an active trade balance. It is very difficult to have access to an entire economic literature which developed over three or four centuries, in several countries, in ancient © 2004 Fanny Coulomb

languages often difficult to translate. A discussion based on the specific characteristics of national doctrines is therefore out of the question. This is why our analysis intends: • • •

first to underscore contemporary debates on the interpretation of mercantilist thought; then to underline the importance of the general principle according to which the State’s power is the main objective of economic action; in chapter 3, we shall show that numerous theoretical differences have appeared within the mercantilist thought, regarding war, peace, defence or national power issues.

‘Contemporary’ debates on the power policy recommended by mercantilist doctrines Studies on the history of economic thought mention little about the analysis of mercantilism. Numerous authors consider Adam Smith as the ‘father’ of political economy, without mentioning that the study of mercantilist and physiocratic thought holds an important place in The Wealth of Nations. However, mercantilist thought went through several periods of ‘revival’, notably in Germany in the middle of the nineteenth century or during the systemic arms race of the Cold War. An approach to this doctrine by the contrasting analyses of the German historical school, by Heckscher, Viner, Keynes, Schumpeter or Silberner, of power, war and defence issues turns out to be very interesting. The debates were limited to two main subjects: • •

what is the priority objective of economy, power or wealth? is economic power necessarily a response to an economic situation of conflict?

Power and/or wealth: which priority objective for mercantilists? In his presentation of mercantilism, by way of an introduction to his work on war and peace in economic doctrines, Edmund Silberner (1957) insists on mercantilists’ bellicosity, in opposition to liberals’ pacifism. He comments on several characteristics of mercantilism, notably the search for autarky, the xenophobia and the idealization of war. According to the author, mercantilism was dominated by the war factor and shared an antagonistic conception of international relations, which determines its monetary and commercial ideas, its will to economically and politically dominate other nations, and its rejection of foreigners. Silberner considers that the great majority of mercantilists did not mistake money for wealth. But precious metals played an important part in warfare and in support of defence. However, numerous economists qualified this bellicose interpretation of mercantilism. In his famous book, Mercantilism (the first edition of which was pub© 2004 Fanny Coulomb

lished in 1931), Eli F. Heckscher devoted an entire part to mercantilism as a system of power. For the author, mercantilism was basically aimed at the objective of the State’s power. Jacob Viner (1948) believed this interpretation was excessive. He considered that, for mercantilists, economic progress was a purpose as important as the promotion of a strong or dominant State. Moreover, he noticed that, often very critical of the governments economic policies of the time and little interested in general welfare, mercantilists were above all concerned with the defence of their own advantages. In answer to these criticisms, Heckscher (1955) admitted that economic and political objectives were strongly interdependent in mercantilist thought. If the State’s power is an important economic factor, it cannot, in the long term, disregard neglect of citizens’ welfare without being contested. But power also benefits from wealth as stocks of resources are at the Prince’s disposal for him to satisfy his political objectives. Therefore, there is no basic disagreement in the analyses of mercantilism by these two authors. This interpretation found a broad echo among contemporary economic literature, which insists on the fact that politics and economy are inextricably connected in ‘mercantilist’ texts. Thus, for Albert O. Hirschman (1945), policies recommended by mercantilists aimed at a double objective: the country’s enrichment and the increase of its power. The balance of trade theory made wealth increase and the search for a national power increase by disadvantaging rival states compatible (see also, more recently, the work of Lars Magnusson (1994) on this question). The policy of power as an answer to a political and economic situation of conflict Subject to repeated attacks by classical and neo-classical economists, mercantilism fell into disgrace at the end of the eighteenth century. But the protectionism rebirth in Europe and the 1870 war revived the economists’ interest for this thinking. Mercantilists were then presented as defenders of ‘realistic’ measures, in the economic and political context of the time. The conviction that ensuring the State’s power was the objective of the mercantilist economic policy was expressed by William Cunningham (1892), the main figure of the historical school in England. In Germany, Gustav Schmoller (1857) wrote a short book on the ‘historical meaning’ of the mercantilist system. Mercantilism is presented as a response to a historical necessity, deriving from the States’ wish to assert themselves with regard to foreign nations, but also to strengthen their authority at the national level, through a policy of power and warfare. This was the first expression of economic nationalism. The economic crisis in the 1920s and 1930s coincided with a strong protectionist revival, in a political context marked by international tensions. John Maynard Keynes, in General Theory (1936), used his defence of mercantilism (against the attacks of ‘classical’ economists) to confirm his conviction that an unsuitable international monetary system contains the germs of international conflict by making the various national interests antagonistic. As stated by the © 2004 Fanny Coulomb

author, the mercantilists’ bellicosity was mainly a realistic answer to the monetary problems of the time. They realized the organization of international monetary relations led to economic war. In the fixed gold standard international system, the balance of payments is a decisive factor for the money stock and the interest rate, and thus for the national economic health. It is therefore necessary to promote national exports to attract the maximum of precious metals, at the expense of other nations. In this context, the preservation of international peace seems highly improbable because the international monetary system prevents the realization of full employment in all nations. In his History of Economic Analysis, Joseph A. Schumpeter (1954) also defended mercantilists against those who accused them of having supported irrational and contradictory economic policy measures. According to the author, mercantilist policies were, on the contrary, based on a strong practical argument. The policies based on the public monopoly of exports and on the control of imports and exchange rates (embargo on precious metals) are rationally explained by the situation of conflict and the international tensions of the time. As stated by Schumpeter, mercantilists were not theorists, but rather interpreters of the popular common sense, in a political context of international confrontation. Besides, most mercantilist authors belonged to business circles, which directly benefited from aggressive foreign policy. They put forward the arguments of the King’s wealth and of England’s security to hide their (real) imperialist motives. For John K. Galbraith (1987), according to the mercantilist doctrine, economy is subordinated to political objectives and is of benefit to national power. But, gradually, there was an evolution in the identification of the power’s economic bases, modifying or substantially qualifying the too abrupt analysis of the mercantilists’ bellicosity. We shall try to bring this evolution to the fore in Chapter 3. The general principle of the Prince’s power as a cause of economic action Whereas English classical economists will later aim at economic development through the expansion of peaceful trading relations, mercantilists have underscored the power and the domination relations of a nation through economic weakening, or even military conquest of neighbouring countries. Above all, economic development was of benefit to military power, by providing the means to ensure the State’s defence and by financing military expeditions abroad. Politics benefited from trade. The precious metals trade surplus: a factor of power Mercantilism was characterized by a few main principles, which justified economic and military conflicts between European states, as well as colonial conquests. The trade surplus enables the constitution of a treasure (or of public © 2004 Fanny Coulomb

savings) likely to protect national wealth. Mercantilists then developed the balance of trade surplus theory. In the sixteenth century, while the economy had gradually monetized, insufficient credits explain the importance given to the accumulation of precious metals. But, above all, the State was newly in charge of permanent mercenary armies, and the changes in military techniques had created substantial financial needs that only the constitution of an important war chest could meet. Antoine de Montchrestien (1615) pursued the idea stemming from Antiquity that money is the ‘sinews of war’. Many other authors, notably Jean-Baptiste Colbert in France and John Locke in England, also shared the view that the power of a State depends on the importance of its Treasury. The dominant idea was that the power of a State was determined by its capacity to have sufficient monetary resources available at any time to achieve its foreign policy, in particular to finance its wars (this point of view was illustrated by John Hales (1581) for example). Thus, there is an immediate relation between supply and demand, in the sense that the money disposal (of which neutrality is an underlying hypothesis) leads directly to the ownership of desired goods. Therefore, the existence of a war chest composed of precious metals or the concrete availability of weapons in case of conflict are assumed to be two equivalent situations. This analysis contains the premises of ‘Say’s law’. However, the role played by the precious metals stock in war success was later minimized. English mercantilists in particular insisted on the importance of manufactured goods exports and of the national production of goods necessary for warfare. The mercantilist argumentation was based on the ‘balance of trade’ theory which was first expressed, as far back as 1616, by Francis Bacon (1625): the development of trade is of benefit to the country if it generates an excess of exports over imports, the trade balance returning to the nation as money. As stated by Charles Davenant (1696), the Prince’s interest implied an aggressive commercial policy, because precious metals reserves could only be acquired through trade. However, conflicts between private interests and public interest could occur. Although they favoured the development of English exports, most mercantilists were opponents of currency exports, therefore hindering trade development. Some of them, like Milles (Spiegel 1971: 100), did not hesitate to prescribe the control of foreign trade, in the medieval tradition of ‘bullionism’. We notice the concept of treasure explains both budget surplus and trade surplus, as if they had to go together and as if the Prince could take possession of the trade surplus. In fact, mercantilists considered that only production leading to an export surplus was really productive and could create wealth. According to Simon Clément (1695: 371), trade within the national territory does not create wealth, but only represent transfers from one person to another (the profit of one making up for the loss of the other). In this way, the production devoted to exports and the traders’ role were glorified. Mercantilists therefore favoured import limitations and encouraged exports. © 2004 Fanny Coulomb

According to certain mercantilists, currency was necessary to the circulation of goods and to economic activities;1 others considered that it represented a liquid capital, which allowed an increase in exports and eventually in stocks (Magnusson 1994: 162–165). This interpretation explains why they favoured both the balance of trade theory and the quantitative theory of money. As early as 1568, Bodin expressed, in answer to Malestroit, the quantitative theory of money, according to which a currency’s value, whatever its nature, is inversely proportional to its quantity. It did not prevent mercantilists from spreading the idea that a nation’s wealth is proportional to its precious metals stock. Bodin himself did not abandon the chryshedonist point of view. Indeed, he considered that gold and silver represented the real wealth of a country and having them in abundance was an advantage which widely compensated for the inconvenience of the price increase following the precious metals inflow, notably by provoking a decline in interest rates favourable to the development of economic activities. Moreover, Bodin’s analysis is not contradictory, in the context of an international monetary system based on the gold standard. Because of public export and import restraints, the quantitative theory only applied to the restrictive case of the non-intervention of the government in economic activities. The question of economic self-sufficiency Can the search for self-sufficiency be considered as a mercantilist principle? Answers differ according to periods and countries. French mercantilists were proponents of a progressive autarkic economic organization. They expressed a profound mistrust with regard to foreign nations and more generally regarding trade activities. This point of view was totally incompatible with that of the English mercantilists, who insisted more and more on the beneficial effects which a nation could gain from foreign trade (see Chapter 3). The economic policies of European states during the fourteenth century were characterized, in Heckscher’s words, by their ‘policy of provision’. This method was introduced in the thirteenth century and culminated in the fourteenth century (and continued until the end of the eighteenth century for manufactured goods) (Heckscher 1955: 91). The purpose was to stop exports of certain goods, especially food, but also military goods. A part of these export prohibitions were applied to trade relations with the enemy, and to ‘strategic’ goods (armaments or other goods useful to national defence). But this ‘policy of provision’ was not only concerned with strategic considerations. Indeed, the mother country still depended on its trade with the colonies, which were difficult to secure. Besides, the need to prepare for an embargo enforced by the enemy was almost never mentioned to justify this policy, which was at first primarily based on the scarcity of goods. Colonial conquests used this logic by giving access to complementary products, different from those produced in the mother country. Heckscher (1955: 131) makes a necessary distinction between the mercantilist policy, which recommended autarky, and the mercantilist doctrine, which recommended the expansion of exports and the limitation of imports. The wish © 2004 Fanny Coulomb

to ensure national independence only resulted from a misunderstanding of the fact that these exports necessarily created links between the national economy and foreign economies, forcing the country to import certain goods. Thus, the search for economic self-sufficiency cannot be considered as a main characteristic of the mercantilist doctrine in England. Besides, we must keep in mind that English mercantilists generally favoured the arrival of immigrant workers on national soil, since the population, and thus the capacity of national enrichment, grew subsequently. On the other hand, the economic self-sufficiency principle was crucial in the works of two important French mercantilist authors: Laffemas and Montchrestien, whose work much influenced Colbert. For Barthélemy Laffemas (1598), the ‘traffic and trade’ of foreigners on national soil brought about the ruin of France. Furthermore, imports made by national traders were also harmful, because they generated an outflow (and thus a loss) of precious metals. The country had to base its economic development on national production rather than on trade openness. Antoine de Montchrestien (1615), who was the first to use the term ‘political economy’, also supported self-sufficiency. His Treaty of political economy was marked by a strong nationalism and by a virulent attack against foreigners, in particular traders, accused of being responsible for all the disorders from which France suffered. In this way, the mercantilist doctrine was also characterized by the exacerbation of xenophobic feelings.2 The recommended solution was to limit the rights of foreign traders and progressively search for self-sufficiency, as the goods produced in France ought to be primarily used for national consumption. Montchrestien advocated the growth of factories and the implementation of rights on exports as well as on imports. But he was not concerned with providing the abundance of goods within the kingdom, nor was he interested in encouraging prodigality and luxury expenditures, dangerous for ‘the greatness of France’. Regarding foreign policy, the search for autarky is coupled with the wish to expand colonial conquests, but without open trading ambitions. French mercantilist theory was fundamentally bellicose. Its theorists exalted war, which helped to maintain unity and national virtue and supply public funds. In this way, they justified the war of aggression. The promotion of economic war According to the mercantilist doctrine, all means are good to ensure the national economic and political domination. Its development was accompanied by the exacerbation of nationalist feelings and the wish to weaken foreign countries, even if it penalized national prosperity. Mercantilists considered that the possession of a money stock superior to that of other States was a fundamental economic objective. In this way, they supported the numerous commercial wars of the time, because of a lack of natural harmony among national interests. Francis Bacon (1625) associated the balance of trade with ‘the balance of greatness’ or of power. According to him, © 2004 Fanny Coulomb

the English policy should aim at developing both the nation’s power and trade. The increase of England’s power and Treasury disadvantaged rival countries. The rule according to which ‘one only wins what the other one loses’ (‘zero-sum game’ principle) justified the State in directing its foreign trade policy towards a real economic war. As stated by Josiah Child (1681: 30), a State’s power and wealth are only relative. Trading relations allowing both countries to grow rich were only desirable if they improved the power of the nation compared to that of its trading partners. The core of the mercantilist doctrine relies on a static conception of economy, i.e. on the idea according to which world economic resources are fixed. Montaigne, Montchrestien, Bacon and Colbert were the main representatives of this conception. At the economic policy level, the main effects of the mercantilist doctrine were the implementation of numerous import restrictions, the encouragement of exports and several measures leading to continual commercial wars between European states. Mercantilists unanimously defended legislative or military measures aiming at increasing foreign trade. In this way, they supported the Acts of navigation, the control of commercial roads to promote manufactured goods exports, as well as trade between the metropolis and the colonies. However, mercantilists works often (strongly) disapproved of wars. Thus, wars entailing a gold outflow (because of the expenditures required to maintain armies in distant countries) were criticized (Clément 1695: 371). This negative effect does not appear for wars fought at the realm’s borders or at sea (Mun 1664: 99). Furthermore, some of the wars led by monarchs are unfair; they don’t aim at the ‘necessary defence of their own rights’, but respond to ‘the pride and the greed to add realms to the realm’ (Mun 1664: 128). As for John Locke, wars of conquest are expensive and create an ‘increase of the needs’, an ‘increase of the Luxury and the Vanity of the People’; business must be preferred to wars (1691: 63). Therefore, there are ‘right’ or ‘opportune’ wars (based on the Prince’s power) and inequitable wars (based on destruction and robberies). Besides, we discern the first stages of an analysis in terms of costadvantages. In spite of this hesitation about certain military conflicts, mercantilists remain convinced that trade expansion depends on the support of a strong military force which is beneficial to defence, deterrence and offensive, according to trade policy needs. This doesn’t mean mercantilist authors are necessarily interested in ensuring or optimizing the populations’ welfare. The objective of the State’s power and wealth prevails over individual well-being, which can be sacrificed to the public cause. Thomas Mun (1664: 135) considers that the more a nation suffers from scarcity, the more it will be ‘wise and industrious’. Abundance shouldn’t prevail in the realm, because it corrupts the population’s capacities of obedience and sacrifice. Similarly, Josiah Child (1668: 20) suggests the creation of legislation to prevent the population from idleness. ‘Human capital’ was an underlying concept of this thinking: John Hales (1581) considers that the population’s training (which should develop its courage, fighting spirit and education) must be carefully maintained, because of its beneficial effects on the © 2004 Fanny Coulomb

Prince’s power policy. As stated by Charles Davenant (1696: 230), the population’s prosperity would be better ensured by the limitation of England’s foreign trade, but such trade is necessary to preserve the State’s power. Jean Bodin developed the idea according to which war against foreign enemies had beneficial effects on national peace. Antoine de Montchrestien pursued the same idea, but added that the same results could be achieved through the rise of the subjects’ living standards. The French, unlike the English mercantilist authors, did not attempt to develop a ‘science of trade’, notably because non-orthodox economic views were subject to an austere censorship, all the more effective as most French mercantilist authors were statesmen. Jean-Baptist Colbert, superintendent of financial institutions, then general controller of Louis XIV, implemented the French mercantilist principles, giving rise to a whole set of precepts now named ‘colbertisme’ in France. By expressing these precepts, Colbert was primarily concerned with the need to provide the financial means required for Louis XIV’s numerous wars and to thwart the Dutch commercial expansion (owing to the French trading companies), which he interpreted as the sign of a political will to dominate Europe. With regard to foreign trade, Colbert’s policy consisted in forbidding raw materials exports, promoting manufactured goods exports, as well as prohibiting imports. However, he emphasized especially international industrial competition and the need to develop French industries, owing to an ‘educative protectionism’. Colbert considered that the State had to use the instruments of investments, of the granting of privileges or of the creation of public factories. The national economy’s construction entails the easing of restrictions on domestic trade, notably through the abolition of tolls (Edict of 1664) and the development of communications. According to Colbert, national ‘laissez-faire’ increases wealth, as well as exports, by mobilizing the ‘productive force’. As early as 1576, Jean Bodin, in his work, The Republic expressed similar ideas. These measures enabled France to become one of the leading world economic and military powers. Beside the promotion of exports, the population policy was another mainstay of the mercantilist analysis. It was a matter of providing the means to implement the foreign policy. The more the State was populated, the more it was considered as powerful.3 In France, Jean Bodin exalted the advantages that a country gained from an abundant population, namely wealth and power. In this way, he expressed the famous proverb: ‘Il n’est de richesse ni force que d’hommes’ (‘There is no wealth nor strength but men’). In the same way, a high birth rate was of benefit to the interests of traders and manufacturers, who needed a labour force to take part in the national economic development. John Hales (1581) searched for the means to develop industry so as to maintain a constant population level, and thus maintain the army’s strength, while the policy of ‘enclosures’ had created a massive movement of rural exodus. He thus suggested the development of England’s foreign trade. © 2004 Fanny Coulomb

However, in this field, mercantilism can’t be reduced to a ‘fanatical nationalism’. Botéro, for example, sets forth the principle of appropriateness between population increase and available subsistence goods. Some mercantilist works mention precepts which fall within a ‘strategy of impoverishment’, with the refusal to implement an embargo on the exports of national products with the enemy, even during wartime. On the contrary, the subsequent gold outflows should contribute to weaken the enemy and increase its economic dependence. Therefore, the development of trading relations could contribute to the increase of one country’s power compared to another. John Cary writes in 1695 about France, at war with England at the time: I wish he were better furnish’d with our Product and Manufactures, and we had his Money for them, which would much more weaken him, than the other would enable him to carry on the War. (Quoted in Heckscher 1955: 99) Mercantilist writings also mention a first expression of the concept of an arms race. The anonymous author4 of the text Britannia Languens considers that the sovereign of a rich country will achieve his military aims faster by arming himself rapidly (forcing the country he wants to defeat to do the same), than by coming into open conflict with his enemy. The opponent being poorer, its resources would very quickly run out, increasing its vulnerability (Silberner 1957: 30). Here are expressed the main hypotheses of Richardson’s arms race model, but also the broad lines of the strategic policies implemented during the Cold War by the Soviet Union and for the ‘Strategic Defense Initiative’ by Reagan. Finally, traders could be employed as intelligence agents, by providing the nation with precious information on the enemy’s economy and resources, which could not have been obtained by military means. This idea was notably developed by Lewes Roberts (1641: 262). In this way, mercantilists shared a real conception of ‘economic war’, very close to our modern analyses of commercial wars, of the economic weapon and of industrial intelligence. The modernity of these analyses is remarkable. Conclusion Mercantilists established a direct link between economic development and the confirmation of national power. From this time onwards, economic reasons justified war. They believed international economic relations were marked by economic and military competition for the conquest of markets and resources. The nation’s power was relative, and government had to improve the national position in the hierarchy of powers. Therefore, the State had to intervene on the international scene to promote national interests. At the national level, it could undertake actions in favour of the development of export industries. These mercantilist principles opened the way to the modern concepts of protec© 2004 Fanny Coulomb

tionism and economic war. In fact, by justifying aggressive trade and military conquest policies, it opened a debate on the opportunity of trade interventionism which still exists today.

The economic bases of national security, according to List Friedrich List, German economist (1789–1846), inspired the German customs union (Zollverein). His most important book, The National System of Political Economy (1841), appealed for national unity and for the implementation of a common trade and customs policy in Germany, but also in all countries wishing to develop their industry, to face the domination of leading economic powers, mainly Great Britain, over international trade. He pursued the traditional practical teaching of economy in Prussia and inspired the German historical school. His analysis is very useful to defence economists, because it always refers to concepts of defence, independence and national power. War and peace issues, presented along with protectionism, also held an important role in his work. List’s theory has sometimes been misinterpreted. It has been defined as a theory of protectionism or of national power which would have foreshadowed the German theories of ‘lebensraum’. However, the Listian analysis is not the caricature it may seem. More than a theory of war, it is a theory of security. More than a theory of power, it is a theory of the national economy’s development and organization. List describes a strangely modern picture of the defence field of analysis, wider than the one depicted by English classical authors. Indeed, according to List, military issues are not subsidiary, notably when they become instruments of the geo-economic security. Moral aspects intervene with material ones as elements of defence. List is the first economist to have placed security in the centre of economic analysis, and to have made it become an explanatory element of the way State economy works and of its integration to international economy. In this respect, his analysis is fundamental. • •

Unlike the liberals, List links defence issues to other issues, and goes further by suggesting a new conception of national security. His theory significantly contributed to the analysis of international economic relations. Indeed, it gives a meaning to economic and military conflicts issues, by relating them closely to matters of development.

The economy is beneficial to national strategic interests In opposition to the classical school, List considers State intervention in trade policy as indispensable to ensure the development of national productive forces. National defence and economic security issues are evident throughout his theory. International economic relations are competitive, and even conflictual.


From military defence to economic security For List, defence implies the development of productive forces, the growth of national industry, economic patriotism and the implementation of a powerful trade policy to defend national interests. Adam Smith and List, who used the concept of ‘productive forces’, had two different conceptions of defence. Whereas Smith considers defence as the most ‘unproductive’ expenditure, List asserts that this expenditure, as well as those devoted to education and justice, allow an increase in national productive forces in the long run, even if they represent a ‘destruction of values’ in the short term. All expenditures devoted to the education of the youth, to the respect for justice, to the country’s defence, etc., is a destruction of value which is of benefit to the productive force. The major part of a country’s consumption aims at the education of the new generation, the care of the future productive force. (1841: 247) The American politician Alexander Hamilton (1791) had already expressed principles similar to those defended by List. According to Hamilton, a solid economic base ensures a country’s security in the long run. He recommended the Union, at the level of which the prohibitive tariffs necessary to face the English and Dutch competition could be implemented. Besides, public support for arms production is essential. Military security is a condition of America’s industrial development, because it enables the country to free itself from its dependence on foreign powers. He suggests an import substitution policy, with the creation of a tariff to protect industries essential to national security. He wonders what opportunity there could be in a governmental organization for arms production. Indeed, the arms production necessary to national defence shouldn’t be subject to the risky speculations of individual initiatives. These ideas will be pursued by List, for whom the power of production is the key to national security. The ability to wage war is based on the potential of wealth production and on the development of productive forces. The danger of war makes the protection of productive capacities necessary. Society’s institutional frame is also productive. List underlines the importance of the freedom of thought and of conscience in the development of productive forces. Notably, the abolition of slavery and serfdom is a source of productive forces. Therefore, laws and institutions must not be considered as unproductive, even if they produce no value; indeed, they contribute to the development of productive forces, which are the instruments of economic prosperity. Besides, the nature of the national government system is a decisive factor of the nation’s industrial, commercial and maritime success. Thus, institutions have to guarantee ‘the civil freedom of institutions and laws, of administration and foreign policy’, as well as ‘the national unity and power’ (1841: 214). Political institutions have to direct individual forces towards the collective project. ‘Everywhere History © 2004 Fanny Coulomb

shows us an energetic action of social forces and individual forces one against the other’ (1841: 214). Freedom is thus the basis of economic development. Yet, the ownership of an industry by the nation ensures the liberalization of its institutions. In fact, industrialization has highly interdependent relations with political freedom, social progress and the confirmation of national power. Therefore, purely agricultural nations are the nations where political institutions are less free and business is less encouraged (slavery, tyranny, theocracy). ‘The School5 has assigned this civilizing power to foreign trade; in this respect it serves as intermediary for the cause’ (1841: 250). Therefore, industrialization is at the basis of every economic development, but also of the nation’s moral values. It enables the realisation of the different objectives which List has always related and considered as essential: prosperity, civilization, power and independence of the nation. Industrialization is the necessary condition for the community to become an independent nation and then an economic power. The mainsprings of List’s theory of defence are thus set out: defence is an important element of political life and justifies State interventionism. The State economy must be directed towards two clearly asserted objectives, besides economic prosperity: national power and independence. In this respect, List innovates with regard to the classical conception of defence. According to List, the formation of a national industry is necessary to ensure the growth of productive forces, the ultimate purpose being national independence. National independence is multiple, i.e. moral, economic and political, and is obtained through the development of industries and of a ‘powerful class of factory owners and tradesmen’ (1841: 111). Like defence and education expenditures, public support for national industries is an investment which will generate an increase in productive forces in the long run. There are two important points here. First, List pursues the idea, expressed earlier, that material capital and human capital are closely related when it comes to ensuring national survival. Therefore, according to List, the ownership of a manufacturing industry enables the increase of ‘intellectual forces of the nation’ – as well as ‘public incomes’ and ‘material and moral means of defence’ – and it guarantees national independence (1841: 320). The development of a manufacturing industry directly contributes to the improvement of national defence: At a time when art and mechanics have such a strong influence on warfare, when all military operations highly depend on the situation of the Treasury, when the country’s defence is more or less ensured, according to the population mass, i.e. if it is rich or poor, intelligent or stupid, energetic or plunged in apathy, if its sympathies belong unreservedly to the country, or are partially in support of foreign nations, if it can arm more or less soldiers; more than ever, in such a time, industry must be viewed from the political point of view. (1841: 320) © 2004 Fanny Coulomb

Thus, List establishes very close relations between economic and moral forces and appeals for economic patriotism. Second, the State must undertake a real economic development policy and create protective taxes, which, even if they represent a loss of value, contribute to ‘the industrial education of the country’ and lead to an increase of productive forces in the long run, by ensuring prosperity and power (1841: 253). Therefore, the nation’s survival relies on the existence of a real political will in favour of national power. List accused ‘the School’ of having mistaken ‘the maxims of private economy for those of public economy’ and of having questioned ‘the existence of nationality and of national interests’, by refusing to encourage the growth of the merchant navy, finance its protection and prepare the country for naval warfare (1841: 274). He therefore blamed Adam Smith for having considered the nation as an individual, by recommending savings. A nation which would prefer savings to its own defence, trying to avoid expenditures generated by wars, would be later condemned to ‘poverty, inhumanity, powerlessness, dissolution’, because foreign countries could then monopolize its assets. The search for cheaper products through free trade should not necessarily be the ultimate objective of a nation, as protectionism plays an essential role in national unity. List appeals to all members of the nation to continually defend their present and future existence, through appropriate economic actions, guided by State intervention. Defence must always be taken into account along with economic concerns. Therefore, military expenditures and protectionist measures must not be considered as exceptional. List criticizes the idea that war establishes a kind of state of exception. He considers peace as a temporary suspension of conflicts, in a world marked by the disparity in levels of national economic development. Therefore, even in peacetime, States must develop their navy and establish a prohibitive and protective system in order to direct capital towards specific industries, notably those related to national security. Restrictive measures on exports of strategic products, such as powder or artillery, would then be unnecessary in wartime. But the military or strategic sphere is not the only one concerned. The entire economy contributes to national defence. Thus, List disapproves of the trade retaliation principle advanced by Smith; he condemns its risky and temporary character. A well-led policy of restraints is a continuous one, and must not correspond to a logic of economic war, but rather of national independence. Therefore, Smith’s argument to justify the protection of industries necessary for national defence must be extended to all industries, because a nation’s potential for defence is determined by its global industrial development. In the same way, List considers that the third exception to free trade mentioned by Smith (when domestic manufactured goods are disadvantaged compared to foreign countries with regard to taxes) is not satisfactory: why are the other disadvantages not considered (1841: 432)? In his argumentation, List mistakes economic for military matters, and defence for economic security matters. And in fact, a central element of his analysis is the search for national economic self-sufficiency, because it © 2004 Fanny Coulomb

is closely related to the government’s economic policy. Unlike liberals, who only considered war, List enumerated three kinds of events which could threaten national economic security: ‘foreign restraints, trade crises, wars’ (1841: 415). Indeed, if war occurs, a purely agricultural nation may lose its products’ outlets as well as the means to buy foreign goods. To overcome this danger, the nation must develop both agriculture and industry, in order to guarantee full employment of productive forces, which will prevent their reciprocal action from being disturbed by war or by foreign measures. Thus, the continual protection of national industries is necessary, not only in wartime but also in peacetime, as it has beneficial effects on both economic development and national independence. A national offensive on foreign markets Under full employment of productive forces, national defence is better ensured if the society is imbued with an appropriate culture and knowledge. Indeed, politics may hinder the course of international trade. These disruptive factors can be ‘a bad policy of monarchs, unintelligent or left to their passion; domestic troubles; war, devastation or oppression of a tyrannical or fanatical system’. (1841: 457). They can cause the downfall of the most economically advanced nations which subsequently lose their comparative advantage. In this presentation of war, List considers that it is never waged for justifiable objectives, and that it is often the result of a political constitution unfavourable to national economic progress. However, there is a positive side to war if it can help leaders to remember the importance for national economic security of having a strong national manufacturing industry. In this way, the United States benefited from war with England, because they had to abandon free trade and protect their manufacturing industries, which turned out to be favourable to the development of an economy whose agriculture had already developed well. The nation should maintain this system of restraints in peacetime, so as to help the development of industries still incapable of withstanding international competition. List does not consider the search for national power as a bellicose aim, but as essential to the protection of national independence: ‘The idea of independence and power arises with the concept of nation’ (1841: 292). By reviving the consciousness of national interest, war encourages the implementation of beneficial economic measures. But it would be even more advantageous if such measures were undertaken in peacetime, within the framework of a good political constitution. More than a competitive struggle between leading powers, it is a matter of national economic survival, in an international context characterized by differences in the levels of national development. However, by appealing for independence, List also appeals for the growth of national power. Although he doesn’t mention them, he wasn’t against wars waged to conquer new colonies. According to him, a nation must ‘train men, © 2004 Fanny Coulomb

manufacture machines and build communication routes’ in order to ensure its defence (1841: 57). But the colonial policy is also a logical continuation of the trade, education, defence and civilizing policy of an enlightened government. As stated by List, the enhancement of national power enables a country to take advantage of foreign countries’ ‘natural forces’, and to do so for several generations, through foreign trade or colonization. The nation’s power, which is assessed by its ability ‘to extend civilization world-wide’, is necessary for the development of productive forces. Indeed, it inspires in individuals ‘a spirit which spurs them on at the level of the whole nation’ (1841: 251). According to him, there are ‘reciprocal relations of cause and effect between civilization, political education, the peoples’ power and economic development’ (1841: 247). The school shouldn’t exclude political and power issues from the political field of analysis, otherwise, it will neglect the ‘intellectual capital of the living economy’, i.e. the fact that a population benefits from the accumulation of knowledge by previous generations. [. . .] Every single nation is productive as long as it knows how to assimilate this conquest of the previous generations and increase it with its own acquisitions; the extent and geographic situation of its territory, the number of inhabitants and its political power are as important as natural resources if a nation wishes to cultivate, exceptionally and harmoniously, all the branches of labour, and extend its moral, intellectual, industrial, commercial and political action to less developed nations and more generally world-wide. (1841: 248) According to List, both moral and economic reasons justify colonization. • •

Colonies wish to benefit from the contributions of industrialized nations, regarding civilization and economic development. Colonial trade, such as exchanges of manufactured goods for raw materials, are necessary to the industrialization process. Besides, the possession of a colonial empire represents the crowning achievement of the development of industry, trade and national power.

Furthermore, List defends the particular attention paid by mercantilists to precious metals against the classical authors. Indeed, the trade balance surplus can help to limit monetary fluctuations. And the level of this surplus depends on the nation’s trade policy and on its position in the hierarchy of powers (in particular the size of its colonial empire).


The pacification of international relations through economic development List considers that, in the very long term, all nations having the same level of development could unite in a ‘universal confederation’, which would guarantee ‘perpetual peace’, notably with the abolition of custom duties. But in the context of trade wars and uneven development of nations of the time, the idea of perpetual peace could only be an illusion, advanced by the dominant theory, which was in fact mostly concerned with England’s supremacy in the world economy. Nations must avoid being trapped in ‘the universal association based on the wealth and power of a single dominant nation, the others being submitted to subjection and dependence’ (1841: 441). In this context, every nation whose agriculture is prosperous, but whose industry is insufficiently developed, must protect it with custom duties. List distinguishes private economy from social economy, and within the latter national political economy from cosmopolitan economy. The cosmopolitan economy supposes that all nations of the world form a single and unique society living in perpetual peace. Quesnay, Smith and Say were the first theorists of this cosmopolitan economy, as they recommended universal free trade, without mentioning the idea of a nation. It is interesting to notice that the dominant theory is here defined with regard to its supposed pacifism. As stated by List, the principles of free trade are only valid in the case of a universal association or confederation of all peoples of the world. According to him, there is a risk for a nation in opening up its economy too much to the outside world; he rejects the principle of the international division of labour and recommends national economic independence. Notably, he states that ‘England can export, through cheap products, its trading problems’ (1841: 321). The best way to protect the economy from commercial crises or from fluctuations due to wars or foreign restraints is to bring all national productive forces together in cooperation. As long as States resort to wars and protectionist measures, the union of peoples is inconceivable. However, the possibility to have recourse to armed conflicts decreases as state economies develop; there is a gradual shift towards the peaceful settlement of conflicts. Two peoples with an equally developed industry would do more harm to each other within a week than they could undo within the space of a generation. (1841: 230) Already, in the congress of leading powers, Europe has the embryo of the future congress of nations. From today onwards, the tendency to settle by agreement the conflicts between peoples prevails over the use of military means. [. . .] (1841: 231) © 2004 Fanny Coulomb

In the future, an association of all humans is possible and desirable for rational and religious reasons. It would represent the success of the scientific, artistic, industrial and social progress of humanity. List is in favour of commercial treaties through which nations make reciprocal concessions and he recommends a progressive decrease in protectionist measures throughout the world. These measures are only useful at a certain level of economic development, but should disappear with the ending of international trade rivalries due to the search for independence, and even for economic domination, by every nation. However, a nation will only be able to ‘enter the future universal civilization’ if it is prepared for it, i.e. if it notably possesses a territory which guarantees its economic independence and its military security. Yet conquests can be the solution to the imperfections of the territory, to ‘round it off’. But even then, a peaceful settlement of conflicts should prevail. List underlines the tendency of his time to modify the territory by ‘purchase, conquest or succession’ or by ‘the association of the States’ interests by means of treaties freely agreed’ (1841: 214). The German customs union is an example of this evolution. List’s plea on behalf of ‘the universal association’ is also an appeal for emigration and colonization, justified by the differences in climates and natural resources from a country to another, but also by over-population and ‘overabundance of capital and talent’ (1841: 98). Moreover, the civilization of ‘barbarian’ nations is one of the missions of politics. Before benefiting the human race in general, the expansion of civilization has beneficial effects on the economy of the nation which impulses it. Economic profits expected from the expansion of the colonial empire are highly superior to those which could result from war or trade conflicts. Therefore, the civilization of all peoples is not only ‘the mission of human kind’, it ‘is also guided by natural laws’ (1841: 286). Colonization serves both economic and moral interests. The nation’s natural economic development thus corresponds to the expansion of civilization which is of benefit to the colonized peoples. According to List, a certain determinism of economic progress corresponds to another determinism of the evolution of national political structures towards an enlightened government that respects liberties and does not undertake unnecessary conflicts which would disadvantage national economic interests. Furthermore, colonization is more efficient and less risky than war to exalt national feelings. Thus, List has a mainly defensive conception of war. More precisely, the fact that a population is conscious of the eventuality of war reinforces national unity and stimulates the wish for economic independence. Regarding the long-term future of humanity, List talks about the ‘universal confederation of human kind’, when all nations will have reached the same levels of development, culture and power (1841: 98). However, according to his theory, the confederation of peoples can be partial at first, before becoming universal, when all nations will be equally developed. And, in actual fact, the issues of economic development and emancipation of colonized countries are not mentioned, nor is the colonial spheres of influence © 2004 Fanny Coulomb

among leading powers challenged. List considers that colonial trade is ‘in the nature of things’ and that it will continue, as all the countries cannot demand a protective system. Such a system can only be of benefit to nations already sufficiently developed to aspire to the rank of leading economic power. In fact, the determinism of resources confines the ‘countries of the torrid zone’ to the production of agricultural products and raw materials; they might never become independent nations with a real military force. Therefore, it seems that the world must remain fundamentally divided between an industrial North, guardian of civilization and progress, and an agricultural and dependent South, confined to a lower level of development by a determinism of resources. Implicitly, it seems that the pacification of the ‘countries of the torrid zone’ can only result from the intervention of industrialized nations and not from their progressive access to economic power, which is not considered. List’s theory also envisages, in the long run, a separation between, on one hand, developed countries, at peace and united in a confederation, and on the other hand, noncivilized countries, still at war. Peace could therefore be ‘separate’ and not universal. Besides, other questions remain as to the interpretation of List’s theory regarding contemporary economic facts. In List’s work, at first sight, power is not conquered by means of an armed force, nor does the author recommend economic war between equally developed powers. The evolution (mentioned above) towards peace and economic agreements is natural, is ‘the country’s destiny’. Political institutions will have to adapt themselves to these changes, or national power will decline. The weight of social hierarchy must not check individual initiatives; thus, we can envisage a political standardization among leading powers, which would definitively ensure the preservation of peace. Therefore, List’s thought does not foreshadow the theories of the ‘German myth’ which were later condemned, by Keynes for example. List’s work is subject to democratic and liberal influences, and it is favourable to a peaceful share-out of economic territories between nations. Even if the search for economic power implies the mobilization of national resources and productive forces, in order to achieve economic selfsufficiency and extend foreign markets, this doctrine is fundamentally peaceful, by conviction but also by pragmatism. According to List, the universal association of human kind does not lie in the disappearance of nations, but in the alliance of independent peoples. We can consider List as a precursor. Indeed, his thinking contains the idea (widely admitted since the advent of the nuclear era) that the destructive capacity of arms production increases in time, until the resort to force to settle conflicts becomes impossible, therefore encouraging the inauguration of new forms of interstate dialogue. List’s universal confederation does not necessarily imply the replacement of the government structure by a larger one. It could just as well be an international structure coexisting with the States and enabling them to regulate international relations. Nowadays, the UN could represent a first outline of this universal confederation. The discussion about the possible domination of the world by the United States (and American interests) does not contradict List’s thesis. On the © 2004 Fanny Coulomb

contrary, he in fact underlined the eventuality of a single state’s domination on all others. A ‘Listian’ interpretation of the contemporary economy could be to consider that all international economic relations will remain dominated by leading powers, and that less-developed countries will be maintained at the rank of dependent nations, because of the uneven balance of power. Another interpretation lies in the idea of a reorganization of the industrialized nations’ spheres of influence around three main poles (Triad), the Third World countries being considered as ‘new colonies’. List’s theory on economic and trade policy closely links political to economic objectives. This author is mainly concerned with national power and denounces the dominant liberal theory’s hypocrisy on this matter. In his theory, the study of defence and power issues is essential for economic analysis. This conception, although totally opposed to the dominant theory, has nevertheless had an essential impact on the following ‘heterodox’ currents of analysis.

The German historical school: for a pragmatic use of the economic and military power instruments in favour of the national interest List’s criticism of the classical school in the middle of the nineteenth century was partially based on the observation of historical facts. However, only later was the historical method used in a systematized way, by authors who wished to entirely renew the method of political economy. Naturally, this movement amply deals with war issues and asserts its essential role in the development of modern societies. The virtues of war and economic interventionism are glorified, as are the measures favouring the population’s cohesion around the objective of national power on the international scene. A new method of analysis While Germany was implementing a policy of power for the first time, in a strained international context of British domination but also, towards the end of the nineteenth century, of American and Russian domination, a new school of thought, partially stemming from Cameralism, developed in this country. Keith Tribe (1988) mentions that, in the nineteenth century, German economists did not talk about political economy but rather about ‘Nationalökonomie’ (State economy), thus insisting on the symbiosis between State and economy. At the end of the nineteenth century and at the beginning of the twentieth, these economists established the first outlines of a science of the modern economies’ administration, which will only fully be developed by Keynes, and they coined the modern language of economic management or political and economic strategy (Tribe 1988: 34). In this respect, the origins of concepts such as ‘regulated capitalism’ or ‘planned socialism’ can be found in the works of these German economists. The economic studies on the Nationalökonomie were © 2004 Fanny Coulomb

preceded by Cameralism, favourable to an ‘administrative economy’. It had directed the elaboration of the Prussian administrative apparatus, which served the government’s political ends, in a context of a strong militarization of the economy. According to the Cameralists, the State dominates economic life, the individual initiative is not recognized and the social order is autonomous, self-generated and stems from natural laws. The difference between Cameralism and Nationalökonomie lies in the importance given to human needs, to their variety and the necessity of their satisfaction. This thought, which began with criticism of liberal theory, only became a fully established general theoretical system in the middle of the nineteenth century, with the publication of List and Roscher’s founding works. Adam Smith was particularly blamed for not having considered the various characteristics of human needs and of national economic development necessities. ‘The historicism’ of German economists was in opposition with ‘the universalism’ or with the ‘cosmopolitanism’ of liberal theory. The German historical school shares a conception of defence radically different from the liberals’ view: it places defence in the centre of economic stakes, the State reinforces its internal power by confirming the nation’s position on the international scene, through an interventionist trade policy. The ideal of world peace is rejected and considered as too Utopian. However, these economists acknowledged that trade had some pacifying virtues and they were not, strictly speaking, ‘warmongering’. The German historical school wishes to initiate a new economic analytical method, based on the observation of facts. Gustav Schmoller (1902: 313) condemns both the liberal and Marxist theories, as ‘twin products of a non-historical rationalism, the last offsprings of the 18th century’s philosophy’. Like those of Whilhelm Roscher, his texts pay particular attention to war and national defence issues and to the promotion of national economic development, in opposition to the ‘cosmopolitanism’ of the classical school. The view of these authors is however different from the mercantilist one. Just like Friedrich List, they do not consider international relations as immutably doomed to antagonism; it all depends on the level of development that nations have reached. The theorists of the historical school defend state interventionism and justify the numerous wars that have punctuated international relations in the past as being necessary to strengthen the national political and economic unity of each nation. The preservation of a strong national defence is recommended, and the idea of disarmament is rejected. The historical justification of war and the insistence on national defence In his work on ‘the historical meaning of mercantilism’, Schmoller (1857: 59–62) shows that economic and military conflicts inevitably accompany the birth and rise of nations. The mercantilist policy represented a historical stage necessary to maintain the existence of national entities. Smith’s criticism of the © 2004 Fanny Coulomb

disastrous economic effects of this policy must thus be reconsidered. Mercantilism was indeed related to this historical reality. It enabled the State to implement national political reforms (administrative reforms, centralization) and to establish useful barriers against international economic competition. This policy, led by monarchs or ‘enlightened’ despots, helped in the formation of national entities. In fact, free trade was only the natural continuation of mercantilism: it appeared when State intervention was not useful any more to promote national economic interests abroad. In this way, a ‘newly created’ political community can only survive if the population adheres to it. The search for self-sufficiency and independence, as well as the commitment in conflicts with foreign nations, are of benefit to the unification of particular interests around the collective interest. As stated by Schmoller, the mercantilist doctrine only answered problems of its time and many of its proposals appeared to be erroneous: ‘The doctrine of the natural harmony of the economic interests of all states is just as false as the opinion then entertained that an advantage to one state is always a disadvantage to another’ (Schmoller 1857: 63). Therefore, the German historical school should not be considered as an adjustment of the mercantilist theory. For example, Roscher (1872: 470), when he comments on Frederic le Grand’s convictions on economic policy, blames him for having embraced mercantilist principles, and for having ignored the theoretical progresses of his time, especially the lessons from Cameralism. Although they rejected economic mercantilist policies (at their time), the German historical school theorists defend State intervention in trade and appeal for the population’s support for the promotion of national power. Regarding this matter, they often insist on the virtues of war. Silberner (1957) enumerated the numerous apologies for war which had been made by economists such as Roscher, Schmoller or Stein. The necessary defence of a nation was expected to inspire a national feeling and a sense of sacrifice into individuals. According to Schmoller (1902: 63), political economy has to study two decisive factors of economic organization: the ‘natural and technical causes’ and the ‘causes entailed by the psychological and moral life of the peoples’. He believed economic theories only considered the first one. The German historical school economists do not believe in the imminent disappearance of war. The nation must be prepared for the eventuality of a foreign invasion, potential enemies being all the more numerous as the nation itself will be wealthy. Roscher considers disarmament as a dangerous choice (Silberner 1957: 139). Peace can only be achieved by keeping national defences at a high level, according to the well-known principle of deterrence. As the old proverb says, ‘si vis pacem, para bellum’ (‘If you want peace, prepare for war’). An army protecting the territory from foreign conquests is considered as productive (Knies, Schäffle), or as a national insurance (Stein) (Silberner 1957: 141). Knies and Roscher were in favour of a permanent army, whose values of discipline and exactness have beneficial effects on economic development. Schmoller (1902: © 2004 Fanny Coulomb

137) suggests that soldiers belonging to the poorest classes of society should be indemnified for their loss of income, during their service. From his point of view, the national service strengthens national solidarity, endangered by an excessive division of labour, and also contributes to the population’s education and to the levelling out of social classes, as universal suffrage does. In the same way as they disapprove of disarmament, these economists condemn political projects aiming at the rapprochement between States. Indeed, as stated by Schäffle, a European federation or a world political unification in the name of peace are Utopian principles (Silberner 1957: 145). Moreover, a simple disarmament would not be sufficient to ensure the end of wars, which are waged for economic but also political and religious motives. According to him, the ratification of an international mutual disarmament treaty would favour the militarily strongest nations and disadvantage the weakest ones, because of the lack of an international executive power and of the technical difficulty in implementing such agreements (problems in the definition of the various weapons at stake and risks of circumvention of these agreements). As inequality and power relations underlie human relations, war is likely to last. The political implications The German historical school’s arguments, particularly those of List, have sometimes been presented as an introduction to extremist political theories promoting an increase of national power worldwide, especially National Socialism. However, such an assertion is certainly improper. As stated by Birken (1991: 179–189), Hitler’s economic ‘conception’ was centred on individualism. The society had to be organized in order to stimulate the individual potential of creative production; the aristocratic principle consisted in granting a higher position in society to the most creative personalities, those who could increase the global value of the ‘race’. The faith in the superiority of the Aryan race was coupled with a search for the means to confirm its everlasting domination on the world, by eliminating the Jews, considered as a potentially inferior race, but a race which controlled numerous productive activities of the country. These ideas inevitably resulted in the promotion of Germany’s territorial expansion and in the extermination of Jews; these objectives being expected to be of benefit not only to Germany but also to the whole world, the productive potential of which would rise. Yet, the more a race is densely populated, the more its chances to dominate the world are important, because it is in this case more likely to find individuals capable of expanding national productive and cultural forces. However, a disequilibrium between the territory and the population was likely to occur because of insufficient agricultural productivity. Wars of conquests were therefore recommended; trade competition and trade wars were considered as unable to establish a permanent superiority of a people. As well as leading territorial wars, the empire should organize itself as an autarkic block, in response to internationalism. In his presentation of Hitler’s economic ideas, Birken doesn’t mention a possible relation with the German historical school. © 2004 Fanny Coulomb

On the other hand, he underlines the classical foundations of the Nazi conception of economic relations, notably by insisting on the promotion of individual productive capacities. As for Pribram (1983: 391), he mentions the close relationship between National Socialism and the German ‘idealist’ philosophy. Philosophers, and Fichte in particular, assigned a universal mission to the German people, supposed to be endowed with superior intellectual faculties (especially the capacity to use ‘introspection’ to understand ‘reality’). National Socialism, which intended to co-ordinate the administration, armed forces and economy in order to advantage the ‘superior national objectives’, was not compatible with ‘the conception of economy as an instrument which benefits the satisfaction of individual needs’. However, Pribram states that some of the historical school proponents accepted important compromises with the National Socialism principles; they notably asserted that economy should be adapted to the value judgements of a specific social philosophy (1983: 394). According to him, the German historical school was particularly well prepared to accept National Socialism principles, because it was adopting a relativist conception, according to which every truth or ethical principle is conditioned by history. It is necessary to distinguish the work of the school’s founders (Roscher and Schmoller) from their later interpretation. Moreover, Pribram asserts that the scientific principles of the historical school were clearly incompatible with the anti-intellectual attitude of the representatives of the ruling parties and that the ‘takeover’ of this school’s theories by National Socialism gave rise to many criticisms in Germany on the eve of the Second World War (1983: 394). The historical school therefore stresses the important part played by wars in the development of modern nations. Its authors have often glorified war and nationalism, supported by past examples. However, few general principles regarding the relationship between power and economy or the issue of national defence are highlighted. In fact, the historical method itself is contingent; it doesn’t provide universal economic principles itself.


2

The economy as a factor of peace

The economy has become an autonomous discipline by excluding defence issues from the field of economic analysis. Indeed, the economic laws revealed are only valid in a context of laissez-faire and free trade. Wars disrupt the freemarket mechanisms. By reasoning in terms of pure and perfect competition, neo-classical economists finished separating the pure theory from the study of political and policy issues. However, liberal theories have often been normative. Concerned to show the superiority of their rules, they insist on their benefits, in particular the achievement of economic prosperity and world peace, the crowning achievement in the revealing of ‘economic truth’.

The physiocrats or the desirable peace From the eighteenth century onwards, the physiocrats asserted that the Prince’s interest lies in the acceptance of a decrease in taxes and hindrances weighing heavily on the agricultural sector. The nation’s power was ensured by its prosperity, which mercantilist measures checked rather than favoured. Physiocrats promised the King powerful, numerous and efficient armies, if their principles were adopted. Therefore, the opportunity of ceaseless wars was gradually questioned. War was considered as a cause of waste and economic chaos, disrupting the natural order established by the divine Providence. During the Age of Enlightenment, following Rousseau, Voltaire, Diderot and Montesquieu’s ideas, peace was analysed as the crowning achievement of humanity’s progress. Physiocracy was the first real ‘homogeneous’ school of economic thought. It opened the way to a completely new field of work and marked a shift from the mercantilist conception of economic issues. Quesnay, the central figure of this school, had numerous disciples, such as Mercier de la Rivière and Dupont de Nemours. But this ‘sect’ also had its precursors, notably Pierre de Boisguilbert, and his ‘independents’, such as Anne Robert Turgot. All of these authors mentioned defence and conflicts in their works. In a century marked by numerous wars, they defended or tried to save, through radical economic reforms, the French government system, which was subject to controversy because of its unsuitable tax system and its excessive burden of military expenditures. © 2004 Fanny Coulomb

Pierre le Pesant de Boisguilbert, or agriculture as the basis of military power In his work, Boisguilbert (1695; 1705; 1707a; 1707b) differentiated himself from mercantilists, by stressing the necessity to implement economic policy measures in favour of agriculture, the French leading economic sector at the time. Only its recovery could enable France to overcome the economic crisis. A rise in agricultural prices could have improved the rural sector’s situation, which was sacrificed in favour of industry by export restriction measures which kept prices at a low level. Thus, non-intervention and submission to the natural order were desirable. In spite of the liberal orientation of its economic policy proposals, Boisguilbert particularly considered economic development within national borders and remained concerned with ensuring national power.

Hindering agriculture weakens national power At the time of Boiguilbert, France was engaged in numerous wars. Yet, the poor results of the rural sector entailed a decrease of the population, and thus of the armies’ strength. Boisguilbert’s arguments clearly announced a shift in the way relations between defence and economy were considered. According to him, mercantilist measures hindered economic development; they thus directly affected military strength, which strictly depended on the country’s prosperity. Trading power was not the primary objective; the accumulation of precious metals was not the real wealth: ‘Money is only the means and the transporting, and the commodities useful for life are the end and the purpose’ (1695: 618). By emphasizing the importance of consumption in economic development, Boisguilbert was a precursor of the theory of supply and demand elasticity and of the multiplier theory: ‘The downfall of consumption is the downfall of income’ (1695: 602). The development of his ideas was in accordance with the interests of the rising bourgeoisie, which was favourable to a liberalization of the economic policy. In Le détail de la France (1695), Boisguilbert showed the negative effects of various taxes, in particular the ‘taille’. He denounced the unfairness of the fiscal system, recommending its abolition, as well as that of the ‘state aids and customs on the realm’s exits and passages’, which slowed down the circulation of grains, thus preventing efficient provision for the entire kingdom (1695: 590). These obstacles, which limited trade expansion, induced a drop in prices, and thus, in the long run, in quantities supplied. This work gave rise to numerous criticisms. Boisguilbert answered them in the Factum de la France, contre les demandeurs en delay (1705), and notably stated the argument according to which the context of war forced a delay of these reforms. He asserted that these measures put a strong brake on French conquests, as they hindered national prosperity. The preservation and the development of national power are pre© 2004 Fanny Coulomb

sented as the supreme objectives guiding economic policy. The economy, moreover, has an undeniable strategic role. Boisguilbert states that the reforms which he recommends are the best means to achieve an ‘advantageous peace’. Indeed, a strong economy has a deterrent effect on the opponent, who is more easily inclined to surrender (1707: 1005). Besides, Boisguilbert considers that the system of tax collection maintains a real ‘civil war’ within the realm, more harmful to the economy than foreign conflicts and limiting both power potential and national wealth. He therefore inaugurated a change in the way of considering the relations between power and the economy. The State has no power without a developed and liberalized economy. National power is inevitably limited by the divine Providence Although he didn’t use this expression in his work, Boisguilbert considers there is a ‘natural order’, that economy is subject to laws similar to those of natural sciences, that the economy can be compared to a mechanism which can be obstructed by erroneous measures of economic policy. However, this liberalism was not ‘unconditional’. Boisguilbert remained favourable to the trade of grains with foreign countries, although he favoured domestic trade. However, he wasn’t in favour of the freedom of imports which was only worthwhile if supplies in cereals were insufficient, in which case it could be prevented through a rise in agricultural prices. But in the case of sufficient national supplies, imports should be limited by high entrance fees, to prevent a fall in agricultural prices which could disrupt the economy (Spengler 1966: 16). According to Boisguilbert, peace should be ‘the purpose of all wars’; this idea was relatively new compared to mercantilists, for whom peacetime was marked by trade conflicts, representing at best a temporary ‘non-war interlude’. Moreover, Boisguilbert clearly specified the causes and conditions of war. Praising the unrivalled strength of the French navy, he asserted that the King used force only to ‘acquire his possessions’ or ‘defend his religion’ and that his ‘justice and restraint’ encouraged him to limit his conquests (1705: 760). Thus, according to Boisguilbert, at first sight war has no economic causes. ‘Just’ or ‘holy’ wars are justified, and are limited for moral and not economic reasons. However, peace must be chosen, not enforced, and is only conceivable if the country is much more powerful than its enemies. Besides, Boisguilbert considers that the French economy is potentially strong enough to provide unlimited resources and to significantly extend its sphere of influence (like Romans and Turks were at the time of their magnificence). However, when a nation is potentially superior to all other nations in relation to economic and human wealth, then Providence hinders power, and thus its conquests, to ensure ‘world harmony’. Wrong measures of economic policy can be interpreted in this way: Here are the three tariffs which curbed the monarchy just when it was able to conquer the entire world. As its greatness and its power were unequalled, © 2004 Fanny Coulomb

Providence had to intervene, to sustain the world harmony, by hindering its greatness, prevent its overly violent consequences. (1705: 764) Owing to the divine Providence, the Prince could thus be subject to balance principles. Boisguilbert therefore strongly differentiated himself from mercantilist principles, as he admitted the possibility of a natural harmony in international relations. The national ambition of world hegemony is limited by divine laws, even if the author’s enthusiasm about France’s superiority under Louis XIV leaves no doubt as to his belief in God’s favour towards a country who deserved to lead the world. Therefore, Boisguilbert apparently agreed with the Sun King’s ambitions. But his thought prepared the ground for the acceptance of a limitation of national ambitions, subject to a fundamentally harmonious and peaceful natural order. His work contains the first expression of the idea of a long-term stationary State, when agriculture reaches its maximum development, later resumed by David Ricardo and John Stuart Mill. The physiocrats: peace, a necessary condition for the growth of the State’s income and power The physiocrats defended the respect of economic natural laws, and were thus against State economic interventionism. Besides, they minimized the importance given to foreign trade in national growth and recommended the development of agriculture. Nevertheless, they were concerned with power and security issues which helped them to justify their liberal theory, the implementation of which was still limited. Emerging physiocratic ideas challenge mercantilist principles: the primacy of economy as the basis of power The physiocratic theory inaugurated in France during the eighteenth century – the conception that the economy is based on specific laws – should appear to be obvious. The economy is compared to a living being or a circuit, where noninterventionism inevitably leads to the best possible situation (optimal, as one would say nowadays). Political institutions were destined to perfectly adapt themselves to the natural order. Thus, physiocrats contradicted mercantilist rules against which they stood from the very beginning. Furthermore, middle-class merchants defended this thinking; they were against Colbert’s policy, characterized by the implementation of numerous trade barriers, and disapproved of the numerous wars waged by Louis XIV which were blamed on mercantilist policies. Factories and trade were considered to be economically ‘sterile’ by the physiocrats. Only the agricultural sector could generate a surplus, i.e. a net product compared to production cost, owing to agricultural products. Therefore, fiscal © 2004 Fanny Coulomb

reforms were recommended in order to establish a tax system more favourable to agriculture. For the first time, the economy was preferred to political and military power, much prized by mercantilists. Its ‘natural laws’ should allow the emergence of an ideal society, without state intervention. Regarding the government system, the physiocrats were in favour of absolute monarchy, i.e. the ‘Ancien Régime’. The King was considered to be God’s representative on earth. He was the only one who could establish positive laws on the way society worked, which corresponded to the natural laws dictated by ‘Providence’. Physiocratic theory already expressed the fundamental principle underlying liberal theory: the search for individual interests is of benefit to the general interest. In actual fact, this implied that individual actions were not restrained by social forces, and thus that there was an adherence to the ‘laissezfaire’ principle. Although they supported monarchy, physiocrats recommended many reforms to state interventionism, especially the abolition of the various taxes and their replacement by a single, fairer tax. Besides, all barriers on domestic trade should be abolished. The respect for the natural order should lead to the highest possible level of development. This theory extended its field of work to the international level, but without establishing the theory of optimal free trade. In fact, physiocrats disdained foreign trade, which they only considered to be a stopgap, when the national market couldn’t absorb the entire domestic production. Therefore, they did not insist on the advantages of free trade. They rejected the balance of trade theory, considering that the source of wealth is in agricultural production and not in the accumulation of precious metals. Defence was excluded from the field of work which is now known as ‘political economy’, in Montchrestien’s own words. However, even if defence issues are not mentioned in the physiocratic analysis, this omission is revealing in itself. Implicitly, peace is necessary to the physiocrat’s natural order. The economy therefore contributes to peace. Liberal theory later confirmed this evolution of the theoretical relation between defence and economy. François Quesnay: power through population, free trade and agricultural wealth François Quesnay (1756; 1757a; 1757b; 1758a; 1758b; 1767), apostle of cereal free trade within the French territory, took the opposite view of mercantilism, by considering agriculture as the mainspring of economic life, and by minimizing the importance of foreign trade. However, he remained concerned with ensuring the King’s power, all the more since he held an important political post. He challenged most mercantilist convictions; the armies’ strength was not the most important factor of their efficiency; the States’ wealth was not assessed by their stock of precious metals, but by agricultural prosperity. Defence and security issues are often mentioned in his work. In his Tableau économique (1758a), Quesnay described the circulation of income flows among the various economic sectors. Adopting a ‘medical’ model © 2004 Fanny Coulomb

of the economy (he was a famous doctor of the time and treated Louis XV and Madame de Pompadour), he compared the circulation of national income in economy to that of blood in a living being. The movement begins with the expenditure of the property owners’ incomes. The three classes – farmers, property owners and artisans – were interdependent, but only the agricultural sector generated a surplus. In an ideal situation, when State interventionism respects the natural laws, the system reaches an equilibrium. According to Quesnay, a nation’s force does not depend on the size of its armies. Indeed, the evolution in the way wars were waged showed that a large number of soldiers was a less decisive factor in victory than the level of incomes that the State could devote to the financing of conflicts. Besides, Quesnay alloted an important role to diplomats and to their ability to lead political negotiations. Society was based on two elements: • •

the subsistence of the population; the wealth necessary for national defence.

National force depended on the existence of a sufficient public income in peace and wartime. Therefore, rather than leading an active population policy, the interest of the State was to favour the increase of inhabitants’ incomes. Indeed, the more a population was prosperous, the more it could contribute to defence. It is good for the soldier and the officer limited to military expeditions, to believe that the nation’s fate only depends on the success of sieges, of battles; to think that a densely populated State is very powerful, because it can provide a higher number of combatants [. . .]. But the government which has wider views won’t depopulate the countryside, and won’t destroy the source of public incomes, to seek a particular best enemy of the general good. (1757b: 520) A policy in favour of agriculture is the best way to encourage an increase in national income. An excessive trade and industrial development could have disadvantageous consequences for the whole economy: ‘The downfall of Empires often closely followed a prosperous trade . . .’ (1756: 454). To ensure its harmonious growth, it was thus necessary to prevent the ‘Milice’ and the taxes from hindering agriculture, the key to national power. Quesnay was concerned with curbing the rural exodus. According to him, gains from trade should be used to improve cultivation, instead of being ‘collected in big cities’: ‘When a nation spends in luxury what it gains in business, the only result is a movement of money without a real increase in wealth (1756: 455). The fear of seeing their children enlisted by the Milice is one of the main reasons for the population’s rural exodus. The defence of the State is one of the first duties of the nation, but sons of farmers, so useful to the nation, should be spared and only tenant farmers should be enlisted. Even if Quesnay rejected the © 2004 Fanny Coulomb

excesses of trade, he nevertheless considered that it was of first importance to ensure the State’s power. Indeed, this one didn’t depend on money, but on ‘the abundance and the market value of agricultural products’ which could only be revealed through trade. According to Quesnay, favourable to free trade, the development of foreign trade took part, with agriculture, in national enrichment. Commercial measures against foreign countries disadvantaged national trade, notably because of the risk of retaliation. National power through economic development Quesnay condemned wastes resulting from wars. According to him, armed conflicts depopulated nations, initiating a decrease in national wealth: ‘The governments too avid for wealth destroy the possibilities of it’ (1757b: 520). He was also against the possession of colonies, which generated a decrease in national wealth because of the wars they generated. Yet, according to him, a wise State was necessarily pacific, as diplomatic action helps to prevent conflicts. Protectionist commercial measures, as well as wars, were of benefit to traders but were against general interest. However, Quesnay’s arguments may sometimes seem contradictory. In this way, he stated that the ultimate purpose of the government was the confirmation of France’s power throughout the world, and he favoured the development of its navy, compared to England’s. He also thought that France should be ‘Europe’s peacemaker’ (1758b: 628). The peace he considered as the wisest policy was thus under French domination. He did not believe in the equality of development among States. A long-term economic domination of France over the other nations could be achieved through free trade. According to the physiocrats, free trade was most of all of benefit to national wealth, but Quesnay did not present a ‘cosmopolitan’ theory of trade advantages, even if his disciples went into this matter more closely than he did. Above all, a nation’s pacifism had to strengthen the Prince’s international power. Thus, nationalism pervaded the physiocrats’ liberalism, unlike the English classical economists’ one. Moreover, according to the physiocrats, as the King was the representative of God, the economic policy had to be accepted because it was created by Providence. Therefore, when they defended free exports of grains, they omitted to state the necessity of free imports. Implicitly, their theory justified measures supporting agricultural prices, in order for this sector to keep on generating a net product. In the same way, the consumption of agricultural products should be encouraged. Quesnay also recommended an interest rate policy of benefit to farmers. The development of manufactured goods exports was undesirable, because it was generally accompanied by a comparative decrease in agricultural prices necessary to cut down production costs. However, physiocrats began a movement which was confirmed later: economic thought was progressively dissociated from foreign policy issues, especially defence and security. They certainly mentioned in their work the imperatives of defence and national power. However, the mainspring was the © 2004 Fanny Coulomb

search for economic development, rather then national power. The nation’s defence capacity is expected to grow with economic wealth. The physiocrats’ systematized and mechanical presentation of economic laws has also influenced the economic conception of war and peace issues. The search for power was progressively excluded from the field of economic analysis and peace was implicitly considered as essential to prevent a disruption to the economy. Our purpose here is not to provide a complete presentation of all physiocratic works on military and commercial conflict issues. Quesnay’s main disciples, particularly Dupont de Nemours and Mercier de la Rivière, took the opposite view of mercantilism, by condemning the cost of trade wars, which were based on the false principle that a country can only grow richer by disadvantaging another one. Mercier de la Rivière (1767) highly recommended free trade, directly derived from property rights, and asserted that it was always to the advantage of a State to respect this principle, even if other States didn’t. A ‘natural, general and tacit society’ existed among nations. In particular, there was a ‘general confederation of all European Powers’ derived from the natural order, notably by enabling all countries to join in order to ensure their military security. Le Trosne (1777) extended the concept of natural order to international relations. Free trade was both fair and advantageous for all States, the interests of which converged. Dupont de Nemours (1764) came to the same conclusions, and also condemned the net cost of France’s trade with India. As for the marquis de Mirabeau (1760), he presented humanity as a large family divided in several branches, which should join in order to prosper; he also criticized commercial agricultural measures. We don’t think it is worth lingering over the presentation of these economists, although they were important, but their thought is a direct continuation of Quesnay’s, even if some of them insisted more than he did on the application of natural order principles. In fact, the physiocrats’ position regarding foreign trade seems to be most of all characterized by a certain refusal, trade being considered as ‘sterile’. It is thus necessary to minimize the importance of the statements made by physiocrats favourable to international trade, especially as power issues remain essential, as shown in the works of Boisguilbert and Quesnay. Peace according to Anne Robert Turgot: a human progress and an economic necessity Anne Robert Turgot (1750; 1751; 1767) defended several physiocratic principles. However, he always distinguished himself from this school. He recommended free trade, but not only to support agriculture. The development of industry and trade was also important for him. Being himself a statesman, he tried to implement economic reforms in the first years of Louis XVI’s reign, which began in 1774. The King appointed him general controller of financial institutions. Turgot started to implement a set of reforms, but his influence was short-lasting. Weakened by the ‘Guerre des farines’ (a popular revolt in April 1775, explained by the rise in wheat price and popular hostility to his policy), © 2004 Fanny Coulomb

his political influence quickly declined, and he was forced to give up his reforms. From that time onwards, the monarchical system probably lost all its chances of survival. Turgot took part in the writing of the Encyclopédie from 1756 onwards and his appointment was considered by the philosophers of Enlightenment as a chance to see their principles implemented. Following Locke, they generally defended the principle of a society’s government by an enlightened despot and the idea of humanity’s progress towards a universal morality, lying within the nature of a man endowed with reason. Therefore, progress was, above all, of the human spirit. Turgot underlined the central role played by war in this evolution. He presented two conceptions of war: • •

regarding humanity’s general evolution, war was a necessary stage; at the economic level, war generated useless waste and encouraged the State to get into debt, notably through loans, which could hinder the French economy.

War: a necessary stage towards progress and world peace In his Discours sur l’histoire universelle (Discourse on Universal History) (1751), Turgot went back over the evolution of humanity’s progress since its origins, as Voltaire did in the Essai sur les moeurs et l’esprit des nations (Essay on the Mores and the Spirit of Nations), but also and especially as Condorcet did in the Esquisse du tableau des progrès de l’esprit humain (Sketch of the Picture of the Progress of the Human Spirit) (1794). According to this thesis, human relations could only become more and more pacific, until the achievement of world peace. Turgot presents wars and revolutions as essential stages in this evolution: We can see the establishment of societies, the formation of nations, which alternately dominate and obey other nations; Empires rise and fall; laws, government systems follow one another; arts, sciences are alternately discovered and improved; alternately delayed and accelerated in their progress, they go from climates to climates; Interest, ambition, vain glory continually change the international scene, flood the earth with blood; and in the middle of their ravages, mores are soothed, human spirit becomes clearer, isolated nations get closer to each other; trade and politics finally reunite all parts of the globe, and the total mass of human race alternately calm or agitated, good or evil, always progresses, although slowly, towards a greater perfection. (1750: 70) Turgot also established a relationship between human progress and nature. The evolution of humanity can only be slow and halting. Nature unfairly distributed the gifts among humanity, which explains why groups progress at different rhythms. Wars, but also revolutions and conquests, significantly contribute to © 2004 Fanny Coulomb

this evolution, as they create a mix of peoples and an expansion of empires. Gradually, nations move closer to a more stable equilibrium; war then confines itself to the borders of empires. Conflicts are thus necessary evils in the development of nations (1751: 105). By establishing a relation between his conception of human progress and his defence of laissez-faire, Turgot prepared the ground for a paradigm which prevailed with the English classic economists: peace through free trade. Loans to finance war: a reason for the French economy’s downfall Just like Quesnay, Turgot considers the economy as a gigantic mechanism led by laws imposed by Nature, equivalent to those ruling physical science. His theory was a significant contribution to the development of economic analysis. He is considered to be the father of the theory of capital. Unlike the physiocrats, he asserted the importance of industry and trade; all fields of economic life had to be subject to the maxims of laissez-faire. Turgot also applied his liberal principles to defence issues. The fast rhythm of wars waged by France increased the risks of State bankruptcy. Turgot must have condemned the continual military conflicts of his time, although his public role limited his opportunities for criticism. He structured his economic programme on three proposals (1767): 1 2 3

put an end to the increase in taxes, and abolish the royal ‘corvées’; save on the budget, notably by reducing expenditures that favour nobility and ministers; abolish economic interventionism, notably by removing all hindrances to agriculture, industry (excess of controls) and trade (numerous octrois). The Edict of 13 September, 1774 established the free trade of grain within the realm. Finally, the military burden on the French economy was condemned, and more particularly the technique of loans, which encourages one to spend more than one has. The only difference between the private individual and the sovereign is the possibility which the latter has to go bankrupt and keep all the same his funds and his income. I suppose that if we had converted the sums we borrowed into taxes, instead of taking out the first loans to support war, we would have spent at first the product of the taxes and would have soon been forced to borrow. All the abuses we complain about here are an inevitable consequence of the unlimited power to increase expenditures. (1767: 251)

For the first time, military expenditures and the loan system were condemned for their disadvantageous economic consequences. This is the first expression of the liberal analysis of defence, war and peace, asserted at the end of the eighteenth century, notably by Adam Smith. With Turgot, economic issues are dis© 2004 Fanny Coulomb

sociated from political ones. ‘Economics’ was becoming a fully established field of work, leaving power issues to the political field of analysis. Ideally, peace was the natural and necessary condition of economic development. Conclusion The first real developments of the economic theory appeared in Europe during the sixteenth century, with the mercantilist doctrine. Until the eighteenth century, it stressed the State’s role in national economic development. Mercantilists shared a static conception of international economic relations, which led them to assert that a country could only economically progress by disadvantaging others. The decline of the mercantilist doctrine, and the development of the physiocratic thought at the end of the eighteenth century, meant a reversal in the way of considering the relationship between defence and economy. While mercantilists recommended the use of economy to achieve the State’s objectives, the physiocrats minimized the importance of foreign trade and focused on respect for the natural economic order within national borders. However, even if they defended free trade, the physiocrats were still concerned with national power, so, later, would be the English classical economists. The economy only gradually became a ‘science’, freed from ‘political’ concerns; this process ended in the nineteenth century, with neo-classical theory.

The classical economists: free trade, a factor of peace and prosperity The classical authors underline the uselessness of wars and their fundamentally extra economic character. The knowledge of the true principles ruling the economy should convince the political leaders to abandon their aggressive trade or military policy. In England, Adam Smith strongly opposed mercantilist principles and defended the conception of an economic body naturally governed by an ‘invisible hand’. Several years later, the economist J.B. Say expressed his ‘Say’s law’ which he considers as a fundamental discovery, notably because it must encourage people to become aware of the benefits of world peace. These two authors founded a relatively optimistic liberal current with regard to the possibility of achieving world peace by free trade. Jean-Baptist Say: peace for and by industrial and trade development Jean-Baptist Say is an ‘optimistic’ classical economist. The first edition of his Traité d’économie politique (Treaty of Political Economy) was published in 1803, after the publication of the Principles of population by Malthus (1798) and before Principles of Political Economy by Ricardo (1815). Popularizing Smith’s theory, Say’s Traité immediately had a great success. He was known by Ricardo, Malthus, James Mill and Bentham, and was considered by his contemporaries as a major author of the classical school. On many points, he only followed Adam Smith’s © 2004 Fanny Coulomb

thought, but he also made an original contribution, founding an ‘optimistic’ liberal thought, asserting the virtues of trade and military peace. Insisting on the important role played by economists in society, he denounced the policies of his time and made concrete proposals on defence issues. But he was also the prophet of a more prosperous and peaceful world in the future. He used his ‘Say’s law’ to show the uselessness of wars and the ineluctability of their disappearance. In the long run, the progress of political economy will eventually convince governments of free trade’s superiority. The idea of peace will spread worldwide through education and a sound knowledge of economic mechanisms. Say’s law: a demonstration of the economic absurdity of war Jean-Baptist Say thought that his law was going to lead humanity on the path of progress, by enlightening governments, but also and especially national public opinions, on the interest of the liberal peace. Chapter XV of his Traité (1803), entitled Des débouchés (On Outlets), expresses the famous ‘Say’s law’, according to which ‘products are exchanged for products’ or ‘supply creates its own demand’. The influence these pages have had on the development of political economy is considerable. Keynes himself, when he denounced classical theory, presented this law as a central element representative of this thought, even if such a generalization was criticized as too restrictive. According to Say, currency is only a veil and, all things considered, trade can be reduced to the exchange of products for other products. Each production creates its own outlet. Without any disruptive influence, notably due to state intervention, overproduction crises can only be temporary; because of a currency’s neutrality, an increase in production will always lead to an increase of outlets and, subsequently, of general economic prosperity. This principle, first applied to the national economy, was then extended to the international level, justifying in this way free-trade policy. A nation, compared to an adjoining nation, is in the same situation as a province compared to another province, as a city compared to the country: it is interested in seeing it flourish, and ensured to take advantage of its prosperity [. . .]. One gains nothing from peoples who have nothing to give. It is precious for humanity that a nation, among others, behaves, in every circumstance, according to the liberal principles. (1803: 144) To facilitate sales and thus encourage industry, it is important to continually stimulate the citizens’ appetite for consumption, and to multiply their needs. International trade enables a nation to increase the outlets for its industrial products. Reservations and reluctance expressed with regard to trade are inherited from the mercantilist ‘exclusive system’, which is based on false beliefs. In Say’s argumentation, peace is implicitly considered as an inevitable condition of © 2004 Fanny Coulomb

economic prosperity, because commercial outlets can only develop through free trade, in a peaceful world. Throughout his work, Say insists on the destructive effects of war and on the economic importance of peace in economic development. 1

2

3

4

5

6

On the moral plane, wars are scourges. Provoked by vengeance or the search for a ‘vain glory’, they compromise the ‘rest and the honour of nations’ and ‘harvest virtues and talents’ (1803: 462). Armed conflicts constitute a waste of people and resources, as well as a loss of income. Warfare is counterproductive (1803: 495). One can assert that war, by eliminating an excess of men, improves the economic situation of survivors. In fact, exactly the opposite occurs, initially because the decrease in the population originated by a conflict is only temporary. By killing consumers, war also kills producers. Therefore, Say’s law is no more valid, temporarily. Under these conditions, the birth rate would increase, families considering the objective of the improvement in their living conditions of secondary importance. Human losses must also be regretted from an economic point of view, as men constitute a real ‘capital’ (the ‘human capital’ concept). Moreover, war represents a loss of resources, as it ‘costs what it prevents from gaining’ (the ‘opportunity cost’ concept) (1803: 494). Even a victorious country will gain no economic advantage from goods acquired by ‘plunder’. Instead of increasing its industry, these goods tend to disorganize it, notably by hindering the circulation of goods and money (1803: 150). Furthermore, when they are financed by loans, wars have incalculable damaging economic consequences; this financial burden, a real ‘tribute imposed to the conqueror’, weighs heavily on the economy for several years after the return of peace. Besides, and this idea had already been developed by Adam Smith, the will of political leaders to expand the colonial empire is economically unjustified, because of the costs represented by not only conquests, but also the maintenance of sufficient armed forces to guarantee peace in the Empire (1803: 227). Finally, conflicts cause important material damage to the territories on which they take place, which will be all the more important if the country is rich and endowed with numerous industrial and agricultural installations (1803: 495).

Say also pursues some of the ideas previously developed by Smith about the origin of prohibition systems, so often a source of war, and notably the idea that these measures would be of benefit to particular interests instead of the general interest (1803: 174). He also denounces mercantilist prejudices, according to which a country can only grow rich at the expense of the others, which represents an offence against the ‘first principles of political economy’. As to the origin of war, Say suggests, in addition to trade or colonial conflicts, there are © 2004 Fanny Coulomb

the ‘prejudices’ of statesmen, regarding their conceptions of honour or glory. Other more original ideas are advanced by Say, notably: •

•

the arms race. Indeed, the maintenance of important permanent armies by a State could be interpreted by its neighbours as threatening for their own security. To a certain extent, the phenomenon of the arms race is described there. the naturally peaceful tendencies of the citizens-producers.

The change from an offensive to a defensive foreign policy: a fundamental economic issue Not only did Jean-Baptist Say denounce the uselessness of wars stemming from a false conception of national interests, but he also gave practical advice on the policy of defence which would be the most favourable to the general interest. • •

•

•

•

Set up a defensive force rather than an offensive one, enabling the nation to lessen the economic burden of military expenditure (1803: 496). Promote a general policy which could mobilize citizens around the cause of national defence. A government which benefits from the people’s support should always be able to withstand foreign invasion (1803: 156). Replace permanent armies with militias. Say mistrusted the military: they often disrupt the economy, notably the movement of products, even in peacetime; furthermore, they have an important role in maintaining a warmongering spirit within governments, but also among the population (1803: 162). Avoid the use of the economic weapon (1803: 180): Say strongly disapproves of governments’ resorting to trade restrictions. He does not even make the same concessions as Smith on the matter of trade reprisals; according to Say, the economic cost of such measures is always superior to the political benefits a nation expects to gain from them. In the same way, he questions the efficiency of embargoes: the enemy on which they are imposed will be encouraged to modify a part of its productions and, all things considered, won’t suffer much from these measures, because all products will be exchanged for other products within the country. In other words, even if autarky is not desirable, Say’s law makes it tolerable. Join an international strategic alliance: this was an original idea for the time. Say’s argumentation focuses on the necessary replacement of an offensive defence policy by a defensive one, thus limiting waste. Say considers this evolution as ineluctable, given that a modern State, which intends not to hinder economic prosperity, won’t have the means to ensure its own defence any more.

Say’s precepts on defence policies correspond to a radical change in the economic debate on defence, war and peace at the beginning of the nineteenth © 2004 Fanny Coulomb

century: economic issues are henceforth in the centre of social organization and human mentalities; the policy of defence is not an exception to this evolution. The development of political economy and its contribution to world peace Say underlines the fact that, if governments didn’t benefit from the support of public opinion, they could never undertake military expeditions. This is why economists must first and foremost enlighten the population, those who govern them being forced to follow the general will, in the case of a representative political system (1828–1830: 162). Therefore, economists have a fundamental role in society; by deducing from the advances of their science the real laws governing economy, and by enlightening public opinion on its real interest, they contribute to the progress of humanity. Yet, one of the fundamental truths revealed by political economy is the uselessness of wars and their negative effect on society’s general prosperity. The progress of the population’s knowledge of political economy will necessarily be very slow. But some great truths, some simple principles, will nevertheless succeed in being rather quickly accepted, like all great scientific discoveries. We must none-the-less be discouraged since in political economy, as in everything, it is the elementary knowledge which is the most useful in practice. The theories of heat, of the lever, of the inclined plane have put the entire nature at the disposal of man. The theory of trade and of outlets will change the world policy. We must thus ensure the spread of established notions rather than pursue their last consequences, and try to enlarge the basis of sciences rather than raise their summit. (1803: 43) In a rather original way, Say is explicitly in opposition with the theorists of political economy who give an essential role to theoretical abstractions. In this respect, he inaugurates the ‘French economic tradition’ of an economic analysis at a low level of abstraction, refusing State intervention (that his liberal followers will condemn even more). In contrast, English economists are more ‘abstract’ and, what may appear at first sight paradoxical, they don’t always disapprove of state intervention and are less and less concerned with the implementation of their principles. By exalting the essential role of economists as guides of institutional and social evolution, and by considering international peace as humanity’s ultimate objective, Say develops an idea, later pursued by Léon Walras. Finally, Say is also one of the first economists to have developed concepts known today as the arms race, alliances and peace dividends. As an enthusiastic apologist for the pacifying virtues of the market economy, Say not only gave some advice to governments for the present, but he also expounded his view of a prosperous and peaceful society which could surely be achieved if economic laws were respected. In this way, he pursued, and even © 2004 Fanny Coulomb

emphasized, Smith’s optimism, and he initiated such an optimistic liberal current of thought that it was, in the style of his time, almost ‘Utopian’. An industrialist pacifism In his description of humanity’s evolution, Say shows that industrial progress removed the possibility of wars of aggression waged ‘to plunder and destroy the sources of wealth’ or ‘to occupy and maintain a large number of inactive citizens’ (1803: 386). With the development of industry and trade and the awareness of their benefits, the causes of wars were transformed, and became economic. The civilized countries started to fight for colonies or specific trade activities. The risk of invasion by non-industrialized countries, which don’t possess advanced military technologies, definitively disappeared. Humanity is about to reach another stage: the continual increase of the domination of society by ‘producers’ will gradually tend to remove the eventuality of conflicts motivated by alleged economic interests; it is ‘in the nature of things’. A last progress remains to be made, and it will be due to a more generally widespread knowledge of the political economy’s principles. We shall admit that when battles are waged in order to keep a colony or a monopoly, we are trying to gain an advantage that is always too costly; we shall realize that foreign products, even those of subject colonies, are always bought with domestic products; that subsequently we must be most of all concerned with domestic production; and that this production is never more favoured than by the most general peace, the most gentle laws, the easiest communications. From now on, the nations’ fate won’t depend on a uncertain and always precarious preponderance, but on their lights. The governments, which can only subsist with the producers’ help, will become more and more dependant [. . .] (1803: 388) The term ‘producers’ has a rather general sense: it includes the ‘industrious’, i.e. entrepreneurs, workers and scientists, and the ‘passive producers’, i.e. capitalists and property owners. The industrious play a far more essential part in economy than passive producers. They will tend to federate themselves and have a strong influence on governmental decisions. As the progress of economics will enlighten humanity on the benefits of free trade and the necessity of peace, wars will naturally tend to disappear among industrial nations. Besides, these ideas will be pursued by the Utopian socialists, notably by the Saint-Simonians. Obviously, the future did not confirm this forecast. The ‘producers’ (workers, businessmen) didn’t unite in a homogeneous group. Some entrepreneurs can have an interest in war, even when it goes against the general interest. Notably, military industries became more and more important in national economies, while international trade was expanding. Yet, the interests of powerful military and industrial pressure groups often lie in the maintenance of a threat of inter© 2004 Fanny Coulomb

national war which originates an arms race. Both World Wars showed that there could be a correlation between ‘the industrial spirit’ and ‘the warmongering spirit’. Say would have explained this evolution by a misunderstanding of the national economic interest and the sacrifice of the general interest to the benefit of individual interests. Nevertheless his optimistic opinion on the inevitable pacification of the world through industrialization was seriously refuted, first by the war of 1870, and then by the two World Wars. But on other issues, Say appeared to be a better analyst than his contemporaries. By emphasizing on the leading role played by the entrepreneur in economic development, he was more modern than the English classical authors, who gave a central role to the property owner in the economy. Besides, the argument that industrial development always corresponds to the development of a pacific mentality was pursued by several economists, in particular by the Saint-Simonians, who, as we shall see later, envisaged a future world federated and pacified by the interests of the industrious. In the twentieth century, Joseph Schumpeter opposed, in Capitalism, Socialism and Democracy (1942), the pacifism of the capitalist bourgeoisie to the warlike spirit of the feudal system of government. Was Jean-Baptist Say too optimistic regarding the disappearance of war? We can’t answer in the affirmative if we consider that his comments on this subject look like a pious hope. On the other hand, he opened the way to an ‘optimistic’ liberal current of thought, which was strongly opposed to all kind of state interventionism, and refused to envisage the eventuality of an international conflict until the eve of the First World War. Keynes blamed them for having induced European governments, faced with the fascist danger, to adopt incorrect measures of foreign policy. But Say’s followers were more dogmatic than their leader as to the economic and political benefits of free trade. Say’s contribution to the economic analysis of defence and peace is fundamental. First because he considers that the economist’s mission is to enlighten governments and peoples on the waste generated by wars and by a high level of military expenditures. Second because he suggests original measures of defence policy, such as the renunciation of all restrictive trade measures (including reprisals), the decrease of military expenditures and the establishment of an exclusively defensive (instead of offensive) system, notably owing to a system of military alliances. Clearly anticipating the dangers of an arms race, he considered that the implementation of a peaceful policy lowers the risk of invasion. Numerous criticisms certainly arose against the simplicity of his theory and his resolute optimism; Karl Marx notably considered him as ‘insipid’. However, Say founded an important current of economic thought, strongly marked by pacifism, among the liberals as well as among the Saint-Simonian interventionists. His thinking on defence and peace is thus of considerable importance in the history of economic thought. Adam Smith and J.B. Say’s contributions imposed the principle of an ‘apolitical’ economic analysis of war, which is considered as expensive, not only because of the direct spending and destruction, but also because of the loss it © 2004 Fanny Coulomb

entails, compared to a situation of international peace. This analysis pursues the plea in favour of non-interventionism and free trade. Military expenditures must be cut down to the minimum necessary to guarantee a dissuasive potential; aggressive trade measures, which often lead to armed conflicts, have a negative economic impact and result from a dysfunction of the State.

The triumph of economics as a factor of peace The economists who defended laissez-faire principles during the nineteenth century were divided into two main tendencies: • •

a liberal current, mainly in France, partially following J.B. Say’s analyses, strongly reasserted the idea of peace through a free-market economy. marginalism, which founds the neo-classical school, develops a ‘pure’ economic analysis, outside the historical context. Its authors aspire to build a theoretical ‘scientific’ system which would definitively guarantee the happiness of humanity. They suggest microeconomic methods of reasoning with little relevance to the analysis of wars and conflicts.

The nuances of the ‘normative’ French liberals as to the advent of a lasting international peace Say aimed to demonstrate that economic progress is unlimited, owing to ‘Say’s law’. He in fact initiated a real ‘French economic tradition’, for which concrete economic policy issues were of more importance than an abstract theoretical reasoning. War and peace issues are often mentioned in the works of these French liberal economists. Whereas in England, with John Stuart Mill, economics gradually abandoned these considerations to the political sphere, French economists maintained a kind of truly political economic tradition. They wished to enlighten governments of their real interest, regarding trade and foreign policy, in order to ensure universal peace. Other developments are also presented, such as the idea of international institutions to guarantee international peace. The works of these French economists, regarding the existence of a pre-established economic order, have sometimes been influenced by the Utopian socialists, and particularly of the Saint-Simonians, as well as by the physiocrats. The economic arguments to promote peace Two basic conjoined ideas can be found in the works of the French liberal economists of the end of the nineteenth century. •

First, peace is a condition of economic development, through enabling the establishment of free trade; the cost of war is far more important than its potential profits.


•

Second, the evolution of the economy towards an increased liberalism guarantees the advent of a lasting international peace.

The economists of this movement rather widely shared the first idea, but their views differed with regards to the second proposition. THE UNANIMOUS AGREEMENT ON THE COST OF WAR AND THE ECONOMIC NECESSITY OF PEACE

The liberal economists condemn the too high-level of military budgets, leading national income away from productive work, which is ‘lost for ever’ in Bastiat’s own words (1864: 584). Chevalier (1858: 341) also considers military expenditures to be too important, slowing capital progress and, reducing in return national security. French economists also unanimously denounce the excessive cost of wars, which may have had an economic interest in the past, but not at their time. The argument of the ‘greatness and decline of war’ was best developed by Gustave de Molinari (1898). Past wars may have been useful and even productive (and thus ‘moral’), notably by ensuring food resources, by defending the territory against foreign covetousness, by enabling a nation to benefit from foreign wealth or by accelerating civil and military progress. But with economic progress, the causes of war, which have always been economic (including religious wars), have gradually disappeared. Technical progress (generally accelerated by wars) has ensured the security of civilized nations; with the growth of international trade, armed conflicts have been replaced by international economic competition. Moreover, war damages are not local but general, notably because of production internationalization. Therefore, war is not lucrative but, on the contrary, very costly (1898: 164). Concerning the profitability of war, Silberner (1957), in an interesting comment on Yves Guyot, considers this author to have pursued Molinari’s arguments. In his book, Jalousie commerciale, Guyot asserts that war is no longer profitable, because conquerors have to respect private property. Silberner comments: ‘the idea of a future war where the conqueror would not respect neither the property nor the personal freedom of the defeated does not seem to come to Guyot’s mind’ (1957: 95). Without making an exhaustive presentation of the various arguments advanced by French economists to denounce the cost of war, we can enumerate the main points: • • • •

cost in human lives; enormous sums spent on conflicts; numerous disruptions in trade; important material destruction.

In this respect, Bastiat (1864: 586) blames wars for most of the miseries from which the people suffer. Indeed, war generates losses in personnel and destroys © 2004 Fanny Coulomb

capital, thus causing a ‘loss of work’. Later, Leroy-Beaulieu criticized John Stuart Mill’s argument, according to which national capital could quickly be rebuilt after war (1896: 259). He also disagrees with Henri George when he states that workers are not maintained by the capital but by their work, which would imply that capital doesn’t hinder industrial development. For Leroy-Beaulieu, economic recovery will be all the more slow as capital destruction is important. The return of peace is often characterized by an important economic crisis, because of national indebtedness, trade disruption, the needs for reconstruction and capital and stocks destruction. A country ‘of ancient wealth’ could certainly repatriate its foreign credits, to finance the economic renewal; but in the end, ‘the country finds itself with more loans, pays more taxes and loses the income of the foreign securities it has sold’ (1896: 447). A few years before, Chevalier (1853: 210) (a former Saint-Simonian) had underlined that peace was a condition of international trade development and recommended free trade. Militarism impedes the development of trade relations and only benefits a limited part of the population. However, free trade is not a sufficient condition for international peace. Even if free trade is a necessary condition for international peace, it is not a sufficient one. This last argumentation distinguishes the liberals, who are optimistic of the advent of a lasting world peace, from the sceptic economists. One of the fundamental principles of French liberalism of the time is the idea that free trade would create peaceful tendencies within societies, notably by educating public opinion. In this way, Michel Chevalier (1853: 211) approves of England’s free-trade policy, which should be an example to the rest of the world. As for Frédéric Passy, increasing international economic interdependencies will make governments aware of the uselessness of wars: ‘One day, all barriers will fall; one day the human race, continually united by ceaseless transactions, will constitute a single workshop, a single market, a single family’ (1896: 114). Frédéric Passy particularly contributed to the development of the peace movement in France, by founding the Ligue internationale de la paix (International League for Peace) in 1867 and the Société pour l’arbitrage entre les nations (Society for Arbitration Between Nations) in 1870. He received the Nobel Peace Prize in 1901, together with Henri Dunant. Passy (1904: 9–24) defends the project of a great European customs union, but disapproves of the idea of defensive tariffs to counter American and Japanese competition. In order to improve its competitiveness, Europe should undertake a significant disarmament, which will release resources for productive activities and pacify relations among European countries. Indeed, the cost of an armed peace is important and the idea of a military sector, the technological innovations of which benefit industry, is unjustified. Passy states that ‘the association, always wider and closer, is the law of history’. Passy particularly insists on the necessity to expand ‘the pacific education’, in a perpetual action to make world public opinion progressively agree on the necessity of peace (1904: 97–115). As for Baudrillart (1872: 336), peace and the freedom of trade are closely related, owing to economic interdependencies. © 2004 Fanny Coulomb

Several other French economists confirm these ideas. Nevertheless, the old mercantilist rules are still debated: for example, Leroy-Beaulieu (1896: 281) criticizes the trade balance theory and the idea that governments should keep as much gold as possible within the national territory, because it represents a safe investment in wartime. He states that governments should be more preoccupied with their balance of payments than with their balance of trade, because when peace returns international debts could be cancelled by means of clearing. Of all the French liberal economists having succeeded Say, Bastiat is certainly the most famous. In his opinion, wars have always started because a State acted beyond its prerogatives, namely the maintenance of public order, security and justice (1862: 194). Governmental foreign policies are not in line with the general interest and are only possible because they are financed by taxes, which overburden peoples and prevent the realization of a ‘universal harmony’. In actual fact, outlets cannot be conquered through trade reprisals and colonial conquests. Bastiat considers that the error of political economy has been to pay more attention to production than consumption: Superficial minds accused Competition of introducing antagonism among men. This is true and inevitable as long as one considers them only as producers; but if one takes the consumption point of view, then Competition itself will bring together individuals, families, classes, nations and races, united by universal brotherhood relations [. . .] (1864: 385) For Bastiat, the economist’s role is to accelerate the awareness of public opinion to uselessness of wars. The progress of sciences, industry and fine arts increase the feeling among peoples that peace has beneficial effects. The development of international trade and communication guarantees a widely spread feeling of community. Europe and the United States lead the world towards the general adoption of a representative system, which is by definition favourable to peace, because decisions to wage wars can only result from a ‘long, solemn, thoughtful consideration, in State councils where the main interests of the country are heard’. Besides, the bankers and traders’ support is essential in the financing of war; yet, they are often hostile to war (1858: 239). WAR: INHERENT TO HUMAN NATURE

Bastiat and Chevalier present war as inherent to human nature. However, both economists draw different conclusions as to the future of international peace. In spite of his belief in the peaceful nature of free trade, Chevalier (1858: 255) doesn’t consider that world peace will ever be definitively established. He quotes several examples of political leaders who, after having asserted their peaceful convictions, have nevertheless led their country in merciless wars, like Napoleon Bonaparte or Pitt. Thus, one mustn’t forget the reality of human nature. Some political projects (the Holy Alliance, the London Conference in © 2004 Fanny Coulomb

1830) certainly contributed to the establishment of a lasting peace in Europe, but nothing is ever guaranteed; furthermore, this doesn’t mean the rest of the world will be pacified. Chevalier doesn’t believe in a transformation of the defence policy; he presented a project to reform the army, so that it becomes an instrument of defence rather than aggression (as we shall see later, p. 109). Bastiat devoted a chapter of Harmonies économiques (Economic Harmonies) (1864) to the question of war. However, this unfinished chapter gives little explanation as to a possible future pacification of international relations. But he recognizes that the principle of interest could just as well lead a country to take possession of a neighbour’s wealth by force, or to develop its own wealth through production. This is what distinguishes ‘despoilment’ from ‘production’, and ‘peoples of despoilers’ from ‘peoples of workers’. The tendency to despoilment is inherent to human nature, therefore war is a permanent feature in the history of humanity. But Bastiat was convinced that perpetual peace was not imaginary. He left unfinished the passage entitled ‘How war finishes’, which ends with the following sentence: Despoilment, like Production, having its source in human heart, the laws of the social world would not be harmonious, even in the limited sense which I gave, if this one should not, in the long run, dethrone that one. . . (1864: 581) Bastiat’s belief in the existence of a divine law establishing a universal harmony was previously evoked. He considers the realization of international peace and the development of free trade as very close objectives, and he even appeals to the French government to start a procedure of total disarmament. His firm belief in human nature’s perfectibility distinguishes his analysis from Chevalier’s, who considers war as inherent to human nature. As for Leroy-Beaulieu, the establishment of free trade is irreversible: it could at any time be challenged by great economic crises, which entail protectionism. Thus, at the end of the nineteenth century, the belief in ‘economic harmonies’ seems to be slightly altered, and the liberal principles give more importance to State intervention and social protection. The various kinds of pacifism of French liberal economists of the end of the nineteenth century Like the Utopian socialists, the French liberal economists of the mid-nineteenth century provide numerous projects on the social changes. With regard to our subject, economists made many original proposals on the French defence policy or institutions in order to ensure a peaceful settlement of conflicts. But not all liberal economists were ready to abandon the concept of nation or national defence for an illusory belief in the advent of a world peace through free trade.


THE FUTURE PRESERVATION OF NATIONAL DEFENCE PREROGATIVES AND ITS ECONOMIC IMPLICATIONS

In a century marked by the idea of ‘nation’, several economists contest the accusation of ‘cosmopolitanism’ formulated against the liberal theory. This concern seems all the more important as the nineteenth century is marked by nationalisms. Baudrillart (1872: 312) therefore considers that, in fact, the defenders of prohibitions are the ones who deny differences in character between various peoples: they don’t take into account ‘the differences that climates, races and institutions have established among men’, which demonstrate the advantages of the international division rather than those of self-sufficiency. Providence ‘founds the alliance of peoples on differences of characters and faculties’. The only concession that Baudrillart made to protectionism is on ‘weapons and ammunitions’. Also defending the idea of nation, Rossi (1841: 282) criticizes the perspective of a worldwide political unification and its transformation into a ‘single and big workshop’. Like Baudrillart, he is favourable to the protection of French armament industries but also of other strategic products. Therefore, by lauding the defence of strategic industries for national defence, these economists implicitly show that they remain sceptic as to the realization of peace. We previously mentioned that Michel Chevalier does not believe in the advent of a universal peace. However, he considers that, since the French revolution, peaceful interests have become more influent than the interests of the military aristocracy, notably because of the remembrance of the wars of 1792 and 1815. He is therefore concerned with the army’s future; he suggests the development of its defensive (instead of offensive) character, and the reduction of the military service duration. But his most original proposition (although inspired by Saint Simon and Fourier, himself being a former SaintSimonian) is to assign to the army an active role in national production, by employing it for civil works in peacetime: In such a situation, it was natural to wonder if these immense forces which war sets in motion, if these corps powerfully organized, full of ardour, and which, when it is needed, work wonders, could not be given to a certain extent a peaceful purpose. (1858: 182) To illustrate his comment, Chevalier unreservedly praises the militarization of the Prussian society (1858: 293–314). His idea is to keep a minimal permanent army, with a population constituted of a large number of brave soldiers who participate in productive works in peacetime and can be placed in the service of the country at the first alert. Finally, Chevalier evokes ‘the possibility to introduce into industry the elements of the army’s organization’, even if free enterprise must be maintained. Michel Chevalier does not mention the role the military sector has in technical progress, an issue which will give rise to an © 2004 Fanny Coulomb

important debate in the twentieth century. His reform proposal for the army is original and combines liberal and Saint-Simonian influences, which is very representative of the time. Other liberals were far more radical and totally refuted State intervention in the economy. Armies, which exhaust public finance, must be dismantled rather than reformed. THE LIBERAL ECONOMISTS’ APPEAL FOR RADICAL PEACEFUL SOLUTIONS

Two economists do not hesitate to propose real institutional revolutions in order to make the establishment of international peace possible. Bastiat appealed for a total and immediate disarmament. Gustave de Molinari suggests the establishment of an international peace organization. Bastiat (1862: 197) recommends the disarmament of European countries, and bases his argumentation on two points: first, a decrease of military expenditure would allow a reduction in taxes, then, it would entail a general movement of world pacification. Free trade is far more profitable economically than protectionism and colonialism. The aggressive military policy must be replaced by a defensive strategy, with a decrease in military expenditures (and thus in fiscal pressure) and the constitution of militias. A country which proceeds simultaneously in a reduction of military expenditures and of taxes, would thus achieve two aims: •

•

a lower risk of invasion, because the other peoples should feel less threatened and should therefore follow the examples of justice and peace. Bastiat even dares to predict that England, which has adopted free trade, will reduce by half its naval forces within seven years. At the end of the third volume of Bastiat’s Works (1864: 518), Cobden and the League, the editor admits that the European war which occurred after the author’s death has prevented this prediction from coming true. a higher national defensive potential, owing to the support of the entire population; a decrease in taxes is the best way to guarantee this support and thus to limit internal disputes.

Bastiat denounces the governments’ erroneous reasoning regarding the necessity of military expenditures to maintain internal peace: ‘Let’s overburden the taxpayer to have a big army, then let’s have a big army to contain the taxpayer’ (1863: 458). For Bastiat, the defenders of a high level of armament (and thus, indirectly, of armed conflicts) are those who benefit from monopolies and who use the argument of national security to justify the protection of their activities (1862: 204). In Paix et liberté ou le budget républicain (Peace and Freedom or The Republican Budget) (1863: 454), Bastiat proposes a programme of total and immediate disarmament of France. He considers that the country would then take the lead of a real revolution, while contributing to the spread of the idea of democracy © 2004 Fanny Coulomb

throughout the world; moreover, taxes should decrease and mass consumption should increase. He doesn’t believe there is a real danger of invasion, nor does he consider disarmament would threaten external security. In a famous passage of his work, his style of argumentation reminds one of the Utopian economists of the nineteenth century. I believe that the moment has come when France has to resolutely declare that she considers that the Solidarity of peoples lies in the linking of their interests and the communication of their ideas, and not in the interposition of the brute force. And to give to this statement an irresistible weight – Because what is a manifesto, whether eloquent or not? – I believe that the moment has come for her to dissolve this brute force itself. [. . .] Personally, I shall not hesitate to vote for disarmament, because I do not believe in invasions. Where would they come from? From Spain? From Italy? From Prussia? From Austria? It is impossible. Which leaves only England and Russia. England! She has already experienced it and a twenty two billion debt, of which the workers still pay the interest, is a lesson which cannot be forgotten. Russia! But it is a chimera. Contacts with France are not what she seeks, but what she avoids. And if the emperor Nicolas dared send us two hundred thousand Muscovites, I sincerely believe the best we would have to do, would be to give them a warm welcome, to make them taste the sweetness of our wines, to show them our streets, our shops, our museums, the people’s happiness, the gentleness and the equality of our penal laws, after that we would tell them: Go back to your Steppes as soon as possible and tell your brothers what you have seen. (1863: 456) According to Bastiat (1862: 153), the real interest of workers lies in free trade, which guarantees peace better than any political initiative. He is not favourable to great international projects in favour of peace (too ‘artificial’) but only to a free-market economy, which ensures ‘the interlacement of interests’ and ‘the worker’s emancipation and rehabilitation’. Unlike Bastiat, Gustave de Molinari (1898: 196) recommended the constitution of a political organization at the international level, in favour of peace. Molinari considers that war always has economic causes, whether direct – to conquer markets or take possession of the conquered territories’ wealth – or indirect – ensuing from the influence groups interested in war (weapon producers, members of the military hierarchy or others) have on governmental policies. These pro-militaristic interests are still arguments of great weight, even in countries such as the UK or the United States, because of the political system, which prevents the pacifist opinion of the majority of capitalists from prevailing. These same interests urge governments to lead aggressive commercial policies in peacetime. State control and socialism are two other forms of the state of war and they derive from the same causes: the will for enrichment of some producers through protectionism and the enrichment of government members © 2004 Fanny Coulomb

through state control, the logic of which eventually leads to socialism. These various forms of the state of war disadvantage the interests of the ‘industrious classes’ and only benefit a minority. Molinari proposes the creation of a ‘collective organization to guarantee the nations’ security’. Its form is not defined, but would probably include the creation of a league of neutral nations in Europe (the threat of coalition and intervention of which would serve to prevent an excessive expansion of a particular State); another possibility would be the founding of a collective court of conflict resolution. The outcome of this process would be the general association of civilized countries, but it won’t occur for a long time. When States adhere to a system of collective security, defence expenditure will be drastically cut, opening the way for a reform of political and fiscal institutions. Governmental rights will be limited, so that private individuals won’t have to finance conflicts any more. In the same way, the subjection of the weak by the strong will disappear. However, the social class interested in war and in the development of armament and defence budgets still have too strong an influence compared to the great majority of citizens, interested in peace, to hope to see these projects succeed in a near future. Only the onset of a murderous war would lead public opinion to put pressure on governments (1898: 199). Gustave de Molinari’s conception can be compared to Paul Leroy-Beaulieu’s view (1896: 284–288), who considered the project inspired by Kant or the Abbé de Saint Pierre of a European court of conflict resolution as ‘a rather poor expedient’, a utopia, because no government would ever consent to risk the life of its citizens and to invest large sums in order to defend an allied nation. ‘Actually, the most effective guarantee of peace is the economic and democratic constitution of our modern societies’, because public opinion is predominantly peaceful. He advocated a reduction of permanent armies, peace being mainly threatened by an arms race. The peaceful liberal movement continued until the eve of the First World War, in France but also in other countries. In this respect, the British economist Norman Angell (1910) calls on governments to become aware that the time for wars is over, and to undertake a disarmament. Denouncing the international arms race, he states that the idea that ‘the prosperity of nations depends on their political power, from which ensues the necessity to protect itself against the aggression of other nations, wishing to weaken our power in their favour’ is a ‘stupid and dangerous mistake’, an ‘illusion’ (1910: XV). He is notably opposed to the idea that a nation can grow rich owing to war, the war indemnity itself being insufficient to cover all the costs of the conflict and its preparation. He also wishes to demonstrate that Great Britain would not suffer economically from the loss of its colonies and that foreign countries would take no advantage from their conquest. Beyond economic matters, Angell suggests that civilization’s progress entails a gradual transfer of the human fighting spirit to the intellectual level. Therefore, intellectual strength should progressively replace physical force, even in the army, whose efficiency depends more and more on engineers and technicians. Psychological progress should also engender © 2004 Fanny Coulomb

an awareness of the necessity to abandon the use of physical force between States, thus destroying the ‘homogeneous personality of States’. Keynes will later accuse the liberal pacifist economists, in particular Angell, in their analyses previous to the First World War, of having disadvantaged their country’s interests by refusing to acknowledge the reality of a danger to national security ensuing from the international situation and by maintaining their appeal for peace on the eve of the world conflict. The neo-classicals: an analysis with no conflict Neo-classical economists, who wish to make economics into a science, and who defend the free-market economy at the national and international level, do not integrate defence and security issues into their analyses. However, some ideas on peace (Walras) or protectionism (Pareto) are original. While the neoclassical theory appears to be relatively homogeneous, it is interesting to note the heterogeneousness of the conclusions drawn by its authors on defence and security matters. Léon Walras: defence out of economic law Léon Walras, like J.B. Say, considers that economists must reveal the real laws governing the economy. Governments will gradually become aware that laissezfaire and free trade lead to the general economic equilibrium and to world peace, which represents the crowning achievement of economics. Like the English classical authors of the eighteenth century, Walras acknowledges that State intervention is justified in a few important areas where the law of supply and demand does not apply, notably in national defence. He was writing in a strained political context, with war between France and Germany, and in a theoretical context marked by the influence of the German historical school which seemed to justify the implementation of aggressive foreign policies. Walras was already thinking of saving capitalism. He suggests another alternative to the one existing between individualism and communism, between liberalism and socialism. He wishes to implement a new economic theory, in three stages: first, a pure political economy must be elaborated, then a social political economy and finally an applied political economy. Only once a pure political economy, a social political economy and finally an applied political economy have been successively established will governments be able to found their political action on the conclusions drawn by economists. Far from wanting to settle a cold science against the unreliable assertions of the supporters of colonialism and protectionism, Walras aspires to scientifically create a new ideal and new dogmas, indispensable to ‘inspiration’, and thus to social progress. Yet, it is the search for universal peace that underlies his scientific project. We shall first present the Walrasian conception of defence but also of economic security which represents a central element of the author’s scientific © 2004 Fanny Coulomb

project. We shall then expound on Walras’ conception of pacifism; the universal search for peace is, in fact, the determining argument of his demonstration in favour of the State’s appropriation of lands, which should mark the end of the trade liberalization process. DEFENCE AND ECONOMIC SECURITY: THE DOUBLE POINT OF VIEW OF SCIENTIFIC REASON AND POLITICAL REASON

In the same way as Adam Smith, Léon Walras concedes that defence imperatives can sometimes justify infringements of free trade. He also leaves the leading of the foreign economic policy to ‘politicians’ as this does not concern economists. Walras (1896: 144) believes that the State is not simply a group of individuals but that it has its own existence, that it guarantees freedom and thus that the search for a greater economic freedom cannot be an argument in favour of its rejection. He claims scientific legitimacy for exceptions to laissez-faire, mainly concerning the production of public goods and monopolies. The army and the police, guarantors for national independence and security, must be maintained, as with all public utilities. In these sectors, a free-market economy won’t succeed in satisfying the demand, which is not individual but collective. Walras asserts that, in this case, as for monopolies, State intervention is a ‘scientific rational fact, justified in terms of equity or utility’. He distinguishes State intervention ‘based on politics’ from the one ‘based on theory and science’, which refers to the difference between ‘ideal and reality’ (1875: 220). Walras’ theory is to scientifically establish a new ideal of society. On this matter, he declares: ‘From a scientific point of view, I am socialist’, because of a relative similarity of ‘inspiration’ (1896: 22). The society’s ideal (which varies according to historical periods) is what determines the nature of the relations between the individual and the State. Furthermore, Walras defines the ideal of a society by referring to two notions: equality and freedom (1896: 146). Whereas, in Antiquity, the individual was sacrificed to the State, the spiritualist ideal of the Middle Ages inaugurated the sacrifice of the State to the individual, notably with the numerous wars led by the Lords. According to Walras, between these two extreme examples it is necessary to find ‘a new ideal foreseen by our fathers, which reconciles freedom and authority in order, equality and inequality in justice’ (1896: 147). Therefore, Walras thinks that the modern era must give a new meaning to state intervention, with the revelation of the real scientific laws ruling economy, which would result in the establishment of a new ideal. Yet State intervention is not scientifically justified in the case of commercial treaties or protectionist measures, nor even when the economy’s security is at stake. Walras hopes to definitively eliminate the liberal economists’ ambiguity on this subject, like Adam Smith’s position on the Act of Navigation, for example. Historical examples certainly show that interventionism has sometimes benefited national industry, like the Act of Navigation, Colbert’s protectionist measures or the establishment of the Zollverein. However, this is © 2004 Fanny Coulomb

only a ‘political’ truth, and not an ‘economic truth’, i.e. a ‘scientific truth’ (1892: 172). As stated by Walras, the law of supply and demand suggests that ‘the best organization of the divided work is freedom’. Consequently, the history of economic facts is not only deduced from the knowledge of the scientific laws governing the economy. Customs and politics are decisive factors explaining the industrial development of various societies in history. Nevertheless, there is, at all times and in all places, only one single scientific truth. The recognition that ‘the personal faculties of men are the natural object of individual property’ (1892: 172) is one of them; slavery is thus always reprehensible, even if it represented an economic necessity for antique civilizations, Egyptian, Greek and Roman. Yet a State which would implement political and commercial measures only pragmatically, from the observation of concrete facts, without referring to economic principles, would run the risk of being weakened: Applied to science as well as to politics, empiricism prevents revolutions but highly favours illegal seizures of power because it destroys the principles and leaves a clear field to all the attempts capable of succeeding. In the absence of principles, everything gives in to success. (1892: 171) Indeed, Walras condemns the German economists, who give no advice as to political economy but only describe economy. He also condemns the idea that economics can be national: considerations of economic policy concern politics and not science. Walras thus declares: The Germans’ national political economy is a confused hotchpotch of political economy and German policy; it is possible that politically such or such country in general and Germany in particular, has specific reasons for protecting its industries; but the German policy is no concern of ours. (1883/89: 607) Walras admits that, in certain circumstances, such as ‘the intervention of foreign competition’, or ‘the introduction of machines’, the State can take measures in order ‘to ease subsequent temporary crises’ (1875: 221). In the same way, it would be impossible to abolish the protecting system all at once, without having disastrous effects on several industries, with a sudden movement of production factors. Therefore, State intervention can sometimes be justified for political reasons, but never for theoretical or scientific reasons. Walras thus presents protectionism as a consequence of all past wars: each country, in wartime, establishes protections which favour an artificial development of industries. With the return of peace, the wish to keep on protecting these ‘artificial’ industries prevents the removal of these restrictive measures (1883/89). For the first time in the history of economic thought, the separation between © 2004 Fanny Coulomb

theory and practice, between economics and politics, is clearly established. Therefore, defence, which is not ruled by economic laws, should not be studied by economists. This doesn’t mean Walras was not interested in contemporary economic realities. On the contrary, once economists have solved all the theoretical enigmas raised by economic facts, they will be able to provide governments with the appropriate instruments to run the national economy and trade. In the same way as in physics, economic laws are valid at all times and in all places, and are irrefutable. But their discovery can only result from a perpetual comparison between theory and practice. WORLD PEACE AS THE ULTIMATE OUTCOME OF ECONOMICS: BETWEEN FREE TRADE AND ‘SCIENTIFIC SOCIALISM’

Walras considers world peace in the long term as the crowning achievement of economic science. He links this objective to the one of land collectivization. The subject of international peace is essential to understand Walras’ scientific ambition: he gave considerable importance to his research on ‘applied economics’ throughout his work. Walras uses the world peace argument to explain his two main purposes: the individual property of personal faculties and the collective property of lands. As regards the first purpose, Walras resorts to colonization. Economic theory should help in avoiding wars and massacres which have characterized all the colonizing enterprises. He distinguishes two kinds of colonization: the colonial system of the eighteenth century, which was reprehensible economically as well as morally; and modern colonization, such as the North American example, which has very positive economic results (even if the indigenous populations were massacred) (1860/1: 164–175). Regarding his second purpose, in a text entitled La paix par la justice sociale et le libre-échange (Peace Through Social Justice and Free Trade) (1907), Walras demonstrates the legitimacy of land collectivization, and considers that world peace will accompany the definitive outcome of research on the real scientific laws of economy. The fact that Walras associates social justice with free trade evokes the simultaneous search for equality and freedom, these two characteristics defining, as we previously mentioned, the ideal of society. By way of introduction to this work, Walras summarizes his project thus: The following theory (individual property of personal faculties and collective property of land) is a theory which has been acknowledged by major economists, and also by a few socialists but none of them have rigorously established it on a scientific and philosophical basis. [. . .] During these last three years I have tried to give it all its scope and all its significance by showing, in the complete abolition of taxes, which it is the only one to allow, the means to establish absolute free trade and, by this very fact, to ensure universal peace. (1907: 467) © 2004 Fanny Coulomb

Walras states that free trade will be quickly established worldwide when economists have revealed the irrefutable scientific proofs of its superiority. This method would be more effective than all commercial treaties and customs unions in favour of international trade liberalization. And, in fact, he aspires to demonstrate that the State can have incomes even without a fiscal system, and that it is possible to give up protectionism without any economic damage. He therefore calls on governments to act in favour of the development of human sciences (which includes economics), by assigning the credits necessary for state education, in particular for university education (1871: 375). These sciences must progress as much as natural sciences do, because they are essential to the ‘humanitarian social question’ and because revealing economy’s real laws will enable democracies to avoid numerous wars or revolutions. Walras presents world peace as a conceivable objective for the generations to come, and not as a very long-term objective. He even foresees that only two European countries, Germany and Russia, will hinder the generalization of free trade and the abolition of armies. Not only do Russian and German policies give too much importance to interventionism, but most of all they threaten the security of modern democracies with their projects of territorial annexation, conquests and military supremacy. While he foresees, for the democracies gradually won over to national principles of economic freedom and free trade, the progressive abolition of permanent armies and international agreement among national parliaments, with dispute settlement by arbitration, Walras worries about the fact that Germany and Russia could hinder such a project. He therefore hopes that they will soon adopt the constitutional system (of government): Humanity will enter at that moment an era of work and wealth prepared by the progress of physics and natural sciences as well as by the one of moral and political sciences. This is the socialists’ dream, and it is also ours. (1879: 403) Walras’ pacifism may appear a little original, with regard to the previous works of the liberals on this subject since the eighteenth century. However, the fact that this search for world peace is strongly connected to the author’s project of establishing a real economic ‘science’, with results as spectacular as in natural sciences. First, according to Walras, world peace, a condition and consequence of the implementation of free trade, is conceivable in the immediate future, as long as everybody agrees to submit to economic scientific laws. Second, because the ambiguity between humanity’s long-term interest to always and everywhere defend the principle of laissez-faire and the necessity to not compromise national economic defence and security, by unilaterally abolishing hindrances to free trade, is at last clarified: the scientific truth is absolute, it is the same at any time and everywhere and it recommends State non-intervention, except in the main preserves, especially defence and state education. Political truth is relative, it varies according to countries and to the national and international environment, and can justify protectionism. However this is only a ‘practical’ © 2004 Fanny Coulomb

matter and doesn’t concern economic science: in this respect, economists must leave these matters to the politicians. The field of economics is therefore very much restricted, but it is entirely up to people to decide to make all their economic actions enter the scientific sphere: to achieve this objective, they must unanimously respect the principles of the laissez-faire policy, with only a few exceptions. Vilfredo Pareto: a hindrance to ophelimity – the wasting of the military sector in a parliamentary system Vilfredo Pareto repeatedly denounces the militaristic drifts of European governments. Like all neo-classical economists, he does not include the study of defence in his system of theoretical analysis. Nevertheless, he wrote numerous texts on this ‘economic policy’ issue. According to Pareto, theoretical research in economy was only a part of social science. Indeed, he published a Treaty of Sociology in 1916. The people’s despoilment by ruling classes is one of the main subjects of Pareto’s argumentation against the parliamentary system. He even subscribes to the socialists’ criticism of capitalist societies, but he refutes their conclusions, being a resolute opponent of State economic intervention. Therefore, he thinks of the class war as a decisive principle in the way modern economies work, because the economic interests of the various classes are different, each of them only seeking its own interest. The class struggle has a positive effect, which leads society to the maximum of economic satisfaction, and a negative one, each class trying ‘to seize the government, so as to make it become a machine of despoilment’ (1896: 387). The people’s despoliation by the governmental class has been a guiding principle of societies since Antiquity. Under the Roman Empire, the people were already forced to get into debt to pay the tribute required by the government to lead reckless wars, which led the Roman civilization to its downfall. Pareto considers that the system has hardly changed since then, because taxpayers pay for conflicts, in the form of a national debt, whereas a few speculators (‘friends of politicians’) will benefit from them. Thus, military expeditions result in a real infringement of property rights, yet are considered as the basis of societies. This is also true for protectionist measures, monetary interventions and colonial expeditions, which only benefit a very small majority (speculators, civil servants) (1897: 128). Pareto identifies two determining factors of military expenditures (Molinari 1898: 277–295): 1 2

the megalomania of the ruling classes; the need for the government to maintain an external threat, in order to ensure society’s cohesion and to divert the attention of the people from the embezzlements of the class in power. Therefore, the government and the military co-operate, the former in order to remain in power and the latter


to obtain additional specific advantages. The refusal of the parliamentary system is thus irrevocable. Pareto, towards the end of his life, politically moved towards fascism. Nevertheless, his economic works, though they contain appeals for ‘reaction’, suggest no model of government. Security remains however one of the attributes of the State, whose intervention must remain limited. Pareto does not reject Malthus’ idea that the population level should remain within the ‘natural limits’ aligned to the increase of the subsistence level. Agricultural progress can certainly temporarily invalidate this proposition. But in the long run, the population is confronted with a lack of space. However, Pareto criticizes Malthus’ conclusions (1896: 121): only ‘moral constraint’ can put an end to the people’s misery, by initiating a decrease in population. The ‘people’s suffering’ results mainly from government policy. The population would remain at the level of economic satisfaction if governments respected the natural laws of economy. Therefore, economic conditions partially determine the population’s evolution, and the formation of ‘personal capital’ corresponds to the ‘general law which makes savings go towards the production of the most necessary capital to obtain the maximum of ophelimity’. If other objectives than ophelimity were the aim (such as the maximum size of military forces and of expansion strength), the optimal level of population would be different. The population would be much more important if the people had access to economic welfare, but the waste of resources caused by a disastrous governmental policy prevents the achievment of this objective. Therefore, history proved that Malthus was wrong: in his time, an increase in population corresponded to an increase in welfare, because the English people succeeded in making its interest prevail, by asking for the cessation of wars and of protectionist measures unfavourable to the general interest (1896: 119). Pareto mentions that, for Malthus, the part played by war in the regulation of populations is no longer valid in industrialized countries. Thus, all legitimacy is denied to war. Adopting an evolutionary point of view, Pareto presents war as an obsolete institution, even if it might have been useful in the past; on this matter, he evokes the theory of Molinari. Repressive governmental policy, with increasing state control, prevented wars from disappearing with the evolution of societies. In some of his works, Pareto elaborates a determinist explanation (with regard to race and climate) of the history of societies, of which war is a central element. Indeed, this determinism is revealed by the level of a society’s ability to lead conquests, or to resist enemy attacks. Besides, social selection through economic conditions strengthens the defensive capacity of a people, which would be reduced, without this selection, to decline and submission to other peoples, as was the case for India dominated by England owing to its system of castes. In the long term, societies which had a higher level of civilization dominated the ‘inferior’ ones. Isolating ‘political’ issues from his theoretical analysis, Pareto presents a theory of war which is more sociological than economic, notably because of its © 2004 Fanny Coulomb

emphasis on the evolutionary law of selection of ‘superior’ societies. Unlike Walras who admitted that the State could have ‘political’ reasons for intervening, which did not concern the economist, Pareto violently rejects all form of interventionism and holds the parliamentary system responsible for the militaristic drift of developed societies. Military expenditures are a waste, and they are one of the main reasons hindering the achievement of an optimal economic situation. No allusion is made on peace as economics’ ultimate end; a principle which had been expressed by Jean-Baptist Say and enthusiastically pursued by Léon Walras. The incursions of Alfred Marshall and Francis Edgeworth into the field of defence The great majority of neo-classical economists don’t pay much attention to war and defence issues, apart from two notable exceptions, Walras and Pareto; they both excluded these matters from the field of pure economy, because they intended to reconstruct a complete social science, in which economic theory would only represent a particular field, and questions of economic policy or applied politics another field, as important as the previous one. Even if he did not share the same ambition with regard to the rebuilding of social science, Alfred Marshall nevertheless showed in some of his works that he felt concerned with defence and security issues. Francis Edgeworth recognized that, for him, microeconomic instruments could be used to analyse international conflicts. Marshall’s influence in England at the end of the nineteenth century eclipsed that of the well-known English historical school economists, like Rogers, Cunnigham, Leslie, Ashley, etc., who refused to resort to mathematics and abstract concepts, and recommended a return to only the observation of economic and social realities. Marshall defended the free-trade policy; however, on the question of tariffs, he admitted that Germany and the United States had become economic powers in spite of their protectionist system. In 1904, he even states in a note that protection is the simplest, if not the best method for Canada, faced with the dumping of American industries (quoted in Reisman 1990: 250). However, he remains convinced of the private initiative’s superiority, and of bureaucracy’s negative effects on industrial and trade development. In his work on Marshall, Reisman (1990) mentions that in 1900, this economist, who admired the American economic performances, pleaded for an economic agreement on trade liberalization between Great Britain and the United States. Another passage of Marshall’s work shows that he was aware of the strategic aspect of the economy, considering that the military responsibilities of England required that it maintains a strong economic position with regard to the other nations. Reisman (1990: 260) publishes a letter from Marshall to Keynes, revealing he was concerned with ‘the German obsession’ with territorial expansion, and in which he predicts the Second World War. Apart from these sentences, Marshall wasn’t very much concerned with war © 2004 Fanny Coulomb

and defence issues in his work. It is, however, interesting to note that, in his Principles of Economics, he considered that the German historical school played a very important part in the development of economics (1920: 634). According to him, the emphasis of these economists on nationalism ensues from the particular political situation of Germany at that time. But basically, this school considers international economy in general, notably in its ‘comparative’ studies of past economic facts. Marshall concludes that the historical School has contributed to the advance of economics. In this way, he implicitly acknowledges the legitimacy of their historical conception of war and defence. He also implicitly admits that national power issues play an important part in the evolution of international economic relations. However, he moderates this praise by blaming German economists for not having been sufficiently interested in the rigorous reasoning, and for having given rise to criticisms as to the lack of scientific rigour of their works. (1920: 635) In Mathematical Psychics (1881), Edgeworth expounds on his ideas of war, in connection with the economy of private contracts. He considers that mathematics should be used to better understand human relations. He compares the analysis of the market’s economic situations with the strategic interactions in international relations, thus opening the way to Richardson, who will elaborate the first arms race model (Schmidt 1991). Edgeworth describes the concept of ‘economic calculation’ as being the study of the equilibrium of a system of hedonistic forces, where everyone aims at a maximum individual utility, and he suggests that it could be applied beyond its normal use, notably to the political struggle for power as well as to the trade struggle for wealth. However, one must distinguish the economic calculation devoted to the system of trade transactions from the one applied to political relations. Indeed, the stakes are different: wealth in the first case, power in the second. In his study of Edgeworth’s analysis of war, Christian Schmidt (1991: 148) shows that the main problem was to still consider power as an economic good. Relations between two belligerent nations can certainly be analysed as interpersonal relations. They share the same rules of competition (i.e. selfish economic calculation). However, two differences remain regarding the definition of preferences and the criterion which rules the calculation. According to Schmidt, ‘these observations suggest that the idea to establish a theory of war, by trying to generalize the model of wars between firms outlined by Edgeworth, leads to an impasse’ (Schmidt 1991: 148). It should be noticed here that Edgeworth (1915: 75) later acknowledged this theoretical impossibility in a work in which he considers that economists must explain that nations have nothing to gain from a conflict, in order to dissuade them from undertaking one. In an armed conflict between two nations, as well as in industrial conflicts between firms, the issue is always the maximization of utility, and thus the comparison between the costs and advantages of a conflict. However, Edgeworth recognizes that the difficulty in the economic analysis of international conflicts lies in the fact that the nations’ costs and advantages are not necessarily economic (the search for prestige or for national honour may also be taken into account), and thus not easily quantifiable (1915: 31). © 2004 Fanny Coulomb

During the nineteenth century, liberal thought was thus divided between two different analyses. A movement of ‘political economy’, mainly developed in France, reasserts the ‘classical’ arguments of war’s uselessness and of the excessive level of military expenditures; a ‘scientific’ movement aspires to build a pure economic theory and therefore does not include political issues in its field of work.


3

The hesitations and internal differences within each economic perspective as a factor of war and peace

The dichotomy between economic conceptions of war and power issues – namely the economy as a peace factor or the economy serving power – is not always so clear. Indeed, internal nuances and divergences exist in both conceptions. Thus, mercantilist authors are not all warmongering and favourable to economic war; several authors of the historical school praise the virtues of trade and international peace. As for the classical authors, two of their most illustrious representatives, Malthus and Ricardo, remain very cautious on the question of the pacifying character of trade. These internal differences also show the difficulty in expounding definitive economic principles on issues that don’t exclusively depend on economic parameters.

The inopportune war Mercantilist authors didn’t unanimously defend warlike precepts to increase the national power, nor will the authors of the historical school. Indeed, some mercantilist texts showed that this doctrine included an old tradition of hostility to war, which was directly linked to the tax system. For their part, while they acknowledged the historical importance of war, several economists of the historical school developed arguments close to those of the classical school, with regard to the pacification of international relations through growing economic interdependencies. Optimistic mercantilism English mercantilists recommended the implementation of trade policy measures favouring a trade balance surplus. This would enable England to increase its precious metals inflows in the long run. However, objections gradually grew regarding the essential character of the accumulation of coins, even for warfare. Trade and goods were also considered as strategically important. The theoretical foundations of mercantilism were challenged within the doctrine itself, outlining a new conception of the economic bases of power, notably by giving more importance to goods rather than to precious metals or to consideration of the people’s welfare. The analysis of economic phenomena © 2004 Fanny Coulomb

gradually evolved, foreshadowing a change in the status of power issues within economic thought. Following this point of view, we shall present three essential ideas developed by certain mercantilists: • • •

without trade, the Treasury is not wealth; without production, the Treasury is not a factor of power; wealth and power are two fundamental interdependent objectives.

Trade as a factor of wealth The ‘orthodox’ balance of trade theory gave rise to numerous controversies among mercantilists. The main debate was about the deterioration of the terms of trade between England and the rest of the world in the 1620s. According to English mercantilists, this evolution was due to precious metals inflows from America, which would have entailed a deterioration of foreign currencies. Malynes (Spiegel 1991: 101) was against the devaluation of the English currency as a solution. However, he strongly disapproved of capital outflows from Great Britain, and blamed bankers’ speculations for it, without admitting that the fall of British exports was the main cause, and even the only one. On the other hand, Misselden (Spiegel 1991: 102) considered that England had to promote its exports and restrict its imports. According to him, England’s unfavourable trade balance was the true explanation for species outflows. He also accused the East Indies company of being responsible, because of its trade, for the significant quantity of precious metals outflows. However, Mun (1621: 49–80) defended the East Indies company. He considered that, owing to its activities, England could substitute colonial trade for traditional imports and acquire goods such as spices or raw materials. The processing of these materials provided jobs for a great number of English workers. He also thought it was necessary for England to maintain its monopoly in India, an essential strategic objective in the context of a fierce commercial competition with Holland, which could develop into an open conflict at any time. The Hollanders, at this time, are very powerful in India; [. . .] it is undoubtedly in their power, to engross the rich traffic wholly to themselves, and to expel us for ever from those countries. [. . .] But suppose they should drive us from thence by force of arms, or that we should quit the trade to them through negligence and folly, it will be worth while to consider, what addition of wealth and strength an entire monopoly of East-India goods may prove to that commonwealth. (1621: 56) This trade would later create a surplus for England’s manufactured goods exports. As stated by Mun, the main factors responsible for the economic crisis were the external devaluation of the English currency and the abuse of trade © 2004 Fanny Coulomb

unfavourable to England (with the modern idea of the deterioration of the terms of trade) and generating precious metals outflows. Later, he confirmed the necessity for England of an export surplus, in accordance with the balance of trade doctrine (1664: 85). To achieve this end, agriculture had to be encouraged and imports reduced and even restricted. Mun was one of the first to express the ‘import-substitution’ theory. The principle of a nation considered as an indivisible whole is put forward by the protection of domestic industries. The State has to guide economic activities in order to maximize national wealth, notably in favour of productions linked to the power policy. The stimulation of domestic demand was not recommended. Goods were kept for exports, in order to increase the British Treasury. Exports of manufactured goods and services (which indicates a certain modernity of the argument) were particularly encouraged, because the factories’ development was expected to increase and diversify national employment. Although he defended the balance of trade theory, Mun had nothing against money outflows initiated by trade expansion. Unlike other mercantilists, he didn’t consider the accumulation of money as essential to national economic development. On the contrary, if money remains unemployed, kept within the national territory, then prices increase and exports fall. Currency should be used for the production of goods, which generates additional money in the long run. Here the idea of money’s power is expressed. The size of the national Treasury depended on the situation of the trade balance. Production as a factor of power The admitted reason for trade and colonial wars was the increase of the national stock of precious metals. However, several authors noticed that owning tangible assets was strategically as important as possessing precious metals. According to Mun (1664), the Prince should not only have an important war chest available, but also goods he could buy if necessary. Thus, he disapproved of the future Say’s law, by wondering what correspondence there could be, during a specific period, between the supply and the demand originated by the constitution of a war chest. In a certain way, he also foreshadowed the Keynesian analysis: so that we may account that Prince as poor who can have no wares to buy at his need, as he that hath no money to buy wares; for although Treasure is said to be the sinews of the War, yet this is so because it doth provide, unite & move the power of men, victuals, and munition where and when the cause doth require; but if these things be wanting in due time, what shall we then do with our money? (1664: 132) But English mercantilists were less concerned with accumulating precious metals than with developing trade. To succeed in war, a Prince mainly needed material goods. As a last resort, goods and products necessary for warfare should © 2004 Fanny Coulomb

be available in the national territory. The State had to ensure the possession of a significant war treasure, but also encourage arms production. Therefore, Mun (1621: 64) considered that, in peacetime, a part of the Treasury should be employed to strengthen the military fleet and the fortifications, to maintain the armed forces or to store weapons and powder. This Treasure did not only represent the precious metals stocks, but also the availability of goods and techniques of production useful to defence. Power was not directly based on gold, but on weapons. The Treasure also provided the means to prepare for war, but also prevented the risk of starvation, notably by storing grain and other supplies. Thus, the economy was mainly of benefit to the national military power. For Charles Davenant, the only way to determine the global balance of foreign trade was to measure the evolution of national wealth, the mere observation of the precious metals stock being irrelevant. Aiming at industrial development was more important than the accumulation of precious metals, because industrial products could be exported, and thus contribute to national economic development. However, given that manufactured goods were primarily devoted to exports, domestic consumption had to be maintained at a low level. This analysis foreshadows the theory of development through exports. Josiah Child underscores that the concrete difficulties in measuring the trade balance made this theory ineffective. According to him, trade should be regulated in a way that favours national factories and employment. In the same way, Nicholas Barbon considered that precious metals had no intrinsic value, thus rejecting the balance of trade theory. Two interdependent objectives: wealth and power Mercantilism was more a doctrine favourable to trade, notably in England, rather than a doctrine of industrial protectionism. Furthermore, as this doctrine developed, priority was given to the growth of exports rather than to the accumulation of precious metals. In this way, Mun exalted the role of trade: Behold then, the true form and work of foreign Trade, which is, The great Revenue of the King, the honour of the Kingdom, The Noble profession of the Merchant, The school of our Arts, The supply of our wants, The employment of our poor, The improvement of our Lands, The Nursery of our Mariners, The walls [ships] of our Kingdom, The means of our Treasure, The Sinews of our Wars, The terror of our Enemies. For all which great and weighty reasons, do so many well governed States highly countenance the profession, and carefully cherish the action, not only with Policy to increase it, but also with power to protect it from all foreign injuries: because they know it is a Principle in Reason of State to maintain and defend that which doth Support them and their estates. (1664: 95) Here are expressions of the ideas that trade must expand and be defended, and that it has beneficial effects on the State’s power as well as on improvements for © 2004 Fanny Coulomb

the welfare of the population. Some English economists, like Nicholas Barbon, believed that trade generated important profits, by originating an increase in wages and in the State’s income. Trade also had civilizing effects, and led nations towards peace. This remark already anticipates the conception of the great English classical economists of the beginning of the twentieth century. In France, Jean Bodin (1568) was also in favour of trade expansion, for liberal rather than mercantilist reasons: trade is beneficial because it enables a desirable friendship among peoples to be maintained. Therefore, the author considers that France should develop commercial relations with her neighbours rather than wage war on them. The mercantilist theory made ‘bellicosity’ and an old tradition of hostility towards war (which was directly linked to the refusal of the tax system) compatible. This tradition would certainly become necessary to ensure national defence in case of conflict, but the preservation of peace was more desirable. Bodin (1568) and Mun (1664) also shared this point of view. Mun (1664) concludes his remarks by condemning wars led by the Sovereign for unjustified reasons. Here there appears a shift towards a conception of a national power as useful for defence purposes rather than to conquests. In a work published in 1670, Roger Coke goes even further by praising peace through trade, rather than wars of conquest. Thus, trade extends national influence by peaceful means; power, which is ensured by wealth, is mainly used to defend the country against possible attacks. This point of view is close to that of the English classical economists of the eighteenth century. Another factor foreshadowing liberalism is the acknowledgement of the fact that trade is always of benefit to the country, whatever its effects on individual traders. The defence of trade by certain mercantilists of the end of the seventeenth century foreshadowed English liberal theory of the end of the eighteenth century, even if most of the time, mercantilists’ calls for free trade and harmony of interests among nations masked the defence of specific interests. And, in fact, classical economists were simultaneously concerned with trade expansion and national defence. The mercantilist theory is generally considered as warmongering because it glorifies the beneficial effects of the economy on political power. On the contrary, the theories that followed were pacific, especially classical theory, which favoured national enrichment through trade, without State intervention in foreign policy. Nevertheless, both mercantilist and classical economists sought enrichment and power. The policy implemented by the English liberal State during the eighteenth century was a policy of power. Instead of a static conception of trade (one only wins what the other one loses), classical economists had a dynamic conception (trade generates a net growth of world wealth). The means are for the mercantilists what the end is for liberalism, and vice versa. According to the mercantilist theory, national power prevailed over national wealth, whereas liberal theory gave more importance to the latter. But the mercantilist theory was above all heterogeneous. Some authors stated original principles. For example, Sully defended the traditional precepts of bullionism and of state control, but he also considered that economic policy © 2004 Fanny Coulomb

should aim at getting France to specialize in the production and export of agricultural goods. His main concern was to achieve food self-sufficiency. In conclusion, there are two interpretations of mercantilism: •

•

mercantilism marks a progressive transition of economic thought towards liberalism, i.e. a new conception of economy, dissociated from political concerns. This interpretation is based on the particular attention paid to trade expansion. mercantilism presents a specific conception of the links between war and economy, which created the modern concepts of economic war and industrial protectionism.

There are two main differences that separate mercantilism from liberalism: • •

the mercantilist conception of international economic relations is static, i.e. trade can’t enable all nations to grow rich. mercantilists’ main concern is the Prince’s power, not the welfare of the people. Therefore, peace is not a factor of development.

The original feature of mercantilism in relation to previous conceptions of society was to assert that national wealth was a decisive objective, for the State as well as for traders (it was an acknowledged fact that, for humanity, wealth was an end in itself). It was difficult to differentiate military power from economic power; economic and political spheres were no longer dissociated. Thus, economic analysis gave a new status to defence: instead of being only of benefit to the political order, it favoured both the economy and politics, two highly interdependent fields. Gradually, public affairs were dissociated from those of the Prince and the trader became the individual agent of the State’s prosperity. Mercantilists insisted on the important role played by calculation in the art of governing. For Davenant, the science of calculation makes skilful ministers; whereas the lack of it makes it impossible to deal with matters of war or peace. William Petty underlined the importance of strategic information as an instrument of power. When English classical economists elaborated their theory, they had to exclude defence issues from their field of work, given that only free trade allowed the realization of the great universal design, i.e. the enrichment of all nations, with peace and happiness for the peoples. Because of the way relations between defence and economy were considered to be radically changed, the economy was becoming a specific field of work. But the theoretical breaking point had occurred before the development of the English classical school. The physiocrats were the first to revolutionize the idea of social order, by asserting the superiority of economic ‘natural laws’.


The vague idea of war’s historical permanence On several occasions, the two main representatives of the German historical school (Roscher for the ‘old school’ and Schmoller for the ‘new school’) insisted on the pacifying effects of economic interdependence between nations. However, they don’t generalize this principle, and their theory is never ‘predictive’; it above all explains past events. The German historical school and the refusal of an unnecessary bellicosity According to Schmoller, the struggles between selfish interests within a society are part of human nature, but their characteristics change with the course of history and their effects are moderated by the moral civilization’s progress. A similar evolution is observable in international relations. Many theorists of the historical school (notably Roscher and Knies) underline the high economic cost of war. However, Roscher (1918) considers that the recollection of the cost of past wars has never dissuaded peoples from beginning new ones. In the same way, even if they defend the use of protectionism to promote national economic development, the upholders of the historical school warn that these measures might have pernicious effects and miss their aim. As stated by Roscher (1918: 420), following List’s example, free trade is preferable in the case of England, where the trade capital dominates, whereas in other countries protectionism may have beneficial effects. More precisely, a wellunderstood protectionism can play an educational role in national industry. The growth of national industry affects the ‘conditions of class’, decreasing the powers of nobility and agriculture, therefore inducing a social equilibrium which once again favours industrial development. But protectionism should be conceived of as a means of free trade, which should remain the ultimate objective of a nation. Only free trade enables a nation to take advantage of its peculiarities, and is in fact in opposition with the universality principle. As for protectionism used as a reprisal (the ‘customs of fight’, against foreign measures penalizing domestic exports), Roscher does not recommend it if national economic and political power is lower than those of the opponents. Their only effect would then be to weaken national industries even more. Trade reprisals can only have a deterring effect between opponents with a similar level of power (1918: 461). Thus Roscher is not an inveterate supporter of ‘economic war’. We can consider this view as representative of the whole historical school, which therefore clearly distinguishes itself from the mercantilist doctrine. Roscher (1872) considers that contemporary economists are wrong to neglect the lessons from the philosophers of Antiquity, who recognized the importance of public finance and State intervention in trade and in national defence: A fact which is related to the most important difference between antiquity and modern times, [. . .] is the relatively much more considerable role that © 2004 Fanny Coulomb

the incomes of war played in the Ancients’ political economy, and generally the one war played in their existence. (1872: 40) However, Roscher refuses to consider that humanity may progress towards a state of world peace. This idea regularly reappears in peacetime, but is every time contradicted by the facts. The diffusion of economic knowledge certainly makes wars rarer and shorter, since peaceful trade development is recognized as being more profitable than a state of permanent war. Nevertheless, Roscher does not justify the liberal cosmopolitanism. On the contrary, using a historical retrospective, he underlines the dangers of pacifism. Indeed, he considers that the wars of Antiquity contributed to national cohesion. Therefore, when the Greeks stopped fighting and searched for peace, under the influence of ‘the Epicureans’ systematic anti-patriotism’ and the ‘Stoics’ cosmopolitanism’, for the economic reasons previously mentioned, their civilization was subsequently annihilated by the Macedonian conquests (Roscher 1872: 40–43). These ideas of pacifism also opened the way to the Roman empire’s expansion. Moreover, warfare had beneficial affects on the defence of Greek society, because it encouraged geographical groupings of populations and was the basis of the slavery system, essential to their economic organization. If Roscher asserts that peace is an ultimate objective that society must achieve, he also considers that its conditions might often be ensured only by a short war or the threat of war (Silberner 1957: 140). In fact, unlike List, Roscher developed no specific theory of the international relations long-term evolution. If he believed in the pacifying virtues of trade, he did not envisage a state of peace without deterrence. In spite of its numerous references to wars and economic conflicts, as well as to concepts of economic and political power, the diagnosis on the historical school’s ‘bellicosity’ must be qualified. In fact, the most famous representative of the old school, Roscher, only developed a few warmongering comments. As for the new school, Schmoller had a conception of international relations whose bellicosity may have been exaggerated in the presentation made by Silberner. According to the latter (1957: 150), Schmoller considers that the ideal of international peace is imaginary. The government system does not even guarantee its pacifism or its bellicosity, as shown by English or American imperialist policies. Silberner reminds us that Schmoller was above all interested in the development of the German economic power, through its foreign trade and colonial empire, notably owing to the development of its naval strength, which was in contradiction with the other powers’ interests. But he does not sufficiently underline the ‘historical’ character of Schmoller’s analysis, who admitted the reality of international relations’ pacification through trade, as shown in this quotation: The progress of the ninetheenth century beyond the mercantilist policy of the eighteenth depends, – keeping to this thought of a succession of ever larger social communities, – on the creation of leagues of states, on © 2004 Fanny Coulomb

alliances in the matter of customs and trade, on the moral and legal community of all civilised states, such as modern international law is more and more bringing into existence by means of a network of international treaties. [. . .] The struggle of social bodies with one another, which is at times military, at other times merely economic, has a tendency, with the progress of civilisation, to assume a higher character and to abandon its coarsest and most brutal weapons. The instinct becomes stronger of a certain solidarity of interests, of a beneficent interaction, of an exchange of goods from which both rivals gain. [. . .] So the eighteenth-century ideas of a humane cosmopolitanism began to instil into men the thought of a change of policy in the economic struggles of European states at the very time when the international rivalry had reached its highest point. [. . .] Undoubtedly we must regard this movement, [. . .], as one of the great advances made by mankind. (1857: 78–79) Moreover, in a work published in 1902, Schmoller evokes the possibility of a territorial insufficiency to face the population growth. Rather than advocating the conquest of supplementary territories by military means, he recommends emigration across the Atlantic, which will contribute to the spread of civilization throughout the world ‘in a constant and smooth way’ (1902: 145). But Schmoller, following List’s example, does not give up the conception of an economic world governed by the confrontation of national economic interests, and he doesn’t mention the eventual ending of international conflicts in the very long term. The historical character of this school, whose first objective was to present the past evolution of economic and social organizations, partially explains the lack of a real ‘scientific’ theory of the societies’ long-term evolution. Nevertheless, the defence of protectionism, in favour of nations still unable to support trade competition with the most developed countries, is a key rule for the historical school proponents. Yet, this could contain the seeds of international conflicts. The pacifism of the English historical school The historical method was also applied in England. It is impossible for us to provide an exhaustive presentation of all these analyses, which have furthermore already been widely expounded by Silberner (1957) and Whitaker (1991). Only a few essential points of this thought on peace, war and defence will be reported here. Some of the arguments mentioned by the English and the German historical schools are similar. However, apart from Ashley (1904) and Cunningham (1892), the English economists gave more importance to liberalism. And, in actual fact, by insisting much more on the need to pacify international relations than their German homologues, they conferred a certain originality to their school. © 2004 Fanny Coulomb

The preference for a Prussian-type permanent national army was shared by many European economists, including liberals like Leslie and Cairnes. John K. Whitaker (1991) has expanded the ideas of these authors on the issue of defence. Leslie and Cairnes advanced the argument according to which this kind of defence was the best way to guarantee the population’s peaceful tendencies, even if its economic cost was significant and if, during their service, soldiers had no productive activity. When giving consideration to cost, Leslie and Cairnes suggest a military service that would be short- or long-term, depending on whether it takes place in the national territory or abroad. This organization of the army can prevent the development of a military ‘caste’, which too often encourages the country to wage wars. Several economists of the English historical school denounced, in the same way as the liberals did, not only the cost of war but also the cost of an excessively high level of national defence, while the sums assigned to the military sector by Great Britain continuously rose during the nineteenth century. Bagehot describes the phenomenon, which will later be called an ‘arms race’. He considers that British military expenditure tends to increase in a disproportionate way for two main reasons (Whitaker 1991: 42): •

•

members of government do not have the necessary knowledge to assess the legitimacy of the budget requirements of military experts, who always lead the country into greater expenditures, reason using the increasing sophistication of military technologies as a reason. public opinion also lacks the necessary knowledge to require a decrease in military expenditures.

Yet this rise in British military expenditure tends to maintain an arms race in Europe, which is costly for all countries. According to Bagehot, the only way out for England is to give up its leading role in world competition on military technologies, and to renew its armament only in response to other countries’ policies. The preservation of England’s world naval supremacy is considered as a priority objective, notably in order to reduce the risk of embargo (Bagehot, Giffen), but it then becomes a matter of maintaining an ability to deter and not to attack. Globally, the rule is to possess a defensive force strong enough to repel a possible attack by a coalition of leading powers. Like their colleagues of the German historical school, English economists (including Leslie) consider that the multiplicity of national economic interdependencies favours, but is not a sufficient condition for, peace. They pay particular attention to the food self-sufficiency issue, essential to England. Cunningham (Cunningham and McArthur 1895: 245) and Ashley (1904: 36–39) recommend that England leads a protectionist policy in this sector, so as to be self-sufficient in case of war. However, Cunningham predicts that trade development will contribute to the ending of national rivalries. According to him, signs of the constitution of an international economic organization (i.e. an international conduct of economic relations) are already visible, notably with © 2004 Fanny Coulomb

the setting up of an international postal system; an international agreement on the monetary system might also be reached in the long term. All these signs seem to indicate that the nation, as a social body for economic purposes, is destined to disappear (Cunningham 1892: 682). To liberal ‘cosmopolitanism’, Cunningham prefers an ‘internationalism’ based on the peaceful coexistence of strong and independent nations, able to cultivate the peculiarities which makes them stronger; this is the only way to reach a long-term international peace. Indeed, he does not believe in a federation of various states for economic motives (but perhaps for religious reasons). Leslie (Silberner 1957: 161) develops quite similar arguments, notably about the advent of international peace owing to the increase of economic interdependencies. He especially insists on the necessary evolution of political institutions in this process: in this respect, war will end when all political systems become free, when permanent armies have been replaced by militias and when an international law and an international court have been established. As for Rogers (Silberner 1957: 163), he thinks that, in the long run, nations will abandon their armies to the benefit of an international arbitration, the respect of its resolutions being guaranteed by the pressure of public opinion. The metropolitan countries and their colonies should join in a ‘system of national councils’ (which corresponds to a political, economic, monetary and trade unification). This brief outline of the English historical economists’ conception shows that the idea that peace could be achieved through the development of international economic interdependencies was rather widely shared. However, unlike the liberals, these economists presented national interest as a ‘moral’ value, and preferred it to individual interest. They did not appeal for disarmament, as war could still occur. They preferred a progressive decrease in military expenditures, within the limits imposed by the necessary preservation of a deterrence capacity. Conclusion The accumulation of wealth is a central objective in mercantilist thought (even if it often masks the defence of private interests), and several authors have considered that it is more likely to be reached by trade development than by conflicts with neighbouring countries. In relation to the historical school, showing the importance of past wars didn’t prevent some of its members from sharing one of the great ideas of their time: that of the pacification of international relations through the development of economic interdependencies.

The avaricious peace: the pessimistic classical school Not all classical economists ventured to forecast the disappearance of wars because of the development of international trade. The silence of several great authors of this movement on this issue shows their reservations. The idea of a future stationary economic state explains that Ricardo, Malthus or J.S. Mill © 2004 Fanny Coulomb

have been less categorical than Smith or Say when criticizing military expenditures and wars. The market economy: a necessary but insufficient condition for peace in Malthus’ work What one remembers the most of the famous Malthusian theory of war is that conflicts between nations are due to overpopulation, but they also regulate this by eliminating large numbers of people. But, according to Malthus, such a rule only applies to the first stages of human evolution. In modern societies, war is less and less useful to regulate populations. This is why his interest for international conflicts issues grew, as is shown by the increasing frequency of his analyses on this subject in the successive editions of the Principle of Population. The economic factors are expounded, notably with the implementation of the effective demand principle. Discussion on the causes of war also discouraged the optimistic idealists who considered humanity’s evolution as a continuous progress towards economic prosperity and thus towards peace. In Malthus’ opinion, progress is not desirable at all costs and free trade does not guarantee world peace. However, he remains an ardent supporter of the market economy and private property. Either considered as a reactionary, or as a precursor, Malthus’ ideas on war were particularly original for his time. His system, more ‘concrete’ than Ricardo’s, is essential in the historical analysis of the defence economy. Through various means, he initiated a reflection on national security issues which would be pursued by Keynes during the inter-war period. His hesitation to accredit social reforms which could curb the people’s misery, as well as his presentation of individual moral constraint as the only chance for humanity to prosper, don’t express a very ‘orthodox’ conception of human and international relations. The Principle of Population (1798) and the Principles of Political Economy (1836b) both mention war issues. War as a consequence of overpopulation In the first part of the Principle of Population, Malthus presents war as one of the destructive hindrances to the growth of population beyond the means of subsistence (1798: 177). He distinguishes them from privative hindrances, which depend on the individual will, i.e. in this context, on the ‘moral constraint’. However, according to Malthus, while a country develops, the privative hindrances will tend to replace the destructive ones in the regulation of the population. War as a palliative to overpopulation is a characteristic of savage or primitive peoples. On the other hand, modern European wars are less frequent and less destructive in the long run. The Principle of Population ends with an Appendix. Malthus assesses his main ideas on the relations between the population and the strength of the State. © 2004 Fanny Coulomb

Noting that France is densely populated which enables her to raise important armies at a low cost, he minimizes this national advantage: if the population is not proportionate to the means of subsistence, it will get younger, an undesirable evolution with regard to national power. Besides, the deaths caused by armed conflicts also induce, more directly, a modification in the population pyramid unfavourable to the preservation of the national force, even if war always generates an increase in births which compensates for the human losses incurred. Therefore, the population’s participation in war should not exceed a certain limit, according to the composition of the population (1798: 341). Unfavourable economic conditions facilitate the implementation of military operations by political leaders by providing a population which can easily be mobilized at a low cost. Moreover, they are the underlying motivations of conflicts. Only the maintenance of the population at the level of subsistence would remove the main economic reasons for war: the search for space and food. Besides, when there are economic difficulties, tyrannical and despotic leaders, inclined to bellicosity, are more likely to govern. Nevertheless, according to Malthus, permanent armies limit the risk of war (the concept of deterrence) (1798: 250). Moreover, economic development is the best way to guarantee the population’s collaboration in case of national necessity. The citizens’ wish to protect economic prosperity is the first safeguard of a State’s warmongering tendencies. Thus, the limitation of the population level would eliminate the main causes and means of offensive wars. Modern societies should only be concerned with the defence of their own territory (1798: 213). Though he considers that offensive military policies often find their origin and their support in economic difficulties and in poverty, Malthus is radically opposed to the reformers’ point of view, according to which social institutions are the reasons for conflicts. War results from human passions and natural laws. He describes war as a just and divine punishment for the human tendency to vice (i.e. the non-respect for moral principles) (1798: 215). Therefore, Malthus considers war in two different ways: • •

the insufficiency of outlets and territories, due to the increase in population, generates war; the population’s ‘vice’, which entails its continual increase, causes war.

These two reasons for war are strictly interdependent: the growth of the population originates an insufficiency of resources. By insisting on the moral causes of war, Malthus adopts an original point of view. Given that workers are responsible for their misfortune, Malthus condemns government measures which could improve the living conditions of the poorest, such as the poor laws (1798: 22). On the contrary, by encouraging the population growth, these reforms can only accelerate the advent of famines and increase the risks of riots. Only moral constraint, which enables a nation to limit its population at the level of available food, can improve economic development. When all countries will have succeeded in limiting the level of their © 2004 Fanny Coulomb

population, international peace will be assured (1798: 213). The limitation of the population at the level of subsistence must therefore be the supreme objective of humanity: world peace should naturally follow. Even if war and all the ‘causes of vice and misfortune’ were eradicated, humanity’s welfare would not be guaranteed, because it exclusively depends on the ‘population–quantity of food ratio’ (and later on the distribution of food or on the quantity of food a worker can buy with his or her salary) (1798: 447) The law of population has thus been used by Malthus to analyse war and peace issues. The main purposes of wars are the conquest of outlets and territories; offensive wars are reprehensible. The state must only aim at defence and deterrence which would be all the more efficient as the population will be prosperous and thus motivated to defend the territory. With regard to Smith or Say, who had already evoked similar ideas, Malthus’ originality is to underline that individual moral responsibility, and not only political responsibility, is a central element of a lasting peace, because, all things considered, demographic control is its only guarantee. Malthus’ pessimism results from a religious conception of a humanity irremediably marked by original sin. Individuals are primarily motivated by the wish to satisfy their sexual desires, rather than the search for profit, as stated in Adam Smith’s utilitarian thought: and these particular motivations are against the general interest. This Malthusian conception of society casts doubt on the possibility of entirely pacified international relations, especially since Malthus, unlike Say, does not believe in capitalism’s infinite potential for economic growth, natural resources being limited. A new interest for the economic management of security issues In Principles of Political Economy, Malthus underscores the likelihood that effective demand becomes insufficient to continue to ensure economic growth. As an example, he analyses the consequences of war on effective demand, and thus on the national economic situation. In his opinion, an increase in births compensated for deaths due to war in countries which have reached a certain level of development (1798: 331). Therefore, modern wars don’t entail the depopulation of a country, as long as they don’t affect the national productive potential. In Principles of Political Economy (1836), Malthus examines the matter of disparities in economic development among countries that have similar resources and histories. He considers two main factors which could increase national wealth: an increase in population (but only within the limits of subsistence means) and the accumulation (or savings) which add to capital. He shows that an increase in effective demand is necessary for a nation to become wealthier. Yet the destruction of capital during a war is precisely what makes this increase possible. Just as the population soon regains its previous level after a war (which stimulates births), the destroyed capital will quickly be replaced, provided that war does not interrupt trade (1836: 264). But Malthus put forward many other arguments to condemn war. © 2004 Fanny Coulomb

In Principle of Population (1798), Malthus already recognized that the lack of outlets for products could hinder national economic development. During a certain period of time, the opening of new markets (notably in colonies) and new inventions (notably in the agricultural sector) could continue to create an increase in capital and encourage population growth. But these two factors are not unlimited and, in the long term, the levels of employment and food resources may prove to be insufficient compared to the population level. It would then be desirable to stimulate effective demand, but Malthus rejects State intervention (a strong taxation would have disastrous economic effects) as well as the resort to war as a solution: a conflict would only make the economic crisis worse (1836: 265). Malthus considers that the governmental policy during the ‘last war’ was erroneous: indeed, the poor laws encouraged population growth and State expenditures were too important. Misery appeared with the return to peace and the suppression of measures favouring overpopulation (1798: 250). Therefore, even if he recognizes that war expenditures can have short-term stimulating effects, Malthus underlines their negative consequences in the longrun. In this respect, he establishes a relation between war and economic crisis. Later Keynes, who admired Malthus, also studied the economic consequences of war. He pursued, although in a different way, the concept of effective demand. The conclusions of both economists on the possible emergence of economic crises, which generate international tensions, can be compared. Besides, Malthus, like the Keynesians, is primarily concerned with short- rather than long-term economic problems. Whereas the ‘optimistic’ liberals, like Smith and Say, consider international trade to have pacifying virtues, Malthus rejects this point of view, because of his doubts as to the capacities of infinite national economic growth. The best way to avoid national antagonisms is to favour domestic agriculture rather than industry or trade. Malthus considers the food security issue of great importance. While Smith insisted on the essential part played by technical progress (and the division of labour) in sustaining economic growth, Malthus states that nothing can stop the progressive exhaustion of soils, and thus prevent the nation from its inevitable progress towards a stationary state. He does not consider the possibility of expanding the national territory through colonization, as such policies generate wars. The solutions to prevent the check of economic development must be found within national borders. Human actions can sometimes be imposed by passion, without any economic rationality. This is why ensuring national security (one of the most fundamental human interests) is so important, even if it disadvantages free trade and thus wealth. Malthus is especially concerned with guaranteeing food security. In 1836, he published The Corn Laws; here he states that there is a low risk of disruption in foreign cereal supplies in peacetime, because producing countries need to sell their products and there are multiple sources of supplies. On the other hand, in wartime, economic interests do not always prevail (because conflicts often have an extra-economic character) and there is a real risk of disruption in cereal supplies. © 2004 Fanny Coulomb

At the same time it should be observed that we have latterly seen the most striking instances in all quarters, of governments acting from passion rather than interest. Though the danger therefore may not be great of depending for a considerable portion of our subsistence upon foreign countries, yet it must be acknowledged that nothing like an experiment has yet been made of the distress that might be produced, during a widely extended war, by the united operation, of a great difficulty in finding a market for our manufactures, accompanied by the absolute necessity of supplying ourselves with a very large quantity of corn. (1836: 101) Other arguments in favour of agricultural protectionism are also advanced by Malthus. Such a policy would notably induce a rise in both nominal labour prices and grain prices, which is favourable to the employees’ situation. Another assertion seems particularly original: referring to the idea that a free cereal trade creates a reduction in agricultural employment and a rise in industrial employment, Malthus warns against the consequences of such an evolution. Indeed, industrial development considerably increases the risks of price fluctuations, and thus of discontent; besides, Malthus considers that the situation and the employment of a manufacturer and his family are unfavourable to health and virtue. And he concludes: [I]t may be said, that an excessive proportion of manufacturing population does not seem favourable to national quiet and happiness. Wealth, population and power are, after all, only valuable, as they tend to improve, increase, and secure the mass of human virtues and happiness. (1836: 101) Therefore, Malthus’ work represents a profound change from the mercantilist proposals, although he defended cereal trade restrictions: from his point of view, national power and wealth are not the aims of political economy. He even asserts that foreign wheat import restrictions would disadvantage the country in international trade and slow the development of the other national industrial activities; however, these measures are necessary for the country to become independent with regard to wheat supplies (1836a: 105). Malthus thus favours security and domestic stability rather than economic power over foreign markets. Social reforms would, at best, only delay the stationary state. Society must be self-sufficient with regard to food and defence. This theory can be interpreted as a defence of property owners. Ricardo, who also had doubts as to the physical possibility of a long-term economic growth, has a very different opinion on the matter of food security. But Malthus’ conception is, above all, dominated by the conviction that humanity is responsible for its own misfortunes. War, even if it is more spectacular, is only one proof among others of this inconsequence of human nature. He believes that the possibility of changing human nature, by convincing the population of the necessity of abstinence, is © 2004 Fanny Coulomb

limited. Nevertheless, we can assume he considered that, with the gradual progress of society towards moralization and civilization, the moral constraint would be of more importance. Even though human welfare will still be threatened by the fact that natural resources are limited. Therefore, world peace isn’t an obvious objective. Ricardo: a polymorphic and partial analysis of war and peace in a free-market economy The British classical school is commonly associated to the paradigm of peace through free trade. David Ricardo is often presented as having defined its broad outlines. His theory of comparative advantages demonstrates that trade favours peace, as it harmonizes the interests of consumers and subsequently of nations. However, the Ricardian theory is also fundamentally pessimistic: in the long run, the economy should reach a ‘stationary state’, international trade only being a palliative, effective in the short and medium term, to an inevitable decrease in profit rate. Ricardo is, in fact, one of the classical economists who has made the least general predictions as to the future evolution of international relations. In actual fact, he pays little attention to the pacifying virtues of free trade in his works, and almost never mentions them in a direct way. This may seem all the more surprising as Ricardo analysed numerous economic problems related to war and national security. In fact, Ricardo’s work is at the cusp of two currents of economic analysis – one considering power and defence issues, and the other one not. Leading economics towards abstraction and an apolitical analysis, scientifically demonstrating the economic advantages of international trade, he disregards the subject of the reasons for wars. Only their economic consequences are studied and considered as particular cases used to underline the general principles governing the economy. Thus, Ricardo initiates a specific tradition in the economic analysis of defence and peace. At the same time, he pursues some aspects of Malthus’ thought on these issues, and he shows himself to be fundamentally pessimistic as to the possibilities of an indefinite and sustained economic growth. Thus, Ricardo has a two-point analysis of defence and peace: • •

empirical studies on the management of concrete economic problems stemming from war and post-war periods; a partial theoretical analysis based on his conclusions regarding the future evolution of international relations, in a market economy.

The economic management of war and its consequences The first phenomenon which awakened Ricardo’s interest in economic problems was inflation in England, during war against France. He showed that the gold price increase had been generated by excessive issues of English banknotes, favouring a monetary depreciation. Other matters connected to war held his © 2004 Fanny Coulomb

attention, notably agricultural protectionism in a situation of conflict. Ricardo aimed at showing that his liberal conclusions weren’t opposed to the national security objective. Ricardo mentioned matters related to war, peace and defence in On the Principles of Political Economy and Taxation (1815), and also in other works, notably Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815), On Protection to Agriculture (1822) and Essay on the System of Consolidated Debts and Amortization (1847). Among other matters, he dealt with food security, war financing, capital flows between economic sectors during conflicts and the consequences of war on employment. Ricardo, unlike Smith, makes no concession to industrial protectionism, even in the case of strategic manufactured goods. This can be explained by the context of his time, characterized by England’s uncontested industrial and commercial supremacy; on the other hand, England represented an important market for the continental wheat production, and in fact Ricardo paid particular attention to the food security issue. He asserts that, even in the event of conflict, wheat-producing countries would need to sell their wheat to Great Britain and, thus, that there is a low risk of disruption in supplies. Furthermore, other producing countries could circumvent an embargo, giving time for English growers to increase their own production (all the more so if the country has been preparing for a conflict for a long time). In this respect, Ricardo strongly defends the cause of free trade, even in wartime, which is noteworthy in the context of Napoleonic blockade (1814). However, his main postulate, i.e. the preservation of trade relations between enemies at war, is much less acceptable today than it was at the time. The Napoleonic wars have precisely inaugurated the ‘total war’, characterized by the disruption of the whole national economy and of all trade relations between the belligerents. War as Ricardo conceived it is hardly ‘industrialized’, and therefore his analysis, already debatable at the time, is difficult to accept nowadays. In that time, the cost of a ‘consolidated debt’, due to the numerous conflicts in which England was involved, weighed heavily on public finance. Ricardo tries to determine the best way to finance wars (1847). He considers it necessary to prevent the accumulation of a disproportionate national debt; otherwise, after a conflict, the nation would have to face important expenditures and levies, maintain numerous tax inspectors and establish a complex system of customs and indirect levies. Of all possible solutions, Ricardo prefers a new tax which would disappear with the return of peace. He considers this to be the best way to make public opinion aware of the massive expenditures required by war, and thus to dissuade it from supporting unnecessary conflicts. The war tax would mainly apply to capital owners and property owners, but also to employees who earn more than the minimum necessary for their subsistence. By encouraging the use of private savings to finance war expenditures, this system would prevent a deterioration of national capital. This would, on the contrary, happen if the government resorted to loans, because private individuals would then be encouraged to save only the interests of these loans (1847: 738). The © 2004 Fanny Coulomb

advantage of a tax is to only momentarily disturb economic activity. When peace returns, no other tax will be necessary, because a conflict financed by a war tax, unlike a loan, doesn’t put the nation into debt. The establishment of an amortization fund would certainly have succeeded just as well in extinguishing the debt, but Ricardo disapproved of this solution; indeed, the amortization fund is more often used to finance aggressive government policies than to extinguish war debts and ensure national defence, its initial purposes. In On the Principles of Political Economy and Taxation, Ricardo mentions several times the example of an economy just after a war to illustrate his theoretical argumentation. In this respect, he makes a new and interesting analysis of the economic consequences of war, particularly relating to the issues of employment or of the reorientation of capital flows from war activities towards peace activities. In Chapter XXI of The Principles, Ricardo is concerned with the way the net income of the country is spent. Luxury goods expenditures create fewer new jobs than the maintenance of domestics, this last expenditure being thus relatively more favourable to the improvement of employee conditions. Indeed, an increase in labour demand is accompanied by a salary rise. In support of his remarks on the importance of the nature of employment to which net income is allocated, Ricardo uses the example of the allocation of a part of the incomes levied by exceptional taxation to the needs generated by war, instead of the usual ‘comfort and pleasure’ activities, notably furniture, clothes, books, etc. War generates an increase in job applications in the armed forces; it thus naturally initiates an improvement in the living conditions of some workers, which eventually leads to a population growth. After war, the sums which had been exceptionally levied will again be allocated to luxury expenditures which create fewer jobs, causing unemployment and thus salary cuts, with a deterioration of working classes living conditions. Therefore, the positive effects of war on workers’ living conditions will only be temporary (1821: 406–407). Moreover, this passage of Principles is only an example, and not a complete demonstration of the economic consequences of war: other essential elements are not taken into account, such as the increase in commodity prices in wartime, or human losses, which clearly underscores the contingent nature of this analysis of war. In Chapter XIX of The Principles, Ricardo considers the problem of the necessary reorientation of economic activities after a conflict. It is not a matter of reconversion of military industries, into civil industries, but of movements of capital from industry towards agriculture, once war has begun (1821: 283–285). The more fixed capital has an important part compared to circulating capital, the more this reorientation is difficult and thus the more the economic crisis ensued from war will be important. This is the case for industrialized nations; their productive equipment is difficult to convert into other activities. With regard to agriculture, the effect is the opposite. In wartime, because of the previously analysed mechanisms, the usually importing country attempts to increase its agricultural production. But with the return of peace and of foreign competition on wheat, a crisis will occur. © 2004 Fanny Coulomb

There is thus a high risk of capital loss after war, which can discourage capital reorientation towards agriculture in wartime, yet is necessary for national security. The solution advanced by Ricardo is to levy a tax on wheat imports for a few years after the end of war. The reorientation of capital towards industry will be progressive and at a low cost for national producers. The increase in wheat price would only be temporary and would be preferable to the one which would occur in the absence of such a tax system; in this case producers would ask for compensation and an exceptional insurance premium paid by the consumer. This import duty should only be used during post-war years and thus be exceptional, free trade remaining the best policy in favour of national growth and ‘common happiness’ (1821: 287–288). This measure should prevent the establishment of permanent agricultural protectionism, recommended by Malthus. In Ricardo’s opinion, permanent food self-sufficiency was not an essential strategic objective. By demonstrating that a temporary protectionism would be sufficient to preserve national security, he in fact defended his argumentation in favour of free trade. Power issues evaded by theoretical abstraction With his partial analyses of war and post-war economic problems, Ricardo makes an original contribution to the economic theory of defence, although it is difficult to draw from his work his main views on this subject. He certainly elaborated, more than his predecessors, a real theoretical system on the way market economy works and on the interdependence of national economic interests. However, in spite of his belief in the superiority of free trade, he did not present a general view of the evolution of societies and of international relations. This leaves several unanswered questions as to his thought on war and peace. When he expounds in The Principles the advantages that a country can gain from foreign trade, Ricardo underscores the convergence of various nations’ interests: Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically . . . while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world. It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England. (1821: 153) © 2004 Fanny Coulomb

This passage established Ricardo’s reputation as a great defender of the freetrade ideology, especially of its pacifying and universal virtues. However, this quotation is relatively isolated in this work and doesn’t even explicitly refer to peace, but rather to welfare. Compared to the assertions made by the classical ‘optimists’ and the liberals on this subject, Ricardo’s analysis is very poor in apologies regarding the pacifying nature of free trade. His theory certainly demonstrates the advantages of international specialization through trade; however, no explicit conclusion on the evolution of international political relations can be drawn from his work. Other passages of The Principles show how the high degree of abstraction of Ricardo’s system leaves unanswered questions relating to the future of war and peace, although his predecessors had considered this issue as crucial. In Chapter XXVI of The Principles, Ricardo considers that a country shouldn’t aim at having a large number of employees. Additional workers often only increase the gross national income, without improving the net income, i.e. the sum of the rents and profits, the salary being part of production cost. Yet, what Adam Smith neglected is that only the net income must be considered. The fact that Ricardo evokes the national power issue to justify this assertion is revealing: It is not on the grounds of any supposed advantage accruing from a large population, or of the happiness that may be enjoyed by a greater number of human beings, that Adam Smith supports the preference of that employment of capital, which gives motion to the greatest quantity of industry, but expressly on the ground of its increasing the power of the country for he says, that ‘the riches, and, so far as power depends upon riches, the power of every country must always be in proportion to the value of its annual produce, the fund from which all taxes must ultimately be paid.’ It must however be obvious that the power of paying taxes, is in proportion to the net, and not in proportion to the gross, revenue. (1821: 360–361) In this quotation, economic power (characterized by the net product) seems to be of more importance to Ricardo than the maintenance of a numerous population. The key to this argumentation lies in the idea that salaries will always tend towards a minimum level of subsistence. A nation must above all preserve the means of public action, necessary to maintain social order, within which only a minority of the population will see their welfare improved. In a note, J.B. Say strongly criticizes this passage of The Principles, on two points (quoted in Ricardo 1821: 480–482): 1

2

one can’t assert that all employees never earn more than the minimum level of subsistence. A higher number of employees inevitably increases total savings. if power issues are taken into account, an excess of population always remains desirable, even if it originates no additional savings.


In his answer, Ricardo refuted the fact that he wasn’t concerned with the happiness of the great majority (1821: 361n). He acknowledged having limited his thought to power issues, but he denied having dismissed those of general prosperity. This should close the debate, as both authors seem to be equally interested in wealth and power. But Say’s remark reveals that they have two very different points of view. Say considers production and consumption as the ultimate ends of humanity. Even if savings are desirable, they are not necessary if a country only wishes to keep its rank in the hierarchy of nations. Thus, why must population growth, which doesn’t add to savings, be considered as useless for the only reason that the nation will gain no additional advantage from it in terms of power? Given Ricardo’s silence on this particular point of Say’s criticism, one is inclined to suppose that he was most of all concerned with increasing England’s relative power and that he also had a different conception of military technique. In his opinion, capital availability was a far more decisive factor than the strength of the armed forces in the level of military power. In this way, he anticipated the imperatives of modern wars. Ricardo’s theory has often been interpreted as a concealed plea for a freetrade policy which favoured England, who dominated industry and trade, more than any other country. And indeed, as the reasons for war are not clearly stated, the alleged peace through free trade appears to be more dogmatic than theoretical. Unlike his predecessors, Ricardo gives no description of an eventual advent of world peace, nor does he mention a progressive transformation of offensive military systems into defensive ones. In his chapter on colonial trade, he recognizes that monopolized trade between a metropolitan country and its colonies can, under certain conditions, highly benefit the metropolitan country, whereas it disadvantages the colonies’ economic interests. It seems, however, harsh to blame Ricardo for having been cynical when promoting free trade in the name of the harmonization of national economic interests, in order to formally establish a doctrine favourable to England’s economic and political power. One must keep in mind the high level of abstraction of Ricardo’s system. He never directly considers nations are linked by power relations, they are ‘areas of competitive forces’. Ricardo’s system, the highly technical and theoretical presentation of which has opened the way to neo-classical analyses, does not deal with considerations of ‘politics’. In a surprising contrast, i.e. the enthusiastic assertion of free-trade advantages coupled with a total indifference for the economic causes of war, Ricardo pays particular attention to the management of war and post-war economies. He also confirms his wish to discourage governments from entering new conflicts, but without clearly explaining the reasons which incite them to do so. Malthus asserted that, in the long run, wars would only disappear if each individual adopted an irreproachable moral behaviour and if food selfsufficiency was ensured; therefore, he had doubts as to the achievement of this objective. Ricardo also adopts a pessimistic view of the future of the market economy. In the long run, the profit rate will tend to fall, leading economy towards a stationary state. However, his conclusions are different. Indeed, the © 2004 Fanny Coulomb

perspective of a stationary state can be delayed for a very long time owing to free trade. Moreover, markets will thus be conquered through the optimal economic specialization to come from free trade. There will be no need for military conquests or aggressive policies, which are condemned. But once again, Ricardo does not expound the reason for implementing such policies. Ricardo never explicitly announces, throughout his work, the end of wars, nor does he ever clearly mention the eventuality of peaceful international relations through free trade. His theory distinguishes the theoretical sphere, in which his system is elaborated, from the real sphere of economic policy. This separation of economic analysis will be pursued by the neo-classicals, and notably by Walras. In this way, Ricardo develops a system which is abstract and pragmatic at the same time, which dogmatizes liberalism but which in fact leaves the majority of the population with little hope for a better life. His system is very far from the enthusiastic peaceful utopia of the French liberal J.B. Say. On many points, Malthus’ and Ricardo’s pessimism regarding humanity’s future are similar, although both authors have different conceptions of international trade advantages. Neither of them present international peace as imminent, nor even as an aim in itself.

From James Mill to John Stuart Mill: from classicism to the renewal of the liberal economic analysis of international relations Both of the classic ‘currents’, pessimist and optimist, were pursued throughout the nineteenth century. James Mill confirms the classical precepts expressed by his predecessors, in a relatively optimistic presentation. John Stuart Mill doesn’t pay much attention to war issues, but he uses Ricardo’s pessimistic theory to suggest an original thought on the State and human progress, in which international conflicts are more or less explicitly mentioned. James Mill: the defence of trade in spite of conflicts James Mill’s work was directly inspired by Ricardo. But even before the publication of On the Principles of Political Economy and Taxation, he devoted an entire work – entitled Commerce Defended. An Answer to the Arguments by which Mr. Spence, Mr. Cobbett and Others, Have Attempted to Prove That Commerce is Not a Source of National Wealth (1807) – to the defence of trade, accused of being responsible for numerous wars. He also refuted the idea that military expenditure favoured economic development, by increasing consumption. James Mill’s ideas on war, peace and defence are very ‘classical’. They cover three main subjects. 1

Wars always have disastrous economic consequences, whereas people are naturally inclined to accumulation. A country at war allocates to its financing a part of private savings, therefore decreasing the capacity of capital reproduction after the conflict (1807: 151, 158).


2

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Trade increases national prosperity, by favouring agricultural and industrial development, and is unfairly accused of being responsible for international conflicts. Commercial motives often provide governments with lame excuses to justify their offensive policies (1807: 152–153). Mill condemns colonial conquests, with similar arguments to those advanced by Smith, notably the idea that colonial trade is only of benefit to the exclusive interests of monopoly. Because of the progress of civilization, modern societies are unlikely to be invaded. A ‘good’ government shouldn’t be aggressive and should develop the national defensive potential. Strategic considerations shouldn’t hinder the economic policy. Like Ricardo, Mill refuses all kinds of protectionism, even in the name of defence (1807: 91–94).

Furthermore, and this is his most innovative contribution on these issues, James Mill suggested the establishment of an international arbitration of conflicts. His Considerations on Representative Government contains a chapter on federative States, where he examines, among other things, the role of the US Supreme Court. He considers it as the premise of a future international court implementing international law, which will become indispensable to continue world civilization. Other English classical economists of the time also defended the liberal conception of conflicts and defence. In this respect, Mac Culloch, who popularized Ricardo, criticizes the ineffectiveness of protectionist trade measures implemented in the name of national defence and reaffirms the nation’s interest to live in peace (Silberner 1957: 31–56). Tooke is another economist to have worked on war issues. He presents two of the economic consequences of war: first, a tax increase, with an effect on prices in the case of an income tax (but not with a consumption tax); second, an increase in demand, leading to a salary rise (and thus to a population growth) and a rise in food and manufactured goods prices. As to the loan, it has no inflationary effect, since it does not enable the purchase of more goods than those drawn from the reduction of individual purchasing powers (‘crowding-out effect’). The effects of war on demand is not as stimulating as it is usually thought: the State monopolization of trade certainly entails an increase in industrial production, but this is counterbalanced by a rise in interest and insurance rates and in transport costs (Wolff 1989: 63–66). John Stuart Mill: the moralizing virtues of trade John Stuart Mill mentioned the field of defence several times in Principles of Political Economy (1873). Following Smith, he acknowledges the priority of defence over economy, in specific cases. He is against wars of aggression, which are immoral, but he considers actions of national defence as justifiable. He therefore supports the Acts of navigation, which enabled England to make up for its naval strength backwardness compared to Holland (1873b: 490). Like © 2004 Fanny Coulomb

Smith, he asserts that these laws are economically unfavourable but have important political advantages. However, he considers them unnecessary for his time. Although he doesn’t go deeper into this matter, we can consider that he justifies any kind of protectionism which favours national defence purposes, notably if the State is attacked by bellicose countries (1873: 492–493). On the other hand, Mill is opposed to agricultural protectionism, refusing to envisage a total disruption of foreign supplies, even in the case of war. In this respect, his argumentation is similar to Ricardo’s. The argument according to which the losses resulting from war shouldn’t have significant economic consequences is one of the most original J.S. Mill advanced on war issues. Indeed, capital rebuilding being very quick, nations can rapidly recover their previous industrial capacities. Besides, Mill condemns wars on a moral plane, which is an original aspect. Like all classical authors, he praises the civilizing and pacifying virtues of trade. More than an economic advantage, the development of international trade is morally desirable. It favours contacts between foreigners and also accustoms nations to be aware of the other nations’ wealth without envying it. Therefore, trade strengthens interests in favour of peace and against war. J.S. Mill pursues here the classical tradition, by criticizing the mercantilist conception of conflicting national interests: and there is no nation which does not need to borrow from others, not merely particular arts or practices, but essential points of character in which its own type is inferior. Finally, commerce first taught nations to see with good will the wealth and prosperity of one another. Before, the patriot, unless sufficiently advanced in culture to feel the world his country, wished all countries weak, poor, and ill-governed, but his own: he now sees in their wealth and progress a direct source of wealth and progress to his own country. It is commerce which is rapidly rendering war obsolete, by strengthening and multiplying the personal interests which are in natural opposition to it. And it may be said without exaggeration that the great extent and rapid increase of international trade, in being the principal guarantee of the peace of the world, is the great permanent security for the uninterrupted progress of the ideas, the institutions, and the character of the human race. (1873: 115) Thus, Stuart Mill emphasizes the capacity of trade to develop the spiritual potentialities of humanity, rather than its economic advantages. In other works, he insists on the State’s role in the establishment of institutions allowing the moral improvement of each individual and the development of his or her talents, therefore contributing to human progress (1873: 305–308). People should prepare themselves for the advent of a stationary state, which Mill considers to be inevitable. Moral progress, rather than economic progress, is the true end of humanity. War is mentioned, together with the search for © 2004 Fanny Coulomb

enrichment, as an objective which has been used so far to focus the energy of humanity. In the stationary state, individuals can devote themselves to higher concerns. J.S. Mill certainly makes no forecast as to a lasting international peace in the future. But he presents wars and commercial conquests as a characteristic of a still-young humanity; in the future, societies should not remain interested in economic progress; he therefore implicitly shows that international relations should become peaceful in the long run. Following Ricardo’s opinion regarding the limitation of economic development in the long run, J.S. Mill does not present national enrichment as the end of human action, contradicting in this way Adam Smith’s postulates. The idea of peace among prosperous nations, owing to free trade, is abandoned in favour of a peace imposed by humanity’s maturity, in the context of a stationary economy.

Conclusion The works of Ricardo, Malthus and J.S. Mill show that these authors did not subscribe unreservedly to the idea of a future state of universal peace, owing to free trade. The idea of economic growth limited in the long term can explain this. In fact, unlike Smith or Say, these authors give little importance to the question of the economic causes of war. International conflicts and defence issues seem to be already considered as issues which go beyond the economic analysis, prefiguring the neo-classical attitude.


Part 2

War or peace, resultant of an economic system New economic analyses on defencerelated issues since the mid-nineteenth century During the nineteenth century, the thought on war and peace no longer developed as the only alternative between free trade and protectionism. New, heterodox economic analyses on conflicts developed around the thinking on the validity of the market economy. In this respect, the Utopian current, but especially Marxist thought, made important contributions. The outbreak of the First World War, in a context of high economic interdependencies, undermined the liberal current. The rise of totalitarian systems and the inter-war years crisis also gave rise to new liberal studies on the viability of the capitalist system and on the causes of wars. Heterodox studies then developed, based on the analysis of institutions, history and even sociology. The part played by militarism in the capitalist system is discussed. Statistical techniques are used to develop other field of research. But the studies on the problems specific to an economy of war have led to a theoretical renewal, notably with Keynes.


4

War and the threat of war at the heart of the functioning of the capitalism system

Before the development of Marx’s theory, the capitalist system had already been questioned by the Utopian economists. The Marxist movement, which was notably pursued by the theories of imperialism, and which continued after the Second World War, shows that capitalism is fundamentally conflicting, because of its internal contradictions. It is therefore logical that this current considerably contributed to the economic analysis of war. The successive stages of the Marxist analysis of war and of military expenditures are presented here.

Socialism through war or peace: Utopians’ pacific reforms versus Marx’s revolutionary war While attacked by the historical school, the analyses and conclusions of the classical theory are questioned by Marx and Engels. They consider social relations as fundamentally conflicting. The struggle thus lies in the heart of economy. Their theory of civil war is, to a certain extent, applied to the analysis of conflicts between nations. Marx claims the scientific character of his work, which tries to contest the arguments of the classic political economy as to the superiority of capitalism. He thus distinguishes himself from the ‘Utopian’ socialists who preceded him or were his contemporaries, such as Proudhon. Marx mainly criticizes the Utopian socialists on their wait-and-see policy, their naïve belief in a reform of social institutions ‘by the force of the example’. According to him, such an attitude is historically outdated, the socialists must now reach the stage of social revolution. One of the main differences between ‘Utopian’ socialism and ‘scientific’ socialism lies in the importance they give to violence in the passage to socialism. Furthermore, they do not make the same analysis of militarism and conflicts in a capitalist economy. Thus, two currents a priori both aiming at the establishment of socialism, but by different means, challenge the liberal theory in the nineteenth century. They have divergent conceptions of the transition towards socialism, and of its contents.


The Utopian economists of the nineteenth century: or peace owing to new social rules The numerous economic theories developed throughout the nineteenth century were not generally very rigorous and bore a project leading humanity towards happiness. They were often rival, and sometimes resulted in religions or life principles, far from all serious economic analysis. Marx called them the ‘Utopians’ and distinguished them from scientific socialists, supposed dialectical and materialist. They were numerous, and often influential. Concerned with the great misery of most workers of their time, they generally fought against the capitalist mode of production, and notably against the rules of property or competition. Often French citizens, they shared the feeling that France had a historic part to play in the reorganization of society, because of its revolutionary or reforming capacity. Moreover, they considered themselves as the children of the Revolution, the ideals of which they defended. In this respect, Babeuf (also known as Gracchus), a precursor, wished to remove the great corrupter, money, and develop an egalitarian society. There has been two main Utopian movements, even if the borderline between them is not always distinct: the Utopian socialists and the anarchists. These two movements differ mainly as to the role which must be given to the State in economic and political life. All these authors largely discuss war, peace and defence issues, which are in fact often of great importance in their analysis. The Utopian socialists Among the numerous Utopian socialists who have had a direct influence on the ideas of their time or an indirect influence on the economic analysis of war, it is especially interesting to study the thoughts of Saint-Simon (notably because of the influence of the Saint-Simonian school on the French economy), Charles Fourier (and the associationism), Sismonde de Sismondi (one of the fathers of the social guarantee), Constantin Pecqueur (or the triumph of collectivism) and Michel Chevalier (or the socialism based on technology and free trade).

SAINT-SIMON, OR THE SUBSTITUTION OF A MILITARY SOCIETY FOR AN INDUSTRIAL ONE

Saint-Simon (1868; 1869; 1875) wished to reconcile the religious tradition, the revolutionary experience and industry. He was highly influenced by JeanBaptist Say’s political economy and especially by Say’s law. Like him, he asserted the undeniable opposition between welfare and bellicosity. Saint-Simon analyses the economic crisis of his time as the inevitable result of a precarious organization in which individualism and competition have pernicious effects. Property is the most unfair privilege, it creates exploitation, prevents the most efficient use of production factors and leads to the anarchy of production. The effects of war can only be negative, whether in terms of human © 2004 Fanny Coulomb

losses, or of disruption of production and trade. Saint-Simon denounces wars led for so-called commercial interests; industrial expansion only requires free trade and security. He also refuses acts of violence, riots or revolts to reform the society. Only peaceful means can lead to solid social foundations. Saint-Simon refutes all interpretations of history which refer to Providence or chance. History is marked by periods of equilibrium, characterized by harmony among the political system, the social institutions, art and the economic system. The periods of crisis lead to a new equilibrium. The course of history is determined by the law of continuous progress. Whereas in the Middle Ages, wars and conquests were essential to the system’s equilibrium, with capitalism, industrial power replaced military power. This process was accelerated by the evolution of warfare technique, and thus of technical progress. With the discovery of gunpowder, the harquebusier became more efficient than the valiant knight; from then on, the villains could defend their territory, and the former nobility became a parasite. The sense of Saint-Simon’s famous parabola gave a decisive role ito manufacturers in society, at the expense of the ‘administrative’ class (1869). In Saint-Simon’s opinion, the industrial system bears a process transforming social relations. The industrialists must hold the highest rank in society; they have the advantage of numbers, of produced wealth, of intelligence and science, and they can manage without the other classes. The term ‘industrialists’ doesn’t only refer to the industrial production based on mechanization, but also to all forms of material, agricultural, craft, industrial and commercial production. Therefore, when the industrialists will have become aware of their mission, they will peacefully come into power, originating a change in property. Indeed, state intervention in economy has always been disadvantageous for industry; therefore, the society should be administered by the industrialists themselves (this idea has also been developed by Auguste Comte). The industrial system will be characterized by the end of the exploitation of one person by another, full employment and an Employment Law. Each individual will receive according to his or her capacities, with the establishment of a social hierarchy, governed by an elite. The most important industrialists will also voluntarily run the public administration. Therefore, the State will gradually disappear, society being no more governed, but administered. With a controlled economy, crises will be avoided owing to the Chambers of inventions, examination and execution, formed of qualified people. France will become a big factory, managed like all firms. This organization will be very centralized, notably with the establishment of a powerful central bank (1875). Saint-Simon appeals for the development of the social ideal of fraternity. All progresses of ‘industrial values’ lead to a decline in military values. Industrial blooming is the best way to guarantee world peace, because people become aware of the identity of their interests. The industrial society marks the end of the class war and of all conflicts (1869: 81–82). Saint-Simon thus proposes that all European nations be governed by national parliaments, which would form a European parliament. So as to avoid war within the confederation, numerous © 2004 Fanny Coulomb

internal works should be undertaken. However, before achieving this aim, many wars may still occur. He also expounds an intermediate project of a French–English alliance with a common Parliament, a common currency and free trade, which would guarantee a peace favourable to economic development (1868). Considering the European race as superior to the others, he believed it had to widen to other countries, for their own good. But all these proposals are founded on only a few solid economic observations. Pursuing the founder’s thought, Saint-Simonian economists insisted on the universal harmony that would succeed wars and misery, the peace spontaneously appearing from the unified industrial society (Bazard 1877: 190). Auguste Comte also developed the idea that people are constantly urged to form larger associations, which favours the durable widening of peaceful zones. CHARLES FOURIER: OR THE BRILLIANT DESPOT PROVIDING ETERNAL PEACE

According to Heilbroner (1992: 122–3), Charles Fourier was probably a little insane. His world, which had six moons and anti-whales harnessed to vessels, was at least fanciful or phantasmagorical. However, his influence on the Utopian socialists has been important. Politically, he expressed pacifist ideas during the war of 1870 and he sided with the Commune of Paris. In Fourier’s opinion, progress and development entailed misery, which is ‘the most scandalous disorder’. He put the blame on bankers and salesmen, ‘these leeches, these vultures, these hornets which practise the noble profession of the lie’ (1846: 222). He also criticizes the industrialists who beset the State, covet places, require protectionist tariffs and seek concessions concerning canals, mines or railroads. He also attacks traders with similar arguments. Condemning the high mechanization of the heavy industry, Fourier pleads for an economy based on the agricultural sector, a kind of pre-capitalist economy. However, he would rather reform the industry than the State, because economy and social progress comes from civilian society. The civilized and barbaric State, based only on violence, is opposed to God’s will. Fourier states that world unity and peace will succeed conflicts between enemy peoples. Industrial trophies should replace slaughters. The army and the navy are two of the main ‘social parasites’: they distract the workforce, they lead to a tax increase, they deprave the youth, which thus loses its taste for work. He suggests the substitution of destructive armies for productive ones, which would build monuments or undertake works of irrigation, reforestation and draining. The resulting cost would be much lower than the one generated by war, as human losses and destruction would be avoided. He appeals for the establishment of industrial armies: In conformity with the thesis of the duality and counter-expansion of the movement, the Association must be capable of gathering productive armies, like civilization gathers destructive ones. (1846: 559) © 2004 Fanny Coulomb

The unitarian government will be the centre of great world industrial operations, it will direct industrial armies in immense works of collective interest. Everyone will be employed in the activity the most suitable for him or her, which will entail harmony and the production of abundant resources. Fourier is hardly interested in collectivist ideas, all the less since equality is the enemy of variety. In his phalansterian ideal society, capital, money and property remain, but they are integrated into a system of spreading participation. He then develops a project of unification of the human race, with the idea of world conquest by a brilliant enlightened ‘despot’. He indeed predicts that a state of perpetual peace should follow the European war, mainly under the enlightened control of France, which would then dictate its excellent laws to Europe, then throughout the world. Therefore, the military conquest and the politico-economic domination of the despot should save the world: ‘It [the government] would run all the general affairs of the globe, all the general operations; of which it would be the high industrial regulator’, quoted by Desanti (1970 [1834]: 216–217). In this new context, the notion of conquest could be rehabilitated, for peaceful purposes. All forms of power or tyranny are likely to disappear, so are their corollaries, the army and the police. In this ideal world, there will be no more wars, nor internal disputes. However, the lack of historicity in Fourier’s model leads us to suppose that domination relations will last at the international level. Although Charles Fourier’s analyses remain weak from the economic point of view, his influence on the economists of the twentieth century has not been negligible. Notably, he directly inspired Constantin Pecqueur and Victor Considérant. Considérant, indeed, recommended the abandonment of aggressive governmental policies and to substitute destructive armies for industrial armies. Like Fourier, he considers that peace is impossible as long as workers and industrialists have not conquered both material prosperity and moral dignity. Only free association in phalansteries, within the framework of a unified European (or even world) economy (or even society), can lead to a generalized peace. CONSTANTIN PECQUEUR: OR THE WORLD STATE FACTOR OF PEACE

Saint-Simon and Fourier both inspired Pecqueur (1842a, b). Often quoted by Karl Marx, he was reformist as well as pacifist and was one of the most influential Utopian socialists, in spite of the weakness of his economic analyses. In Pecqueur’s opinion, all wars disadvantage the prosperity of the people; they are always the result of a bad calculation, even for the conqueror. War results from the exploitation of people, due to the system of private property. To fight against economic crises and poverty, he recommends the expropriation of the owners of the means of production in a peaceful way. Pecqueur favours State collectivism but he is opposed to the communist doctrine, which leads to the exploitation of the best people by the ‘selfish, unfair and pervert’ ones. Like Saint-Simon and Fourier, he does not advocate absolute equality. He also rejects associationist socialism, which could induce the maintaining or revival © 2004 Fanny Coulomb

of competition. He recommends a single cosmopolitan association; the State would be the only capital owner and the only employer, all citizens being civil servants. The programme of humanity’s ‘social and political economy’ would be fraternity, liberty, equality, unity and solidarity. Pecqueur recommends a reform of the army before its abolition. Following Fourier, he proposes an active and laborious army (instead of an inactive and expensive one), ensuring both national security and prosperity. The establishment of a single power through a union of nations would definitively eradicate all national rivalries. But this would only be feasible once all nations have reached the same level of development. Meanwhile, the economic unity of Europe, the most unitarian human family, could be achieved; in the spirit of the German association of his time, Pecqueur considers that customs unions prepare for peace and that protectionism could be used in order to ensure economic development. He also recommends the creation of international courts, of a League of Nations (following Saint-Simon), for international conflict resolution. As a cosmopolitan, Pecqueur wishes to develop economic interdependencies between peoples and abolish nations, which are bellicose elements of international relations. Other Utopian economists Many other economists who are today considered as Utopian were not ‘socialist’. Almost all of them have dealt with defence or war issues and have proposed pacific solutions to change the economic and social system. For example, Robert Owen bases his thought on the negation of free will and on the power of reason. Humanity must be guided by an irresistible moral influence. Completely pacifist, he was opposed to the revolutionary method and to the use of class war to implement social reforms. He presents war as an absolute evil, the expression of madness; what nations lose in war would be sufficient to ensure the prosperity of the human race (1970 [1842]). Science, morality, justice and happiness cannot coexist with war, violence and wealth destruction. Owen wishes to convince the military themselves of the economic and social destructive effects of their profession, which must be abolished. Other theories have been developed, notably by Etienne Cabet (1840). This one considers that humanity is good by nature. Wars are the sad result of bad social organization; they should disappear with the advent of communism. However, it is necessary to convince the rich, without dispossessing them, because the immediate abolition of property would induce violence, which must be avoided. Nevertheless, in the long term, the State should possess all means of production. Cabet recommends a fraternal democracy, named ‘Icarie’, which is an egalitarian society, without property or trade, without master or slave, without exploiters or exploited. The offensive army should be replaced by a defensive militia. Cabet suggests the general disarmament and the fraternity of all peoples, the abolition of customs, the freedom of trade and industry. He also recommends, in the same way as Louis Blanc but by different means, a confederation of peoples. © 2004 Fanny Coulomb

The opportunity of interventionism has also been discussed. After having admired the works of Adam Smith, Sismonde de Sismondi criticized, from 1819, the invisible hand principle, by revealing the existence of overproduction crises and the necessity of social justice. Economy’s aim should be the happiness of all, and not only a wealth increase. Rejecting the law of outlets, he considers that non-interventionism induces the exploitation of the poorest. While remaining favourable to private property, he recommends several reforms, notably a system of basic welfare benefits, thus prefiguring modern systems. Sismondi scarcely developed his analysis of war; indeed, he does not connect war with economic crises. Like most economists, he considers the army as useful to defend the country and denounces the governmental foreign policies, which are more aggressive than defensive. Following the liberals, he is opposed to the system of permanent armies and of war financing by loans (1819). Agreeing with Sismondi, Louis Blanc believes that State intervention in the economy is necessary; it is notably an instrument of information and forecast, useful to reduce economic crises. Regarding war, he underscores its utility to strengthen the governments’ power, within the national territory as well as abroad (1839). He denounces the negative (human and economic) effects of armed conflicts, for the conqueror as well as for the vanquished. Moreover, the permanent threat of war makes it difficult, even impossible, to implement the economic advantages of peace. The system of armed peace is as dangerous and as counterproductive as war itself. Finally, Louis Blanc proposes the creation of a high Confederative Court which is intended to settle conflicts between member states. Finally, following Saint-Simon, Michel Chevalier (1832) considers that humanity’s objective has always been the replacement of the military order by the industrial one, and of conquest by the association. Unlike Malthus, he asserts that productivity can compensate for the population increase, and more. He also rejects Marx’s concept of class war and calls for the agreement of all producers. Moreover, he wished to promote the Mediterranean System (Système de la Méditerranée), i.e. the association of all peoples living around this sea, and the connection of East to West by a railway. This should inspire the later establishment of a universal association, with an international system of industrial works. It would be a technical, economic and political revolution. Governments, henceforth pacifist, would abandon military expenditure and finance the building of canals and infrastructures. This Mediterranean Confederacy would ensure industrial expansion and the advent of peace, ‘like magic’, people finally understanding the peaceful character of common activities. He also states that the universal association will only be established once all inequalities of class, race and sex are removed. An alliance of bankers should give them great political power, which is desirable, because they are cosmopolitan by their function. By favouring the growth of production, and by establishing a peaceful power, they are the surest ferments of the European union (inspired by Enfantin), which will lead to the cessation of war. All these analyses are not very rigorous with regard to economic theory. © 2004 Fanny Coulomb

They often represent acts of faith concerning technical progress and the capacity of men to agree and to organize themselves, within the framework of an international system of conflict settlement, mainly centred on a dominant, pacifying and even colonizing (or civilizing) Europe. The anarchistic movement: for peace without the State According to William Godwin, the father of anarchism, war has its source in liberalism and property rights. In the ideal society, it would disappear. Very critical of Malthus’ law of population, he formulates the principles of a society without government where everyone would take advantage of the common work in proportion to their needs. The anarchistic movement has later been developed under the influence of the works and actions of Proudhon and Bakounine. PIERRE JOSEPH PROUDHON: FROM A WAR FACTOR OF PROGRESS TO A PEACEFUL CONSEQUENCE OF INDUSTRIAL DEVELOPMENT

In Proudhon’s opinion, studying the laws of social economy comes down to making the theory of the laws of reason and creating philosophy. Having accepted labour as the only source of value, but refuting historical materialism, he was violently criticized by Karl Marx, who replied to his Philosophy of Misery with a book entitled The Poverty of Philosophy (1896). Proudhon asserted that Marx’s aggressiveness against him was due to the fact that he had thought like him, but before and even better than him. He refused to rely on violent revolutionary actions to improve society and he believed in the efficiency of a peaceful reforming action. Proudhon, who states it is impossible to separate economics from politics, intends to demonstrate how a civilization which starts with war tends towards universal pacification. He has not been very well understood, all the more as he remained quite ambiguous on this matter. After he underlined society’s main evils, he expounded the causes of war and peace, and then presented the main characteristics of a future peaceful society. Proudhon considers that, in the nascent triumphant capitalism, some economic rules are opposed to justice, notably private property and the excessive role of the State. The whole social question amounts to the problem of property. This provokes a devastating competition and leads to economic crises, disparities, unemployment, oppression and tyranny, because it cannot be imposed without force. One person’s exploitation by another is, above all, defined by the famous slogan ‘Property is robbery’, which will later represent the anarchistic refusal of the State (1861: 347). But at a first level, property is politically justified; it is the best protection of human freedom and the only force capable of opposing the State. Yet, State intervention aiming at reducing pauperism in fact aggravates it, notably because it can induce capital outflows. Collective property would result in the State’s interference in all economic fields. The nationalization of the means of produc© 2004 Fanny Coulomb

tion would favour the rise of civil servants and of monopolies opposed to the workers’ interests, within which would prevail carelessness, waste and favouritism. The centralized State is an instrument of exploitation and subjection, it destroys liberties, generates an unbearable financial burden, and it is even incapable of ensuring national education. He recommends the abolition of the State and of nationalities (1858: 289). The necessity of a government, which only existed so as to make the capitalist oppression accepted, would disappear with it. In a rather original way, Proudhon’s work is marked by a negative image of peace, synonymous with nothingness and inactivity. Peace without war is unintelligible, it is war at rest (1861: 23). War is a divine fact, based on pauperism and it should disappear with it, although the warlike spirit will always be necessary for social development. From his point of view, war is a phenomenon of growth. Humanity’s life is a permanent war, against need, against nature, against others, against him or herself; People are warlike animals. War is a major fact which dominates history, it has, like religion, its superior principle, its end, its internal order. It is neither just nor inequitable, it is a product of consciousness. It enables the society to reach civilization, notably because it leads to the development of national law. If political issues are the visible causes of war, economic needs are its fundamental secret causes. The first, universal and always constant cause of war [. . .] is the same as the one which urges nations to scatter, to form establishments far away, to seek lands and outlets for their population excess. It is the lack of subsistence; in a higher style, it is the break in the economic equilibrium. . . . In the last analysis, pauperism: the original cause of all wars is there [. . .]. Yet, [. . .] nowhere could the power to produce equal the power to consume [. . .]. In brief everyone is affected by pauperism. (1861: 326–327) Pauperism explains international conflicts, civil wars and revolutions. War is based on the economic anarchy of free trade. Proudhon considers that, with its colonial ambitions, Europe is entering a cycle of violence and of disregard for principles; it is the decline of the Christian nations. Unlike Saint-Simonian or liberal ideas, he recommends the preservation of professional armies, the specialization of certain citizens being necessary in the context of rapid war technical improvement (accelerated by the appearance of firearms and their industrialized production) (1861: 482). He is therefore against all ideas of a ‘productive army’. Proudhon states that war must be transformed, must change from the heroic phase (with armed conflicts) to the economic one: ‘Reinstating war in its ancient prestige and paying homage to the warlike spirit condemned by the industrial spirit does not come down to admitting the perpetuation of war in its former forms’ (1861: 369). Weapons have a destabilizing effect in modern societies, they compromise © 2004 Fanny Coulomb

order. However, it is necessary to maintain the warlike spirit, and use it in the struggle for social progress. He presents the military institution as the first schoolteacher of world history, and pacifism cannot replace it. At the economic level, Proudhon criticizes international agreements on trade liberalization, notably the trade treaty with England, the competition of which will weaken the French industry and increase the risk of exporting to France the misery of the English working class (a kind of beggar-my-neighbour policy) (1861: 423). Proudhon described his conception of the ideal society as a pacifist one, which presupposes ‘mutualism’ (a mutualistic system), federalism and the extinction of pauperism. State education, employment and temperance are necessary to fight against pauperism. Justice, freedom and independence are the three main social objectives in the mutual association. Ownership replaces property, the mutual system rules the distribution of trade in kind and free credit is established. Unlike Fourier and Saint-Simon, Proudhon wishes for an egalitarian society. This leads him to suggest the creation of workers’ companies in charge of wealth production, which, like soldiers, will use their machines to overcome pauperism. The judgements of warlike competition would be substituted for the judgements on the battlefields. Peace is then based on economic law. Proudhon wishes to develop a positive, dynamic peace, with the replacement of heroism by industry: it is what he calls ‘the synthesis’. He considers that all peoples and governments want peace: ‘Only humanity is great, is infallible. Yet, I believe I can speak in its name: humanity doesn’t want anymore wars’ (1861: 510). The disappearance of armed conflicts presupposes the destruction of their common cause, namely monarchies and dictatorships but also, more generally, nationalities, which are opposed to world economic unification. In the ideal society, national groups should be considered as links of much larger groupings, confederacies of small States, which would ensure the international equilibrium postulated by the law of nations. As early as 1852, Proudhon develops a project of a European Union, which would remove the risk of interstate power rivalries. As with many other French socialists, he imagines that this confederacy will be established by and for France. The decisions of this country, which no other dares to attack, will determine the political future of Europe, and notably European peace, or even world peace. The project of the federated states of Europe is not based on the idea of a great State but of a sovereign and independent Confederacy of States, capable of bringing together separate countries. Federalism preserves the advantages of competition, but limits its dangers, guarantees order in freedom and the sovereign power of the people. This mutualistic federalism should bring justice and social peace. In the anarchistic society imagined by Proudhon, economic principles prevail over militaristic ones. The idea of conquest is incompatible with the federalist principle: each ‘linguistic and racial’ group remains the master of its © 2004 Fanny Coulomb

territory and governs itself on a mutualistic base. These communities mutually protect themselves against foreign enemies or dangers of domestic tyranny, and they consult each other in the interest of their respective economic activities. The administration works on a contractual base, with a strong autonomy granted to municipalities. The society can defend itself in case of attack but has no right to judge or punish. Only consciousness can judge consciousness. Refusing this rule comes down to admit war, authoritarian systems and force abuses. Anarchy abolishes all exploitation and desire for wars: The capitalist and owner exploitation stopped everywhere, employment abolished, equal and true trade guaranteed, value constituted, cheapness ensured, the principle of protection changed, the world market opened to producers of all countries; consequently, the barriers brought down, the ancient law of nations replaced by trade agreements; the police, the justice, the administration, placed everywhere in the hands of the industrialists; the economic organization replacing the governmental and military system of government in colonial possessions as well as in metropolitan countries; finally the free and universal competition of races under the single law of contract: here is the Revolution. (1951: 48) The passage to this type of system must be achieved without any violent revolution, in which Proudhon does not believe. He wishes to develop an antisociety within the capitalist society, based on the principles of association and mutuality. MICHEL BAKOUNINE: OR PEACE BY FREEDOM

Michel Bakounine is one of the main theorists of anarchism. His numerous works are political, lampoonist, critical against State communists. Nevertheless, he isn’t very well known, for his economic analyses, which have never been expounded in one great work. However he adheres, at least partially, to Proudhon’s initial socialism (1867: 78). Even if he acknowledged ‘Mr. Charles Marx’s merits’, he was firmly opposed to the idea of an authoritarian organization, giving him influence within the international. His programme was socialist, anti-authoritarian and anti-religious (1980 [1895]: 101). He disapproved of the working-class exploitation, the State and war, although the latter could serve the anarchistic revolution. For Bakounine, there are two social classes which have opposite interests: the ‘political classes’, composed of all the privileged persons, with regard to ‘land, capital or even only the bourgeois education’, and the ‘underprivileged working class’ with regard to capital or land, and ‘deprived of all education and instruction’. Slavery is when one is forced to work for someone else, just like being a master means living on the work of others. The bourgeoisie only applies the anarchistic law of laissez-faire to itself, provided that the ignorant masses © 2004 Fanny Coulomb

remain subject to the austere discipline of the State. The economic cost of the State, necessary for the bourgeoisie’s protection, is very high, notably because of military expenditures, war being inherent to state control. It [the bourgeoisie] had not calculated that the military system was costly, that already by its sole internal organization, it paralyses, worries, ruins nations, and that, furthermore, governed by its own logic which has never contradicted itself, it has war as an infallible consequence; dynastic wars, wars of points of honour, wars of conquest or of natural boundaries, wars of equilibrium [. . .] and everything to satisfy the ambition of the princes and their favourites, to enrich them, to occupy, to discipline the populations and to fill history. (1895: 208) He foresees France’s defeat in the war against Prussia and considers that it could be a chance of ‘a mass uprising of the French people’, i.e. an anarchistic revolution. Indeed, France will be under the Prussian administrative yoke, which will lead to tax increases, thus aggravating pauperism (1870: 69). Bakounine was a founding member of the central committee of the new League for Peace and Freedom, in September 1867. This movement can be clearly distinguished from ultra-pacifist tendencies expressed elsewhere, because it considers that peace is acceptable only ‘under the supreme condition of freedom’. Freedom, which can only mean the abolition of historical rights, the prohibition of perpetual contracts and the recognition of the right to secede, should be developed in a democracy, within the framework of a union of nations. The League has to fight against the States’ desire for glory, greatness and power. With the creation of the United States of Europe, civil wars between different peoples should become impossible. According to Bakounine, centralized, bureaucratic and military States cannot take part in this type of international confederacy (1867: 46–47). Marx and Engels: the class war, an expression of a civil war proper to the capitalist system Marx and Engels showed a great interest in conflict issues, whether civil or military, national or international. The tense political context of their time can explain their numerous allusions to matters of war and peace, and to European military or political events. In this respect, in 1848/1849, numerous revolts occurred in Europe; the French–Prussian war broke out in 1870; in 1871, the social unrest in France led to the ‘Commune’ of Paris, which was repressed in blood. However, and this is not the slightest paradox, in spite of the importance of State conflicts in their analysis of daily events, to which they often refer in their correspondence, Marx and Engels did not in the end succeed in developing an economic theory of war or of the military sector’s role in the economy. Nevertheless, they aspired to explain all phenomena owing to © 2004 Fanny Coulomb

this method of historical materialism. In the same way, military production does not appear in the Marxist schema of reproduction, no allusion is made, for example, to its influence on the profit rate. Besides, the later developments of the Marxist theory, particularly by the theorists of imperialism, will give a decisive role to conflicts between economic powers in the normal evolution of capitalism. We must thus distinguish the thought of Marx and Engels from those on which the Marxist ideology is based. To briefly summarize their analysis of war, peace and defence issues, we can mention the following broad outlines: 1 2 3

war, conflicts or security weren’t favoured theoretical subjects, in spite of both economists’ interest in the socio-politico-military splits of their time. conflict lies at the heart of capitalism, notably in the class war, of which war might only be a derived element. war – as well as national or internal security issues – is destined to disappear; it is a future vestige of the archaic history of the modes of production which preceded socialism, and of course communism.

War: a (reluctantly) neglected theoretical analysis Marx remained concerned with the lack of analysis of war issues in his theoretical works. We know today that he intended to write a volume of Capital devoted to the State, but that it was never written (1857: 263–265). Several elements indicate that Marx wished to widen the field of application of his historical materialist method to realities other than those studied in Capital. In this respect, he left notes for a work, which was never written, and which would have dealt, among other issues, with the relations between the military industry and the civil one. It would also have gone deeper into the study of international relations which are, however, described as ‘derived production relations’, as ‘secondary and tertiary facts’ (but without explaining whether this concerned only economic exchanges or conflicting interstate relations in general, whatever their nature). In a famous letter to Friedrich Engels, Marx expresses his wish to integrate into Capital an analysis of the relations between military technologies and economic development: The army’s history illustrates better than anything else the soundness of our conception of the relation between productive forces and social conditions. The army, in general, is of great importance in economic development. The salary, for example, was first of all fully developed in the army, among the Ancient [. . .]. In the same way, the division of labour within a activity was first of all established in the armies. These ones summarize in a striking way all the history of the forms of bourgeois society. (1857: 1600) Later, Marx comes back to this point: © 2004 Fanny Coulomb

In which domain does our theory on the determining of the organization of labour by means of production prove to be more brilliant than in the industry of men slaughtering? It would really be worth it for you to write (because I lack the necessary knowledge) something on this matter. I could add it, with your signature, as appendix to my book. (Quoted in Silberner 1957: 200) This letter shows that Marx leaves the matters which fall within the military sector to Engels. Davis found no less than eighty articles on this issue, signed by Engels, published in the Neue Rheinische Zeitung, in the year 1848 alone. Besides, the Anti-Dühring (1878) is partially devoted to the ‘theory of violence’, or, in other words, to the study of some of the consequences of the relations between military and civil sectors. Marx, for his part, wrote several articles more or less concerning the economic study of war, peace and defence. At first, numerous reflections on these subjects are integrated to the Manifesto of the Communist Party (1848a), published in association with Engels. On the other hand, Capital contains hardly any analysis directly linked to military issues or to the explanation of international conflicts. But the discourse On Free Trade (1848b) deals with these matters. Important indications on his conception of war and conflicts appear in his correspondence, notably with Engels, as well as in his numerous articles, notably in the Rheinische Zeitung. Conflict of the heart of capitalism The notion of conflict is central to the Marxist analysis of capitalism, together with the concept of historical materialism or of class war. Even if Marx and Engels did not study it clearly, they nevertheless greatly inspired the concept of economic war, but only from the class war point of view. We know that Marx was highly influenced by Hegel’s philosophy. Hegel developed a theory of violence considering it as a necessary stage in the process of social change. In the very long term, this evolution should lead to social structures enabling each individual to freely prosper. However, these social changes will only succeed if people struggle, first against themselves, then against current institutions. Revolutions and wars are often necessary stages in this process. Marx used Hegel’s method of dialectics, represented by the ‘Master–Slave dialectic’. From this point of view, people, social groups or nations, but also ideas, have fundamentally conflicting relations, which lead to changes in the structure governing these relations, once internal tensions become insurmountable. This evolution is a dialectical process, which is self-maintained, the evolution in the intellectual sphere being at the basis of all these changes. World history is indeed a history of the development of the idea of freedom, each stage being dominated by a ‘spirit of time’, with contradictions inherent to this conceptual structure. The State is a central element in this evolutionary process, as individual freedom can only exist within the submission to State laws. Therefore, social evolution © 2004 Fanny Coulomb

also entails interstate wars. Thus, war plays a central part in the dialectical process leading societies towards perfection. Enthusiastic about ‘great statesmen’, leading battles for what he considered as being ‘the idea of freedom’, Hegel admired aggressive democratic systems of government. When he began his work, Marx announced his wish ‘to set Hegel’s philosophy back on its feet’. According to his own argumentation, ‘it is not Man’s consciousness which determines his existence, but on the contrary his social existence which determines his consciousness’ (1859: 273). Thus, changes in the spirit of time, in the evolution of ‘ideas’, are in fact only the expression of the transformations of production relations through time. He had a materialist conception of history, a ‘dialectical materialism’; the consciousness of class is not the nation’s one. In other words, if List considers that national consciousness expresses the sense of belonging to the nation, according to Marx the consciousness of class membership prevails. However, neither Marx nor Engels ever clearly applied the historical materialism method to the analysis of war. Pribram mentions that, in a series of letters written between 1890 and 1894, Engels relativizes the importance that must be given to economic determinism in the Marxist theory. In 1890–1894, Engels admitted that one shouldn’t give a too-narrow sense to the concepts of economic functions and relations. He wished to include among the elements of these concepts geographical and racial factors, science, traces of the previous stages and even ‘public power’. Furthermore, he questioned the existence of mutual relations between economic conditions on one hand and, on the other one, the political, legal, religious and philosophic events’ (quoted in Pribram 1983: 251). This does not challenge the Marxist analysis itself, rather, it underlines the fact that Engels questioned the decisive and exclusive explanation in last resort of the materialist interpretation of history. This could explain why Marx did not apply the historical materialism method to war and international relations, in spite of his expressed intentions. In Marx’s work, political phenomena lie in the superstructure of capitalism (1859: 273). They are thus directly determined by production relations, which depend on the level of development of the productive forces which form the society’s economic infrastructure. Economic conflicts occur at this last level, owing to production relations. The class war is therefore the basis of all social evolutions. In the Manifesto of the Communist Party (1848a) Marx writes: ‘The history of all hitherto existing society, is the history of class struggles’ (1848a: 162). This struggle is described as a war between oppressors and oppressed. In the Marxist presentation, history is characterized by the succession of modes of production (proslavery, Asian, Antique, feudal, capitalist), each creating the conditions of its own disappearance: the domination of a class gradually leads to the appearance of an opposite and oppressed class, always more determined to put an end to its exploitation and to express its own values. However, only a few indications are given as to the nature of the events which provide the impulse for the transition of a mode of production to another, even if revolutions or wars are the most evident ones. © 2004 Fanny Coulomb

An unexpressed conception of ‘economic war’ At the national level, the class war can generate revolts, strikes or civil wars. For their part, the ruling classes try to hinder the downfall of the capitalist mode of production by resorting to foreign markets, which explains why they encouraged free trade. Thus, Marx and Engels consider that, with the exception of the founding thoughts of Quesnay and Smith, the theoretical defence of free trade has been organized to serve the bourgeoisie’s interests and has therefore no scientific value. Political economy is only a ‘common economy’, the quality of which Marx considers as having been mediocre since the 1830s; he even evokes Bastiat as the most representative liberal economists, they who deny the existence of economic contradictions and make an apology for the established order, without analysing the objective reality (1870: 685). Peace is considered as inherent to capitalism, because one of the basic hypotheses of this theory is the pacifying character of capitalism. For Marx and Engels, the free-market economy (and thus free trade), after having been a factor of progress, has now become a hindrance to economic growth, because it entails a radical opposition between particular interests and the general interest. Free trade cannot be considered as a solution to pauperism, which is dissociated from trade, liberal or protectionist policies led by the State. In fact, competition is the struggle of individuals against individuals, of classes against classes and free trade only transposes this struggle to the level of international relations (1848b). A protectionist article, attributed to Marx, considers that protectionist duties correspond to ‘the organization of a state of war in peacetime, a state of war directed against foreign countries, but which inevitably turns, in its execution, against the country itself ’ (quoted in Silberner 1957: 205). Marx also considers that the replacement of wars or war threats by economic competition is not the solution to international conflicts, even if their form might change (i.e. from military conflicts to economic ones); but he remarks that the liberals’ opposition to military expenditures is rarely expressed in order to influence political decisions (1852: 586). The concept of economic war is thus clearly evoked, even if not conceptualized. Marx underlines one of the main consequences of the economic weapon, namely its cost for the countries involved. Furthermore, free trade not only enables capitalist economies to find a provisional way of avoiding the fall of the profit rate; it also allows capital (the bourgeoisie) to dominate labour (the proletarians) (1848b: 141–156). The entire free-trade analysis comes down to an adaptation of the class war idea to interstate relations, international economic relations being characterized by tensions and confrontations. If Marx and Engels have not been deeper into the study of military conflicts, it is because they did not consider them as essential for the understanding of their time, unlike economic war. Marx and Engels, with their long-term analyses of production modes, did not connect vertical conflicts (between classes) to horizontal ones (between States), which marked the end of the nineteenth century. These ideas were later pursued by Gunder Frank and Arrighi Emmanuel. © 2004 Fanny Coulomb

War: the result of derived production relations For Marx and Engels, war in a capitalist system is, above all, based on the class war. It is, however, capable of changing the path and length of the ineluctable law of the system’s evolution. War can result from the competition between the ruling classes of capitalist States regarding trade or colonial objectives. It can then be interpreted as the expression on the international scene of the internal economic contradictions of each capitalist society. It is a political phenomenon determined by the economic sphere (1848a: 171). Marx thus describes war as being the perpetual state of the bourgeoisie, which historically had to fight to impose its power on other classes and which is always in conflict with the bourgeoisies of all countries. And yet, while asking for the proletariat’s support to its fight, the bourgeoisie gives it ‘the elements of its own culture’ and ‘puts in its hands weapons against itself’. Even if Marx does not express this idea explicitly, his conception links international war with the class war, in the long run. Indeed, he often insists on the necessity for capitalism to conquer foreign outlets, in order to thwart the law of the falling tendency in the profit rate. But Marx and Engels also consider that war could lead proletarians to be mistaken about the identity of their real enemies. Marx and Engels present violence as an essential factor of progress. Civil wars which promote the proletarian’s interests are considered as positive, like all interstate wars which lead to the same result. Engels thus approved the conquest of California by the United States, stating that the civilization of this colony would be useful for the cause of revolution, which can only develop in countries where capitalism is sufficiently advanced to be crushed by its internal contradictions (1849: 1063). War is not a matter of morality, but of revolutionary efficiency; it is analysed in the light of its politico-economic consequences. By accelerating history (and thus the advent of communism), wars or revolutions serve the cause of the working class. Marx and Engels analyse the advent of nations, or the realization of national unity, as historically necessary stages in the progress towards the proletarian revolution, by allowing the economic development of capitalism and of the bourgeoisie in the second half of the eighteenth century. When the social revolution is achieved in industrialized nations, the concept of nation will disappear, as well as interstate conflicts, to the benefit of an international peace. Kautsky (1909: 173) revealed a contradiction in Marx’s assertions on the nation, between the Manifesto of the Communist Party and Capital. While, in 1871, Marx disapproved of the French–German war and the annexationist ambitions of Germany, he supported, in 1849, the war of conquest led by the United States against Mexico. At the same time, Marx was opposed to the claims for independence of Slavic Austrians. Nevertheless, in Kautsky’s opinion, he must not be considered as a proponent of aggressive annexationist wars, nor as an enemy of selfdetermination. He explains that Marx and Engels proclaimed above all ‘the superiority of the European revolution over individual nations. They were opposed to the nations’ aspiration for self-determination when it contradicted © 2004 Fanny Coulomb

the international revolution’s interests and threatened them’ (1874b: 173). In fact, both economists seem to consider the achievement of national unity as a necessary preliminary to the development of the working-class movement. However, the nation should not be considered as a revolutionary concept. Everything which refers to it is, on the contrary, counter-revolutionary. The workers must not adhere to the idea of nation: the workers’ cause, and not the national cause, is the only defensible one. Thus, Marx writes: communists are criticized for wanting to abolish homeland, nationality. The workers have no country. We cannot take from them what they have not got. Since the proletariat must first of all acquire political supremacy, must rise to be the leading class of the nation, must constitute itself the nation, it is, so far, itself national, though not in the bourgeois sense of the word. (1848a: 179) The success of social revolutions will notably depend on the trade policies led by States. Marx considers protectionism as an instrument of coercion, even of economic war (he even uses this term). Besides, in Germany, the protectionist policy is the bourgeoisie’s weapon against feudalism; it removes from social structures their archaic forms (1848b: 156). However, the German case is specific; generally, the workers’ interests lie in the support of the bourgeoisie for the liberal philosophy, because free trade is more progressive than protectionism, and thus more likely to accelerate the internal downfall of capitalism In the first analysis, Marx, like the liberal school, envisages free trade as a factor for peace. However, the reasons and the methods of this assertion diverge. In Marx’s opinion, free trade increases the violence of the class war; rather than prosperity, it accelerates capitalism’s downfall. Free trade accompanies the transposition of nations’ internal economic contradictions to the international market, which also becomes conflicting. In doing so, economic confrontations tend to replace military conflicts. In this way, capitalism is more peaceful than feudalism. But it is only once communism is achieved that antagonisms between peoples will really and definitively disappear. National differences and antagonism between peoples are daily more and more vanishing, owing to the development of the bourgeoisie, to freedom of commerce, to the world market, to uniformity in the mode of production and in the conditions of life corresponding thereto. The supremacy of the proletariat will cause them to vanish still faster. United action of the leading civilized countries at least is one of the first conditions for the emancipation of the proletariat. In proportion, as the exploitation of one individual by another will be ended, the exploitation of one nation by another will also be ended. In pro© 2004 Fanny Coulomb

portion as the antagonism between classes within the nation vanishes, the hostility of one nation to another will come to an end. (1848a: 180) The end of war is thus connected with the end of class war. Marx’s assertions on the pacifism of capitalism do not lessen his hostility to economic liberalism as a permanent system, which only transforms military conflicts into economic ones. Engels insists on the immoral character of trade, which is a robbery, and on its interested pacifism, insofar as it favours the conquest of international markets by certain capitalists (quoted by Silberner 1957: 208). Thus, the cosmopolitanist arguments only hide the bourgeoisie’s selfish interests. The liberal idea of harmony among national interests through free trade neglects the existence of disparities, exploitations, domination and their adaptation to the international division of labour. Marx also considers that the German labour party mustn’t approve of the thesis of the peoples’ international brotherhood, which derives from bourgeois ideology. From his general point of view, the school of Manchester wishes peace in order to lead the industrial war (1853: 705): the concept of economic war is thus expressed. On this subject, Marx is in opposition with Saint-Simon and the Utopian socialists who believed in the pacifying role of industrial development (conflicts ensuing from poverty), even of manufacturers themselves. In Marx’s opinion, before being a matter of poverty, war is first of all a matter of exploitation and alienation. In Marx and Engels’ analysis, free trade is thus judged differently, depending on the period analysed: 1

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in a first stage, free trade is considered as favourable to revolution, as it is likely to accelerate capitalism’s maturation, and thus the moment of its downfall, under the weight of its internal contradictions; in a second stage, international economic competition itself becomes retrograde and is used by the bourgeois class to perpetuate its economic domination.

Economic competition is a war phenomenon; only its disappearance can lead to international peace. War: a phenomenon destined to disappear War has contradictory effects on the situation of the working class according to the period considered. Engels notably expressed specific comments on the negative consequences of international conflicts or an arms race on the proletarian cause. Only the communist society could lead humanity towards peace. Engels was wrong when he predicted that the art of warfare had reached its peak during the war of 1870/1871 (1878: 198). But he was strangely premonitory when he predicted, as soon as 1888, the occurrence of a total world war which would last three or four years and generate a violence inconceivable until © 2004 Fanny Coulomb

then, capable of accelerating the revolutionary process (1895: 1131). Three main conclusions on conflicts may be drawn from his different articles on defence and war issues. 1

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The militarism which dominates Europe is becoming a real economic burden and accelerates the States’ financial collapse and thus capitalism’s downfall. In Anti-Dühring (1878: 196–201), he demonstrates that military art and technique, as well as the size of armies and navies and the level of communications, are determined by economic conditions. Military organization, tactics and strategy also evolve as productive forces develop. In the long term, a world war will open the way to the victory of communism, by creating the conditions of the proletarian revolution. Moreover, it is only once the revolution will have spread worldwide, through armed confrontation, that the peoples will be united in a universal fraternity. The bitter experience has taught us that the ‘European fraternity of peoples’ is not achieved by means of hollow sentences and of pious hopes, but only by radical revolutions and bloody struggles; that it does not concern the fraternal union of all European peoples under a single republican flag, but the alliance of the revolutionary peoples against the counter-revolutionary peoples, an alliance which doesn’t materialize on paper but only on the battlefield. (1849: 1062)

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Engels also insists on the chance that represents, for the working-class movement, the ‘geometric progression’ of military expenditures resulting from changes in military techniques (firearms, shells, explosives) and from the defence policy (notably with the establishment of the military service after the Commune of Paris). Indeed, tax increases, made necessary by the rise in military budgets, ‘push the most destitute popular classes in the arms of socialism’. The arms race between France and Germany, initiated by the conflict in Alsace–Lorraine, is accelerating this process and must thus be welcomed with optimism (1895: 1131). The proletariat will later benefit from the progress of arms techniques, as well as from its own familiarization with the military sphere, owing to the obligatory military service. The victory of communism will mark the end of militarism, which will be broken from inside, according to the laws of the dialectic historical materialism (1878: 200). In certain letters, Engels moderated his optimism as to the revolutionary outcome of war, and he expressed his fear that such confrontations result, on the contrary, in an outbreak of ‘chauvinism’, which would prevent the development of social movements. Therefore, in the shorter term, instead of accelerating the revolution, a war can have the opposite effect. An economic exhaustion of Europe due to war could hinder the social revolution and favour the American industrial hegemony. An international war would


indeed lead to the decline of the working-class movement, instead of stimulating it. This one would probably be taken back twenty years, because chauvinism would be inflamed for several years, leading the proletariat to forget its class solidarity (quoted in Davis 1991b). Therefore, all these fears moderate the certainty expressed in Anti-Dühring, according to which a war, whatever its immediate effects may be, will have one long-term consequence: the victory of the social revolution. Engels’ later thoughts showed that war could represent either the acceleration or the deceleration of the social movement, depending on its capacity to mobilize (or not) workers’ interests. After Marx’s death and towards the end of his own life, Engels wrote a project on disarmament, published in 1893, in which he denounces the rearmament process of European countries started several years earlier. The continual increase in the level of armament which countries have to maintain exhausts their economies, and leads to an impasse, of which the only way out is total warfare. Engels recommends the beginning of a disarmament process which could be achieved by transforming the ruinous system of permanent armies into a system of militias, based on the people’s general armament. He thus proposes a new conception of militarism, as well as a disarmament by people, rather than by force. His project is centred on the idea of an international agreement on a gradual decrease of military service: he presents it as the simplest and the quickest way to prepare the transition from permanent armies to militias. Germany should suggest it to Austria, Italy and France, the support of this last country, however, being considered as fairly unlikely. Engels thus looked for the means to avoid an international war. His conviction as a revolutionary theorist, according to which war prepares the ground for revolution, at least in the long term, gives way to his wish to interrupt the arms race between capitalist countries. This conclusion is particularly interesting with regard to the Marxist theories developed in the second half of the twentieth century, according to which the militarism of capitalist economies, maintained by the arms race, is a factor of their power, but also of their destruction, in the long run. In their main works, Marx and Engels reject the appeal for workers’ unity in favour of national defence as well as the ‘pacifists’ appeal for workers’ mobilization for peace. In fact, military conflicts hide the real problems of society, which are those of the class war, and lead the proletariat to lose its class consciousness. As for the pacifist doctrine of the liberal economists, it only masks the fact that, from now on, economic war replaces military conflicts, and that peace serves the bourgeoisie’s interests. Nevertheless, Marx and Engels consider that world peace will be the ultimate result of the societies’ historical evolution, at the stage of communism, after the social revolution. However, unlike the Utopian socialists, Marx and Engels never clarified their view of the future society. Marx himself said he didn’t wish to ‘boil the pots of history’. Once in power, the proletariat will gradually abolish all class differences, and thus the State itself (Engels 1878: 316–317). The new societal system of government © 2004 Fanny Coulomb

would ensure individual prosperity and freedom, with the end of private property and of competition, and with the collectivization of the means of production and the establishment of a planned economy. There would be no more social classes and no more exploitation of one person by another. The internal social conflicts would disappear. However, wars will only cease when this social structure has been generalized throughout the world (Marx 1848a: 124). Armies should be maintained as long as the worldwide struggle between capitalist and socialist systems remains. Once communism has been established throughout the world, permanent armies will disappear, because there would be no more social conflicts, and no socio-economic reasons for aggressive wars any more.

Divergences of Marxist theories about the consequences of militarization on the stability of capitalism Conflicts at the centre of capitalism and the revolutionary struggle: the first theorists of imperialism The theories of imperialism, developed at the beginning of the nineteenth century, opened the way to an important area of application of Marxist theory. However, neither Marx nor Engels ever developed a real theory of imperialism. In these theories, war is a central issue: it ensues from the competition between imperialist States for the division of foreign markets, at a stage of capitalist development characterized by capital export, because of the limitation of investment possibilities within national borders, given the constraints of the law of the falling tendency in the profit rate. Peace, on the other hand, is almost never mentioned, because the duty of the oppressed classes is to fight the bourgeois democratic system, and because international conflicts are presented as inherent to the capitalist economic system. World peace will therefore only be achieved once communism has spread worldwide. National defence is a bourgeois concept, which does not reflect the real interests of the majority of the population, the real nation of which is proletariat. In spite of a few common characteristics, there is not only one, but several theories of imperialism, and their conclusions as to the future of capitalism differ. Rosa Luxemburg was the first and only Marxist of the time to present a real economic analysis of imperialism and of the economic role of the military sector, pursuing Marx’s schema of capitalist reproduction. But Lenin is the most well-known among these theorists, because of his works but also because of the part he played in the Russian revolution of 1917. In Imperialism, the Highest Stage of Capitalism (1916), he asserts the ineluctability of wars in a capitalist mode of production. Other theorists, notably Hilferding, never asserted that the evolution of the capitalist system would inevitably lead to confrontations between major powers. The theories of imperialism of the beginning of the twentieth century gave rise to a very important Marxist current of analysis, which was presented as the only satisfactory alternative to the liberal models of international relations. © 2004 Fanny Coulomb

Hilferding: the likely but not inevitable war, at the stage of financial capitalism Rudolf Hilferding was the first Marxist theorist of imperialism. He published his main work, Financial Capital, in 1910. His thesis states that capitalism had reached a new stage in its development at the end of the nineteenth century, i.e. the ‘financial capital’. Since then, the capitalist economy is characterized by a process of increasing centralization (with the emergence of numerous monopolies, cartels and trusts), of a concentration of banking activities, and thus of a deterioration of competition (1910: 315–319). Financial capital represents banking capital in the form of money, which is transformed into industrial resources. Its development coincides with the concentration of economic power in the hands of a few shareholders (in joint-stock companies), whereas the property of capital is scattered. The banking capital henceforth dominates industrial resources. Banks have thus acquired an unprecedented power, while the State’s role in the economy has increased, favouring the adoption of protectionist policies guaranteeing strong profits for monopolies (1910: 407–420). The development of direct investments in other advanced capitalist countries, i.e. the establishment of firms abroad, enables a nation to bypass protectionist barriers. The development of capital exports is indeed necessary to escape the internal contradictions of the State economy. Furthermore, the leading powers wish to extend their colonial empire, in order to increase the security of their supplies of raw materials and to find new markets for their manufactured goods. The capital of industrialized countries are thus in conflict to widen their sphere of influence to non-developed zones. The imperialist policy is connected to the financial capital rise. Subsequently, demand for armaments increases, for defence but also for foreign policy. The army benefits the main national economic interests, because the leading capitalist firms resort to the State to defend their profits. Therefore, at the stage of financial capital, militarism characterizes capitalism (1910: 491). Thus, Hilferding elaborated one of the first economic (and not political) analyses of imperialism. In spite of the increasing militarization of capitalism, Hilferding considers that wars could be avoided, owing to the resistance of the proletariat and of the middle class (1910: 491). The policy of Jaurès and the French socialist party at the beginning of the twentieth century relies on the same idea. In Finance Capital, Hilferding extrapolates on the future outcome of the evolutions of capitalist structures. He announces the coming of an ‘organized capitalism’ era, characterized by the control of the entire capitalist production, and by the disappearance of money, the price system becoming purely theoretical. A general cartel associated to a central bank will thus control the whole national production (1910: 329–330). Hilferding developed this argumentation between 1915 and the end of the 1920s. In the 1920s, he asserts that organized capitalism is in fact a stage towards socialism. The principle of the free-market economy is gradually replaced by one of planned production. © 2004 Fanny Coulomb

With regard to international relations, Hilferding predicts that, in a longer term, the increase in the size of firms and the internationalization of their activities will lead to an agreement between the most powerful capitalist interests, beyond national borders. The exploitation of non-developed zones will guarantee the preservation of their strong profits, but also relatively high salaries in industrialized nations (1910: 423–424). This idea of an agreement between the most powerful capitalist interests, on a worldwide scale, was pursued by Kautsky, in his theory of ‘ultra-imperialism’. Kautsky: the agreement between powers at the stage of ‘ultra-imperialism’ Kautsky considers that capitalism can prevent major imperialist conflicts, which would entail its end. A theorist of the German Social Democrat party, he played an important part in the second International, as guarantor for an ‘orthodox’ Marxism (with regard to his works written between 1890 and 1914). Later, he was severely criticized by the Marxists of the third International, who considered his attitude to be opportunist, feeling that he supported the system in power. In Kautsky’s theoretical works, numerous signs herald the end of capitalism, especially the increasing monopolization of economy and the ‘proletarianization’ of the middle classes. This last phenomenon is the result of an underconsumption process of the working class, which leads to overproduction. The expansion of markets is not sufficient to compensate for the effects of productivity increase and capital accumulation; the search for foreign markets is therefore necessary. But the non-capitalist zones, which represent most of these new outlets, do not have the same potential of economic expansion as the capitalist ones, and the underconsumption crisis cannot be durably curbed. However, Kautsky does not consider that orthodox Marxism includes a catastrophic conception of the economic downfall of capitalism. Territorial expansion is a way to thwart the internal contradictions of capitalist economies (quoted in Haupt et al. 1974: 119). In the capitalist mode of production, firms have to constantly increase the scale of their production, to remain competitive, by acquiring a higher level of specialization in their activities. But this rise in productivity and the division of labour creates the need for new domestic and foreign outlets. The State would then have to lead a policy of power, to reach two objectives: • •

have a significant influence over the definition of international trading rules; create new ‘jobs’ for the middle classes, threatened by proletarianization.

However, like Hilferding, Kautsky did not believe in the ineluctability of a generalized confrontation between leading imperialist powers. On this subject, he developed a theory of ultra-imperialism which later gave rise to numerous controversies. According to this theory, the process of capital export can contribute to stabilize capitalism, if the imperialist powers agree, forming a kind of big © 2004 Fanny Coulomb

world ‘trust’. This rapprochement of the leading powers’ interests could help to slow down their militarization, and thus avoid arms races and wars: Can’t the current imperialist policy be supplanted by a new, ultra-imperialist policy, which would substitute for the fight between national financial capital, the exploitation in common of the universe by the financial capital united on the international scale? This new phase of capitalism is at least conceivable. Is it feasible? There are yet no essential premises which allow us to answer the question. (1915: 144) Lenin (1916: 166) virulently questioned this conception of ultra-imperialism, calling Kautsky an ‘ex-Marxist’ and accusing him of playing the game of ‘the propaganda of peace and unity with the opportunists and the social-chauvinists’, asserting that imperialism implies a fundamental antagonism between monopolies and competition, and develops possibilities of huge financial profits for only a small part of the capital. To complete this break between these two economists, Kautsky violently criticized the new Soviet system of government, which he didn’t consider as a stage towards socialism but rather as the dictatorship of a new dominant class, which had the means of production, ‘independently of the people and often in opposition to it’. Rosa Luxemburg: the inter-imperialist war for outlets in non-capitalist zones Rosa Luxemburg considers war results, most of all, from differences in the modes of production. In 1913, she expounds her theory on inter-imperialist conflicts in The Accumulation of Capital (1913). The reproduction of the capitalist economy is conditioned by its capacity to show the surplus necessary to keep on financing accumulation. However, the expansion of the domestic market is not infinite, and sooner or later capitalists will have to look for new outlets abroad. Indeed, demand insufficiency hinders the accumulation process, in Marx’s reproduction schema, the existence of solvent markets being a necessary preliminary for investment. The originality of this analysis compared to Marx’s own is to postulate that the reproduction of the capitalist economy can be ensured through trade, and not only to the process of production. Non-capitalist markets constitute privileged areas for the spread of capitalist forms abroad. The military and economic conquest of these zones by the dominant imperialist economies, which aim at their exploitation, will momentarily offset the insufficiency of outlets. But conflicts of interests for the division of these territories can appear between imperialist countries. Military expenditures are thus useful for conquest and for the empire’s defence, but also for the preservation of the civilian peace in colonized zones, the native culture and industry of which will be destroyed to the benefit of capitalist forms. Therefore, in a military conflict, territorial conquest is not an end in itself, but aims at spreading capitalist forms in countries still little concerned with capitalist development. The military conflict is a civi© 2004 Fanny Coulomb

lizing colonial war and not an armed conflict between bourgeois States, although it could later lead to inter-imperialist conflicts in colonies. War is thus primarily a war of production modes, based on the conquest of all non-capitalist forms of production. In her works written on the eve of the First World War, Luxemburg considers that the internal contradictions of capitalist economies will lead imperialist powers to wage wars. Militarism, a characteristic of imperialism, notably in advanced capitalist economies, is reinforced by the fact that the military sector shows a surplus generally superior to the one (which would have been) obtained in other sectors. Indeed, the production cost of the surplus is reduced, because the rate of exploitation of the variable capital increases (the fixed capital assets remaining unchanged), owing to a tax rise which results from the increase in military expenditures. The rise in the taxation rate diminishes the proletariat’s consumption and means of subsistence. But, at the same time, fixed capital assets become more important compared to variable capital; this is one of the reasons, in Marxist theory, for the falling profit rate in a capitalist economy. It is thus necessary to distinguish the short-term effects of militarism, which are beneficial, from the long-term ones, which are disadvantageous, because they intensify the internal contradictions of the capitalist mode of production. Capitalism’s maturation is moreover accelerated by the development of the military sector, because the tax rise resulting from it forces farmers to sell their products at markets, thus favouring the integration of the agricultural sector into the whole economy; military expenditures therefore generate the development of new markets. Finally, and this is an essential element of capitalism’s preservation, military expenditures serve to exert economic control (1913). But the role of military expenditures in the resolution of the contradictions of the capitalist economic system can only be transitory. In the long term, all national imperialist expansion comes up against the imperialist ambitions of another power. The world territory being limited, inter-imperialist conflicts will arise, in a context of internal economic crisis. All the requirements will then be met for the proletariat to come into power, in many European countries. Rosa Luxemburg was the first to apply the Marxist political economy to the study of military expenditures. A controversy still remains today as to the interpretation of her theory. For some theorists, she developed a theory of underconsumption. Military expenditures are a way to invest the surplus, without increasing the productive capacity. Others reject this interpretation. Rowthorn (1980), for example, considers that this theory, on the contrary, demonstrates the important role of military expenditures as an incentive for capital accumulation, by favouring technological progress and destroying the internal hindrances to capitalist expansion. Apart from Rosa Luxemburg, few authors of this period were interested in the analysis of the economic effects of military expenditures. Moreover, she refused the idea of the socialist party’s support for nationalistic movements of self-determination (quoted in Haupt et al. 1974: 190–191); according to her, these could only reflect ‘the movements of the ruling bourgeois class’ and delay the advent of the proletarian revolution. The conquest of © 2004 Fanny Coulomb

foreign markets and colonies is a necessary stage in the evolution of capitalist economies, whereas the division of each State in autonomous national entities isn’t. In this respect, she is opposed to Kautsky’s point of view, which is favourable to Poland’s demands and according to which all oppressed nations should sooner or later reach autonomy. The debate on the ‘national question’ became very animated among the Marxists, as from 1905 (Weber 1983). For example, the Austrian theorist Otto Bauer criticized the orthodox Marxist conception according to which the advent of socialism will entail the progressive disappearance of national disparities. He considered that the International had to realize international unity in national variety. This theory was highly criticized by Kautsky, who believed that, on the contrary, nations wish to unite in large state entities, as shown by the development of international economic exchanges, which is a first stage in the rapprochement of nations as well as a fundamental tendency of capitalist economic development. Lenin: the inter-imperialist war will entail the end of capitalism Towards 1905, in his analysis of the war between Russia and Japan, Lenin envisages the possible defeat of Russia: according to him, the bureaucratic heaviness of the Russian state apparatus, as well as its corruption, prevent the development of modern weapons as well as the establishment of an effective military organization, the military suffering from a lack of competence, and the logistics proving to be insufficient. For Lenin, there is thus a real interdependence between economic and military force. Furthermore, Lenin considers the Japanese victory as more desirable, because it would favour social progress, the Russian bourgeoisie being more reactionary than the Japanese one. Besides, a defeat would durably weaken the Russian economy, and thus the tsarist system of government. After the Russian defeat, Lenin considered that all requirements would be met to launch the revolution there: the tsarist power would be weakened by the general economic decline, resulting from the importance of human and material losses, from the scale of the waste of resources, and from the impossibility of getting the credits necessary to restore economic prosperity. Later, the year before the beginning of the First World War, he denounced the ‘bourgeois chauvinism’ and the ‘social chauvinism’, as well as the support of this cause by some Mencheviks and by the Second International (1916: 185). He then called on European oppressed classes to recognize their true interests, and join their forces to serve the social revolution rather than national defence. The international conflict must become a civil war in each country; it is also necessary to facilitate national defeat, to better prepare the social revolution. Finally, workers should defend the struggle for national self-determination in colonies (1915 article, quoted in Howard and King 1989: 71). Lenin only gradually elaborated his study of imperialism. In 1905, he analysed the reasons for war as based not only on the search for profit, but also on the adventurism of the tsarist system and its wish to protect its dynastic © 2004 Fanny Coulomb

interests. In 1908, he noticed an escalation of the competition between European countries in colonies, accompanied by an aggravation of the tensions in these territories. Yet, such a situation could later lead to international conflicts. In 1913, he considered that the European arms race revealed the wish of every nation to widen its domination on foreign markets. But another more theoretical explanation is given: the increasing militarism of the European economies would enable the ruling classes to strengthen their control over the population, while delaying the fall of the profit rate, because of the strong profits generated by the military sector. Militarism helps to reduce social contesting, while allowing the bourgeoisie to extend its economic control abroad. According to Lenin, war is thus the result of the internal economic contradictions of the capitalist system. Lenin expressed a theory of imperialism during the First World War, in Imperialism, the Highest Stage of Capitalism (1916). War is only the expression of capitalism’s internal economic contradictions. It represents a new stage in the evolution of capitalism, which is henceforth characterized by financial capital (following Hilferding’s analysis) and imperialism (following Hobson’s, but also Boukharine’s analysis). War is thus historically outdated. The historical evolution of capitalism can be divided into a few main stages, each being characterized by a new stage in the evolution of state institutions. The highest stage of capitalism is imperialism, or monopoly capitalism, which appeared towards the beginning of the twentieth century. This stage has five main characteristics (1916: 90–105): 1

2 3 4 5

the development of more and more important monopolies, which gradually acquire a decisive role in the economy. The cause of this is the concentration of production and capital; the appearance of financial capital (and of a financial oligarchy), resulting from the merging of banking and industrial capital; the development of capital exports; the division of the world between a few main international monopolies; the completion of the world division between the leading capitalist powers.

Capital exports are caused by the exhaustion of investment opportunities within the national territory. However, Lenin does not explain this phenomenon on the theoretical level. He does not refer to Hobson’s theory of underconsumption, nor to Marx’s law of the falling rate of profit (as Hilferding and Boukharine do). Nevertheless, it would be erroneous to assert that Lenin’s theory can only apply to the colonialism period. Indeed, capital is not necessarily exported outside Europe and annexations do not only concern non-capitalist zones. In last resort, Lenin considers capital centralization as more important than underconsumption. Wars correspond to the questioning of the sharing of foreign markets between various imperialist powers, due to the disparity in national economic growth rates (1916: 115). With time, the economic hierarchy of major capitalist © 2004 Fanny Coulomb

powers changes, leading sooner or later to a modification in the hierarchy of powers. In this way, the First World War corresponds to the expansion of Germany’s economic power, which resulted in the German contesting of the British and French supremacy in foreign markets. The stake is the access to new markets for goods, but also to protected spheres of capital investment, as well as to new sources of raw materials. Therefore, international instability results more from new capitalist economic powers than from old colonial ones. A durable agreement between leading imperialist powers (according to Kautsky’s idea) is impossible. Even if international cartels can exist, they can only be temporary, because the disparity in national economic rhythms implies frequent questionings of the established order. Lenin, like Boukharine, does not envisage a lasting peace, for example with a ‘super-imperialism’, in which a single capitalist power would militarily dominate the world, this hypothesis being envisaged by Trotsky. Lenin is first of all concerned with political action, and in a way, he elaborates a theory which helps him to come into power. He blames Hilferding for not having made his theory lead to revolutionary prospects, and for not having recognized the inevitable character of an armed conflict between imperialist powers, which would mark the beginning of the social revolution. Unlike Boukharine, Lenin does not believe that the internal economic contradictions of national economies have been fully transferred at the level of the world market, while the process of capital centralization and of the formation of monopolies developed. First, the process of economic centralization is not finished, and conflicts of interests remain within each economy. Second, the increase in the number of monopolies reduces the capacity of adaptation of capitalist structures to an economic crisis. This theory explains why Lenin did not, at least at first, support a total take-over of the State apparatus by the proletariat, and a replacement of previous State structures by completely renewed ones. The social revolution must of course entail improvements in the democratic system, but they must be relatively limited to begin with. These are the Theses of April (Lenin 1918b: 67–68). Thus, Lenin rejects all idea of a relatively autonomous State action. The economic materialism of Marx’s theory is preserved. Unlike Boukharine, Lenin adopts a purely ‘economist’ conception of international relations, refusing to talk about a relative interweaving of the political and economic spheres. In his work State and the Revolution (1918a), Lenin evoked or criticized the ideas of Bakounine, the theorist of anarchism. They both considered that war enabled the oppressed classes (proletarians but also poor farmers and some minorities) to unify against capitalism. Lenin at first also shared his conviction that capitalist State structures must disappear, and be replaced by institutions of mass democracy similar to those established by the Commune of Paris in 1871 (1918a: 15). But with the political evolution, Lenin revised his point of view on this matter, and in 1917, he came over to the idea of the necessity for a phase of ‘proletariat dictatorship’, so as to protect the first benefits of the revolution, and thus the necessity to take control of the State apparatus (1918a: 37). In this context, the State, assisted by its army, exerts control over the population, in © 2004 Fanny Coulomb

favour of the ruling classes, thus preventing all from contesting. The State apparatus is indeed far too developed in capitalist countries (notably because of the existence of permanent armies, helped by an important bureaucracy) to be abolished all at once. In support of this new conviction, Lenin follows Bukharin’s thesis of ‘State capitalism’, considering that the bourgeois state apparatus is only adapted to serve the interests of the most parasitic and reactionary capitalist classes, which lead wars that threaten civilization itself, while weakening the capitalist system, all the more so as it is henceforth a matter of total warfare. The thesis of the development of militarism, aiming at strengthening the domestic economy with regard to others, as well as at reinforcing the State’s control over the population, is once again reaffirmed. In the communist society, defence will be ensured by universal conscription and the armament of all workers. On this issue, Lenin’s opinion differs from Bakounine’s, who prophetically criticized the proletariat’s dictatorship, which he considered as implicitly expressed in Marx’s theory. Bukharin: the economic war and the progressive autonomy of the State The triggering of the First World War accelerated the achievement of Nicolas II. Bukharin’s main work, Imperialism and the World Economy, published in 1915, in which he develops the idea that capitalism has reached a new stage in its development, i.e. the State capitalism. This stage is characterized by an increasing integration of capitalist economies in international markets, with the development of financial capital (following Hilferding). Capitalism is subject to two tendencies (1915). First capital centralization or monopolization, which is characterized by operations of concentration of the economic structures and by an integration of the financial capital into ‘State capitalist trusts’. This process is accompanied by a separation of property and control, which favours the development of a class of rentiers and many parasitic classes. At the domestic level, the bases of the economic crisis have disappeared, because of the positive economic effects of the State’s increasing intervention in the economic sphere. The state apparatus has been transformed and one may henceforth speak of a State capitalism, very organized, which exerts a strong control over the economy. Economic interventionism is all the stronger as the country is at war, but the return of peace doesn’t imply it will significantly decrease. An aggravation of impoverishment of the majority of the population should also occur. But because of these evolutions in national economic structures, competition and conflicts tend to disappear within national borders, and to be transposed to the international level. Second, the internationalization of capitalist economies which are more and more subject to world market laws. The fight against the fall of the profit rate does not take place on a national scale any more, but on an international scale, as shown by the internationalization of industrial activities. States defend national interests on the international scene; they wish to conquer new markets and notably expand their colonial empire. The antagonism among certain © 2004 Fanny Coulomb

national interests in the struggle for the division of foreign markets can create international military conflicts. Because of the new economic role assigned to the State, the borderline between the economic and political fields becomes less marked. International tensions should increase with the development of economic wars, which are only preludes to military conflicts: The prodigious development of the productive forces and the extreme shrinking of free outlets recently, the powers’ customs policy linked to the hegemony of the financial capital and to the aggravation of the difficulties in realizing market values create a situation where the last word belongs to the military technique. (1915: 82) Bukharin’s conception of international conflicts doesn’t correspond to Lenin’s thesis of 1917. First, whereas Lenin considers that imperialism is a phase of stagnation of the capitalist economy, Bukharin states that, on the contrary, imperialism opens important possibilities of development for capitalism, because several regions of the world which are still agrarian may well be exploited by industrialized nations. Then, whereas Lenin explains conflicts as the expression of a new division of world markets, which corresponds to the changes in the economic hierarchy, Bukharin considers that public policies influence world market structures at least as much they are influenced by them. However, he doesn’t believe an agreement could one day be reached between the imperialist powers, for example by forming an international cartel, as predicted by Kautsky in his theory of ultra-imperialism. The disparities in the levels of national economic power will prevent all agreement from lasting, because the particular interests of different countries could not all be satisfied by a single common agreement (1915: 137). The inter-imperialist wars will be inevitable and repetitive. Bukharin’s analysis could be interpreted as an attempt to question pure economic determinism (Howard and King 1989). Indeed, given that, at the stage of State capitalism, the State has henceforth an economic role, its action is a decisive factor in the evolution of the international economic structures. Therefore, relations of the world market and those of the system of the States would be codetermined, and there would be no more direct causal relation between the economic base and the superstructure. It would thus be a matter of review of the historical materialism already begun by Trotsky, in 1914. From Bukharin’s point of view, the social revolution could only be achieved by ways other than the legal political ones, because the parliamentary bourgeoisie gradually adapted the political apparatus to its interests, resulting in a lack of democratic procedures which could challenge its power. Parliamentary institutions are therefore only screens masking the reality of the domination of a new quasi-totalitarian capitalist system. The state apparatus should be abolished after the revolution. War tends to reinforce even more the domination of this new bourgeoisie stemming from the internal centralization of capital, by justifying State control at © 2004 Fanny Coulomb

every level of national institutions. The leaders of the labour parties could eventually be bought by the bourgeoisie, which explains the failure of the Second International. Later, Bukharin (2003 [1920]) justified the measures of the militarized social organization, considering that it was necessary to replace State capitalism by State socialism. State capitalism has opened the way to socialism, notably by gradually removing competition and market relations. But it is necessary to introduce militarism into the society, so as to encourage the working class to organize itself. Bukharin thus presents the State as a realization independent from economic criteria. In his theory, the ‘effects of nation’ are superior to the ‘effects of class’, which is quite surprising. The experience of power: from ‘war communism’ to Stalinism In 1919, Bukharin and Préobrajenski published The ABC of Communism (1969 [1920]), in which they consider that war inevitably leads to the revolution. This raises the problem of the transition towards the socialist system. To start with, the authors state that the ‘proletariat dictatorship’ will retain the state apparatus; coercive measures must be maintained until communism spreads worldwide. This period of transition must be short because of its cost. The first necessity is to win the civil war. In order to achieve this purpose, Bukharin recommends, in 1920, the adoption of a model of ‘proletarian militarized production’, which will contribute to fulfil military objectives, but will generate wastes of economic resources. However, this war economy will initiate technological progress which could contribute to ensure economic prosperity with the return of peace. Besides, the socialist society will neither have an army nor a navy. The theoretical promises weren’t honoured in practice. War communism was maintained long after the end of the civil war, until 1921, and the model of production and organization applied to the military sector and to the defence industries was applied to the civil sphere. The revolt of the sailors from Kronstadt in 1921, which expressed the complete exhaustion of the Soviet population following this continuous ‘war effort’, incited the Soviet leaders to undertake an economic reform, the New Economic Policy, which was maintained until 1927. After Lenin’s death, Bukharin and Préobrajensky defended divergent opinions as to the choices which had to be made regarding economic policy. Bukharin considered that agricultural prosperity, which could only be ensured through free individual initiative, spurred by self-interest, was an indispensable condition to provide the surplus necessary for the industrialization process. He was criticized by Préobrajensky who wanted to immediately pursue a policy of industrialization, by taking the indispensable resources from farmers. Stalin, who was close to Bukharin and came to power owing to the support of the ‘right-wingers’, disapproved of them and chose the solution of forced industrialization. After this period, the Soviet official theory was transformed into the statement of dogmas, of undeniable truths, most of which had only few connections with Marx’s theory. The dictatorship was justified as necessary, because of the persistence of the capitalist danger, and it was even justified as being the © 2004 Fanny Coulomb

expression of the people’s will, by authors like Andrej Viskinsky. Stalin wished to make his theoretical contribution, and ‘showed’ that the various elements of Marxist theory justified the main orientations of the Soviet policy. The fiveyear plans favoured heavy industry, and the armament industry disadvantaging agriculture, housing or consumer goods. The various Marxist theories of imperialism that developed at the beginning of the twentieth century were thus divided over the issue of capitalism’s future. Kautsky envisaged the possibility of an agreement between imperialist countries on a world division, and consequently of a peaceful coexistence, at least for a certain time. For Lenin or Bukharin, on the other hand, contradictions of modern capitalist systems, as well as uneven rhythms in national economic developments, would sooner or later result in a generalized conflict between dominant nations. But in actual fact, both world wars were followed by a period of international peace which did not challenge the market economy. Lenin elaborated his theory in a perspective of conquest of power, during the First World War, and this could explain why he insisted on the idea that capitalism would end in a confrontation between leading imperialist powers, which are in conflict for outlets. Marxist analyses since 1945: military expenditure, underdevelopment and falling profit rate From 1945 to the 1960s, the dominant Marxist current believed that military expenditures had a positive economic effect on the capitalist system. Unlike the analyses of imperialism from the beginning of the twentieth century, the Marxist analyses of militarism developed after 1945 mainly studied the economic effects of military expenditures on the capitalist structures. Thus, the theory of the ‘permanent arms economy’ considers militarism as a factor of the preservation of the capitalist system. Besides, other relations between military expenditures and capitalism were expounded, notably the ones between economic crises and wars or political changes at the international level (structural or historical and structural analyses). Military expenditure as a solution to capitalist under-consumption The Marxist ‘orthodox’ theory started giving numerous arguments for the positive effects of military expenditures on capitalist economies. At first, militarism gives an ideological advantage: governments use the external threat to reinforce national unity. Then, imperialist policies in colonies or neo-colonies help to counter the fall in the profit rate. Moreover, military research and development has positive effects on the civil sector. Furthermore, military expenditure encourages the aggregated demand, thus decreasing the under-consumption trend which prevents the realizing of a surplus. Finally, they represent one of the most important counter-tendencies to the long-term decline in the profit rate. But such arguments were questioned within the Marxist current itself, and © 2004 Fanny Coulomb

notably the question was raised as to whether militarism only benefited the capitalists of the militaro-industrial complex or the entire economy. The theories that considered military expenditures as a major element in the stabilization of capitalist economies have sometimes been called theories of the ‘permanent arms economy’, in Kidron’s own words (1968), and focused on the concept of under-consumption. Baran and Sweezy (1966) are the most famous representatives of this current. BARAN AND SWEEZY’S THEORY: MILITARY EXPENDITURE AND THE ABSORPTION OF THE SURPLUS

According to Baran and Sweezy (1966), military expenditure contributes to absorb the economic surplus generated by monopolistic capitalism; the arms race is thus in accordance with capitalist logic which tries, through unproductive spending, to maintain a constant production-demand ratio. The surplus can be absorbed by capitalist consumption, by waste, by civil governmental spending, but military expenditures are the most effective solution; indeed, they comply with capitalism in so far as they don’t redistribute incomes to those who show a weak productivity, while stimulating collective values. Disarmament isn’t compatible with capitalism, which always generates international tensions. In the Theory of Capitalist Development, first published in 1942, Paul Sweezy (1946) considers that militarism thwarts the under-consumption trend inherent to the capitalist economy, by opening new opportunities for investment. But it’s only after the second World War that he develops, with Paul Baran (1957), his theory of monopolistic capital, presenting military expenditures as a major element in the running of capitalist economies. Militarism is thus considered as one of the main factors in the absorption of the surplus. The economic surplus, which tends to increase in aggregated value, is defined as the difference between the value of production and the production costs, at the level of the whole economy. Military expenditures would thus have played a significant role in the preservation and the development of American power since 1945. ‘Militarism’, ‘imperialism’ and ‘the absorption of the surplus’ are closely connected in capitalist economies. According to Baran and Sweezy, a country maintains armed forces according to its position in the ‘hierarchy of exploitation’ which has characterized capitalism at the international level since the Middle Ages, with a structure of Metropolitan–colonial countries. An empire represents, in this terminology, the ‘sphere of exploitation of a given metropolitan country’. The level of military expenditure depends on the nation’s membership of an alliance, its level of national ambition or the degree of stability of the international system. Before they had the means of leading an imperialist and expansionist policy, the United States developed alliances with older powers, at first France, then England, enabling them to establish a secondary but relatively vast empire (the sphere of exploitation being notably widened by the Monroe Doctrine), which did not require a high level of force. They finally became the dominant nation © 2004 Fanny Coulomb

after the Second World War, like Great Britain after 1815. However, while a relatively weak level of international military needs characterized the period of British hegemony, this level grew constantly under American domination. This can be explained by the United States’ need to maintain their leadership and to watch over their new colonial empire, composed of fragments of former empires, after decolonization. But this high level of military expenditure is also due to the emergence of a rival system and to the policy of opposition to the Eastern bloc. The authors consider this situation as a ‘new historic phenomenon’. American politicians and journalists put forward the argument of a necessary defence of the ‘free world’ (1966: 171); however, Baran and Sweezy question the reality of the threat, notably by asserting that Soviet foreign policy is essentially defensive. Such an assertion can be reconsidered today, given the present knowledge of Soviet policy and the events that took place after 1966, the year of publication of this work in the United States. The authors even recommended the development of trade between capitalist and socialist countries, and denounced American firms’ opposition to it, which they explained as stemming from their hostility to the expansion of socialism worldwide, because of their own imperialist ambitions. Thus, as stated by Baran and Sweezy, international economic relations are characterized by an economic war, in which the strategies of the multinational companies are assisted by their government’s policies. The American policy towards Cuba is quoted as an example. Baran and Sweezy consider that, in the United States, ‘the oligarchy’ is interested in an important development of the military budget. Indeed, the arms sector benefits from a strong profit rate, because it is protected from market laws; moreover, the military sector conveys a culture that favours the reinforcement of the oligarchy’s social position. Finally, the high level of military expenditure during the 1940s and 1950s contributed to preserve monopolistic capitalism, by preventing the development of massive unemployment, but without avoiding a ‘creeping stagnation’. Indeed, several problems hinder the use of military expenditure as an economic stimulant (1966: 194). Notably, with the evolution of arms technologies, military goods and services create fewer new jobs; indeed, they require high expenditure in research and development, engineering, control and maintenance, fewer employees and more skills. Thus, the rise in military expenditure will become less and less useful to increase investment and create new jobs. Besides, Baran and Sweezy consider that the capital intensity of arms production tends to increase, therefore reducing its capacity to thwart the fall in the profit rate. Finally, keeping a high level of armament implies a high level of taxation, detrimental to economic activity; however, a tax decrease owing to a cut in military expenditures would entail a serious crisis of overproduction. In the 1970s, Marxists widely shared the idea that the militaro-industrial complex represents only a very temporary solution to capitalist economic stagnation. These analyses were resumed by the theory of monopolistic state capitalism, according to which the capitalist mode of production is doomed to disappear because of a lack of capital; defence industries offer to capitalists the © 2004 Fanny Coulomb

advantages of the market mechanisms, without the disadvantages; the State finances research and development and guarantees outlets owing to its longterm commands and export subsidies. MICHAEL KIDRON: MILITARY EXPENDITURE AS A SOLUTION TO OVERPRODUCTION

According to Michael Kidron (1968), military expenditure is the key element of capitalism’s success after 1945. The high level of military expenditure in the 1950s and 1960s curbed over-production and unemployment, and thus prevented over-investment and generated important technological spin-offs for the civil sector. Expenditure on arms certainly slows down economic growth, by leading to a high level of taxation of profits, therefore diverting resources from productive investment. But, all the same, the fall in the profit rate is checked, because the rise in organic composition of capital in civil activities is slowed down, even if this one is higher in military production. This can be explained by comparing armaments to luxury goods (sector III, in Marx’s theory). They are neither consumed by employees, nor used as means of production in consumer goods industries. Therefore, the permanent arms economy is the ultimate and the most powerful counter-tendency to the falling rate of profit. Following ‘imperialism’, a new stage in capitalism, i.e. ‘permanent armament’, is thus reached. The high level of military expenditure on arms also favours exports, while maintaining the level of full employment. Kidron therefore considers that the arms race is useful, because the foreign danger justifies the State’s orientations. It is the result of economic competition as much as it is of military competition, especially as it imposes an economic cost on the opponent. At the political level, these expenditures fall within the scope of the bourgeois ideology. The capitalist economy thus becomes a permanent ‘economy of armament’. But in the long run, the arms race reduces the stabilizing economic potential of military expenditures, and becomes, in turn, a factor of economic instability. Indeed, as the arms industry becomes more and more capital-intensive and technological, its efficiency to reduce unemployment declines. In the same way, in his analysis of the effective demand, Pivetti (1992) asserts that military expenditures is one of the most effective ways to reduce the gap between the effective demand and the productive potential. Indeed, a weak propensity to spend and an excess of savings structurally characterize capitalism; yet, military expenditures can reduce this difference, in so far as they represent an additional spending which stimulates investment. THE DEBATE ON THE IMPACT OF THE MILITARY SECTOR ON CAPITALIST ACCUMULATION

The analysis of militarism by the theories of ‘under-consumption’ was criticized from the 1960s. This can be explained by the new economic context, with a © 2004 Fanny Coulomb

lasting economic crisis, while international military budgets kept on growing. Marxist theorists then put many arguments forward to show that military expenditures only benefited the militaro-industrial complex, and not the entire economy. Some Marxists contested Kidron’s analysis, which assimilated military production to the production of luxury goods, considering that Marx himself had doubts as to the validity of the Ricardian theory of luxury goods. As stated by Piero Sraffa, the only industries that have an influence on the profit rate are those which provide consumer goods and production means. However, no conclusion can be drawn as to Kidron’s point of view given the lack of explanation of the Marxist theory. Because of the problems of access to information and of data processing, an empirical confirmation is difficult to obtain in the long run. However, some econometric studies tended to refute the argument of underconsumption, notably Ron Smith’s (1977), which shows that military expenditures are not positively correlated with the level of employment, because they are, according to the author, too capital-intensive. Ernest Mandel (1975) also stated that the rise in the organic composition of capital in military expenditure contributed to the fall in the profit rate, therefore exerting a destabilizing economic effect. However, Howard and King (1989: 110) question this point of view, by using Bortkiewicz’s model, which tries to demonstrate that the evolution of the profit rate is independent of the conditions of production in the third sector. Gottheil (1986) expressed another criticism, which we shall present in detail, of the idea that military expenditures are a solution to underconsumption. This author refutes the importance of the defence sector in economic growth. In an article, which gave rise to numerous controversies, he underlines a fundamental contradiction between the post-1945 Marxist analyses and Marx’s own analysis on the role of the military sector in the development of capitalism. Indeed, in Marx’s analysis, the activities connected to war are symptoms rather than causes of the economic crisis and don’t fundamentally affect the future structure of the capitalist society, which inevitably advances towards self-destruction, because of its internal economic contradictions. In Marx’s model, the decline in the falling rate of profit derives from the growing capitalintensive nature of production technologies (capital accumulation law). Military expenditures would be able to thwart the falling trend of the profit rate only if arms production becomes less capital-intensive than the average production of the non-military sectors. Yet, this situation doesn’t correspond to reality. Therefore, in Marx’s model, the military sector would contribute to the fall in the profit rate rather than to its recovery, unlike the neo-Marxists’ assertions. Moreover, the profit rates obtained in the field of military production are not, in the long run, higher than the rate of average profit in the other economic sectors (because of the tendency to equalization of the profit rates). Gottheil also rejects the idea that military expenditures absorb capitalist overproduction, in so far as Marx’s theory provides no mechanism likely to remove the gap between global demand and production. He asserts that the main weakness of neo-Marxist theories is to forget that, by converting civil goods into armaments, © 2004 Fanny Coulomb

even in the absence of demand, the capitalists ‘tax’ themselves, given that proletarians are paid on the basis of the ‘subsistence level’. After all, the rate of profit obtained is not different from the one achieved under the conditions of overproduction. Therefore, military expenditures do not hold an important part in capitalism’s survival, by thwarting the fall in the profit rate. Only one assertion can be drawn from Marx’s theory: faced with several solutions of investment to absorb their overproduction, the capitalists generally prefer military projects to civil ones, even if the latter would lead to the same rate of profit. Finally, he mentions that Marx considered that nothing could thwart the bronze laws of the capitalist evolution, and that he would certainly not have been inclined to revise his model, even if he had witnessed the important development of the militaro-industrial complex. James Cypher (1987) answered Gottheil’s article. He notably blames him for not having made a faithful description of the ‘classical’ Marxist point of view on this issue, especially Rosa Luxemburg’s, according to which the ceaseless technological innovations of the defence sector would have a positive effect on the profit rate. Yet, Cypher considers that the military technology spin-offs on the civil sector lead to lower costs. Cypher also blames Gottheil for omitting in his analysis 60 per cent of the military activity, which are more labour- than capital-intensive, such as military operations, maintenance, salaries. Cypher also draws a parallel between the periods of increasing military expenditure and of increasing profit rate. According to Ernest Mandel (1972), military expenditure reduces the increasing structural gap inherent to the capitalist system between supply and demand, and permanent armament is one of the most important means to solve the problem of capital excess. However, even defence expenditure destroys a part of the surplus, thus thwarting capitalism’s tendency for over-accumulation and the fall in the profit rate; they are not a remedy to its contradictions. To achieve this last objective, three conditions would indeed be necessary: • •

•

the armament sector must be characterized by a long-term decrease in the organic composition of capital; the purchasing power necessary for arms purchases must be created by a levy on the social surplus value, but without affecting the real wage of the proletariat; the rate of surplus value in the third sector must be sufficiently higher than the social average so as to increase the global profit rate.

These conditions are contradictory and incompatible with the capitalist system. At best, military expenditure has a neutral effect on the evolution of the capitalist system. At worst, it has negative effects on the competitiveness of civil production. Mandel’s analysis of the permanent economy of armament was later criticized. It was notably accused of explaining neither the capitalists’ motivations, nor the internal social conflicts. This analysis seems profoundly simplistic and © 2004 Fanny Coulomb

above all cyclical, as confirmed later by Chesnais (1990) or Serfati (1995) in France. Controversy regarding the economic consequences of military expenditure was resumed outside the field of pure economic theory, notably in debates on the economic influence of the militaro-industrial complex. These analyses sometimes go beyond the borders of economic theory and also interest the political or sociological fields. Marxist theory, essentially multidisciplinary and aiming at a global understanding of society, seems particularly well adapted to apprehend the various facets of militarism. Marxist theory of militarism According to Ron Smith, Marxist theory, which provides a general theory of society, seems to be the most adapted theory to take into account all the various subjects regarding the field of militarism, not only the economic subjects but also the political and ideological ones. Marxists have never succeeded in establishing a general theory of militarism, their analysis of which can only be fragmentary. Several specific analyses of militarism, more or less connected with the Marxist current, were developed in the 1970s. In France, Jacques Attali (1978) considered war as the final expression of industrial competition; it generates destruction and new demands, it modifies the modes of consumption and transforms social habits. War stems from uncontrolled economic competition, which considerably limits the potentialities of disarmament of the dominant modes of production. Bernard Rosier and Pierre Dockès (1988) consider that armed conflicts (as well as social ones) give rise to major innovations in all fields, economic and technological, but also social and cultural. They underline the importance of the poly-conflictual situation, i.e. the plurality of conflicting fields and of their mutual relations, in the creative innovation of societies. Aglietta (1979) questions the exclusively economic explanations of war; he considers that a State only exists within a system of States, which institutionalizes social relations. The feeling of loyalty towards the nation is one of the major hindrances to the system’s dismantling and results directly from a ‘military culture’, in which the whole society is immersed, and in particular from the idealized reference to the Second World War. Aglietta thus recommends a fight against the ‘cultural reproduction of militarism’, through pacifist movements. Finally, to end this (non-exhaustive) presentation of the specific relations between Marxist theory and the study of militarism, we will mention that the existence of militarism confronts socialist theory with a problem, notably because the historical precedents showed that the reinforcement of the state apparatus is inextricably linked to an increased militarism. The renewed economic explanations of imperialism Apart from to the theory of the ‘permanent arms economy’, other Marxist analyses explained militarism as a consequence of the necessity of extending the © 2004 Fanny Coulomb

economic sphere of influence of the capitalist States abroad. The theories of the imperialism were thus renewed. From the 1950s, in the context of the Cold War and of the world’s division into blocks, the theories of underdevelopment tried to explain the specific problems of the coexistence, at the international level, of developed and underdeveloped zones. These theories analysed the importance of unequal economic relations with underdeveloped countries in the preservation of capitalism and generally recommended social revolutions in Third World countries. These studies rejected the Ricardian conception of trade as a factor for development; on the contrary, they denounced the exploitation of the ‘core’ by the ‘periphery’ owing to trade and foreign investment. Paul Baran (1957) was behind the thesis of underdevelopment through development. The division of the world surplus between various regions explains the differences in worldwide levels of development: the surplus is drawn from underdeveloped zones towards capitalist economies, through foreign investments, which enable capitalists to repatriate the profits. The imperialist domination influences the social order of underdeveloped countries (compradores bourgeoisie), and the threat of an intervention of capitalist advanced powers (especially the United States) prevents all attempts of autonomous action. The domination would therefore be economic as well as political. The interest of advanced capitalist economies lies in the perpetuation of relations of dependence with underdeveloped countries, based on former colonial structures: this policy is called ‘neo-imperialism’ or ‘neo-colonialism’. Harry Magdoff (1979) added Marxist elements to Baran’s thesis: the exploitation of underdeveloped zones by advanced capitalist countries would lead to a fall in the organic composition of capital, the key factor of a lasting capitalist economic growth, in Marx’s theory. Paul Baran gave rise to a new Marxist theoretical school of underdevelopment. The theory of dependence is derived from it, with Gunder Frank’s works (1970): since its origin, capitalism has always been characterized by relations of surplus extraction from colonies in favour of metropolitan countries. Colonialism is the original and permanent cause of underdevelopment. Foreign domination relies on military power, either directly, or through the threat or the collaboration of some nationals. Moreover, the internationalization process of capitalism leads to a reduction in workers’ national consciousness in underdeveloped countries. Hans Singer and Raul Prebisch’s famous theory showed a deterioration of the terms of trade for countries producing primary products, since the nineteenth century, which would explain the increasing gap between rich and poor countries. Free trade would thus become an instrument of imperialist domination. Arghiri Emmanuel (1972) does not attribute uneven exchange to the differences in the organic compositions of capital, but to the increasing difference in real wages between rich countries and poor countries, which Bettelheim questioned. None of these theories explain why capitalist countries are so interested in hindering the growth of underdeveloped countries, while it would be more profitable for them to trade with more advanced economies. According to Howard © 2004 Fanny Coulomb

and King, Paul Baran omitted to mention the possibility of economic development through exports. Besides, the motivations of the American strategy in the Third World are more political than economic. The relation between wars and economic cycles: the historical economy In several Marxist-inspired theories, the question of the relation between war and economic cycles gave rise to both structural and historical studies. A certain Marxist theoretical current attempts to re-read the history of capitalism in the light of a structural analysis, based on two fundamental Marxist laws: the laws of the falling and equalizing tendencies in the profit rate. In this respect, Samir Amin (1975) considers that the alternation of phases of expansion and of ‘structural crisis’ characterizes the history of the capitalist mode of production. The capitalist system (especially the international emigration of monopolistic capital) leads to unequal trade and to the exploitation of workers, notably in the periphery. Ricardo’s law of comparative advantages is no longer valid, and poor countries should choose a strategy of self-centred development, dissociated from the international division of labour. This thesis resumes the work of Arghiri Emmanuel. The theories of regulation developed in France also agree on this analysis. But these studies are not always primarily interested in international conflicts, and often don’t even deal with military issues. However, as stated by Alexandre Faire (1975), one can consider that economic history is marked by the rivalries between major powers to share the spheres of influence and by the consequences of economic crises on international relations. The theorists of imperialism weren’t the first to assert that wars were the result of specific national economic development characteristics. The English classical authors had already integrated the issue of colonization into their global economic thought, but they didn’t consider colonies as a condition for economic prosperity. We previously mentioned that Schumpeter considers the access to new outlets as no longer necessary in the twentieth century, because other elements, especially major technological innovations, can offer capitalist economic growth a new reprieve. Nevertheless, Hobson presented imperialist policy as an inevitable characteristic of capitalism. This system leads to overproduction, an uneven distribution of wealth, under-consumption, a capital surplus and consequently to periodic depressions. In this context, imperialist States wish to expand their foreign markets and secure their supplies in raw materials. But within each country, only a few specific groups benefit from this imperialist policy; a reform of the capitalist economic system should be undertaken, so as to reduce economic disparities, notably through taxation and public expenditures. Immanuel Wallerstein (1974) developed the theory of the ‘world economy’, or of the ‘world system’, in the scope of the historical economic current. He uses the concepts of inequality and dependence in his analysis of international relations. No State has ever succeeded in establishing a world empire, but the modern age, which began towards the middle of the fifteenth century, was © 2004 Fanny Coulomb

characterized by the emergence, first in Europe and then at the global level, of a world capitalist economy. The world economy is divided between a core, a periphery and a semi-periphery. The central state is the hegemonic power, which imposes its laws worldwide by controlling a large part of the international markets. The dominion is assessed in terms of comparative advantages and implies the monopolization and the merging of certain businesses on the territory of the central State, which then acquires a decisive advantage in agricultural and industrial productivity, but also in the fields of finance and investment. However, all hegemonic powers are doomed to decline, and this downfall is followed by a period of increasing economic and military competition. The interstate war thus occurs when the political frame corresponding to the domination of a formerly hegemonic power hinders, instead of favouring, the production and distribution processes at the international level. War is not triggered by central States but by a competitor State; war is therefore inherent to the organization of the world capitalist system, characterized by uneven development, exploitation and competition. Peace will only be reached when the existing system will have been dissolved and replaced by a world socialist system. In the same way, Georges Modelski (1979) and William Thompson (1988) established a theory of the international policy’s long-term cycles. The world system would be characterized by three main structures: the global political system, the world economy and the world cultural sub-system. It can be ruled by several States but also by a single world power, capable of maintaining the world order through its monopoly of military resources. Since 1500, several world powers have successively structured the global system. The rise and downfall of these world ‘leaders’ is cyclical, and every cycle begins with a global war, from which emerges a new structure of the world system, and a new dominant power. In spite of their economic basis, these theories fall in the scope of the political field rather than of the economic analysis itself.


5

‘Turbulence’ inherent to capitalism

Both world wars have relatively weakened liberal theory. This theory wasn’t prepared to explain these conflicts, which it had kept out of the field of political economy, as an inevitable consequence of the poor knowledge governments have of the real laws of economic. In fact, the Marxist theories of the time (and notably the theories of imperialism) seemed to be more appropriate to explain the new political and economic crises. Some non-Marxist economists then carried out new studies on war and peace issues. The issue is to improve the functioning of the market system, both in wartime and peacetime, to ensure its lasting. Many analyses, more or less ‘heterodox’, have then been developed, before and after the Second World War.

The heterodoxies of the inter-war years: economists confronted with war Liberal theory was not appropriate to explain the two world conflicts. Some theorists, such as Sombart, Veblen or Schumpeter, have then elaborated theories that differ from classic liberal doctrines, finding in the sociological and institutional characteristics of capitalism the explanatory factors of wars. Besides, for the first time in history, economists became strongly involved in analysing the economic management of war and post-war years. The issue is to save the market economy, by organizing as well as possible the war economy, so as to supply the means for victory, while avoiding economic crises when peace returns. The Keynesian analysis is particularly exemplary of this new interest for the issues of war and peace management. Worried about the emergence of a new ‘Bolshevik’ system and then of a planned system in Soviet Union, the militaristic character of which he recognized, Keynes suggests the ‘protection’, at least in the short term, of a capitalism that defends democracy and shields against totalitarianism. His argumentation is one of an activist of market economy, of which he acknowledges the imperfections and dangers, but also the productive potential and the necessary respect of individual freedom. The economists of the time were concerned with similar politico-economic issues, even if their analyses diverge. The economic analyses on the causes and consequences of both world conflicts spurred a real renewal of economic theory, and more © 2004 Fanny Coulomb

conclusively, of the economic analyses of war, peace and defence. The great theoretical systems are renewed by many rival and additional analyses, strongly inspired by the study of current economic realities. The future of capitalism in question: Veblen, Schumpeter and Sombart With the historical method, born in Germany, the explanation of international conflicts from the point of view of the social orders’ historical evolution became common. Three ‘heterodox’ economists have pursued this tradition, but without belonging to the German historic school, even if it strongly inspired Sombart. Veblen and Schumpeter transcended the traditional field of economic analysis, widening it to other social sciences, and the study of defence and war issues came within this orbit. However, if Schumpeter is recognized as a great economist, it is not always the case for Veblen. These three authors have developed analyses of the place of war and militarism in the capitalist system: • • •

Werner Sombart underscores the dynamic role of military expenditure not only on capitalism’s evolution, but also on the State’s imperialist character. Thorstein Veblen tries to demonstrate that war is outdated, a phenomenon inherited from a ‘feudal habit’. Finally, Joseph Schumpeter expounds the conditions under which war occurs in a capitalist economy.

Veblen: or the ‘feudal habit’ of war and the evolution of society towards peace War, peace and defence issues hold an important place in Veblen’s work. He devoted two whole works to them: Imperial Germany and the Industrial Revolution (1915) and An inquiry into the Nature of Peace and the Terms of its Perpetuation (1917). His approach being highly original, its complete presentation would require very long developments. Biddle and Samuels presented Veblen’s entire theory of war, peace and national security in detail. We shall present it here more concisely and in a different way. Veblen uses the institutionalist method to demonstrate the decisive role of economic nationalism in modern societies. He also underlines the opposition between ‘dynastic’ States and ‘modern’ States, regarding the maintenance of international peace. Veblen devoted numerous works to war, peace and defence issues, but these contributions have often been neglected, because of an insufficient scientific rigour, mainly because his analysis, which combines economic, political, sociological and legal thoughts, is considered as ‘multidisciplinary’. But, actually, Veblen wished to reform the whole of social science, and he considered the orthodox economy as too static (notably the general equilibrium concept) and unable to take into account institutional changes, phenomena which explain social evolutions. Veblen had no doubts as to the ‘scientific’ character of his © 2004 Fanny Coulomb

theory, he even blamed the historical school for its insufficient rigour. But, in fact, the validity of Veblen’s methodology was questioned by several economists, notably by Blaug (1993). Blaug quotes the analysis of Ward (1972), criticizing the methodology of institutionalism. However, this methodological criticism cannot only apply to Veblen, but also to numerous works on defence economics, in particular to Walras, Pareto or Schumpeter’s works of applied economics. However, the first two authors clearly distinguished applied economics from ‘pure’ scientific economics, and the last author presented a generalizing theory of the passage from capitalism to socialism. Although Veblen did not succeed in establishing a sufficiently general theoretical system, the institutionalist analysis represents an alternative to the dominant orthodoxy and opened the way to the development of several heterodox analyses. But only a few works on the history of economic thought give him an important place. Schumpeter (1954) only quotes him in a chapter devoted to the developments of fields of analysis connected to economy. Besides, Veblen has had no direct followers, even if several contemporary economists can be related to institutionalism. FROM THE PREDATORY INSTINCT TO THE KEY ROLE OF ECONOMIC NATIONALISM IN MODERN SOCIETIES

Veblen’s theory on war and peace is both simple and complex. Simple, because it presents a rather clear theory of the evolution from the dynastic (warlike) State towards the modern (peaceful) State, and of the possible return of the dynastic State. Complex, because there is no determinism in Veblen’s work; unlike Marx, he proposes no ‘law’ of social evolution, which results from a permanent adjustment between instincts and institutions. Therefore, it is impossible to forecast a society’s future orientation. Veblen’s ideas on peace are particularly illustrative of the numerous implications of this non-determinism. Whereas on one hand, he underlines the possibility that militarism intensifies in most developed countries, on the other hand he welcomes the advances of world peace, which, in his opinion could well last. From Veblen’s point of view, institutions influence the ways or habits of individual thoughts, thus determining social evolutions. Institutions guide human action, but at the same time, the changes in mental habits (the spreading of new ideas) lead to institutional and social changes (1915: 58–59). He considers that a society’s evolution has always been determined by ‘the predatory exploitation’. Human relations are characterized by force and by the instinct of predation. In a Darwinist presentation, he considers that wars contributed to the process of social selection, by eliminating the weakest institutions. War has always been a key element of the socio-economic development of societies, as have the various economic or political measures taken in the name of national security, and this without hindering trade. In fact, war and trade have always been in interaction; moreover, the development of trading relations has never guaranteed international peace and has no vocation to do so. © 2004 Fanny Coulomb

However, societies tend to become more and more peaceful. Veblen presents two ‘models’, the dynastic society and the modern society. In both models, a competition between commercial interests and dynastic ones still remains. The predominance of one or the other determines the social structure. After having been dynastic, Anglo-Saxon societies are modern; but some developing countries, such as Germany, are still following the dynastic model, without having achieved their economic and political modernization (1915: 65–68). The dynastic State has inherited specific mental habits from the feudal era, notably characterized by bellicosity, the sense of duty and the spirit of subordination. In Germany, victorious wars, as well as the discipline of war preparation and indoctrination, are a key element in the population’s ‘allegiance’ to the State, in the respect of its authority and in the maintenance of the warlike spirit (1915: 81). Such characteristics can also be explained by Germany’s difficulty in asserting itself as a nation on the international scene. Conversely, England has known a period of relative peace since the eighteenth century, which enabled it to promote the ‘arts of peace’ rather than those of war. In such modern societies, peace is the normal state; the government is representative instead of autocratic; the individual economic initiative is respected; the ‘material realities’ are recognized. The ideal public policy fundamentally differs in these two countries: Germany aims at strengthening its military power; for England, military expenditures tend to be reduced at the minimum level necessary to ensure national defence (1915: 173). However, military and trade conflicts still occur, including between so-called ‘modern’ States. Veblen explains this fact by the persistence of dynastic tendencies within modern societies and by the important part played by patriotism and nationalism in their cohesion. Numerous problems hinder socio-economic progress. There is always an appreciable warlike animus present in these modern nations; necessarily so, since their governmental establishments are necessarily of a coercive character and their ruling classes are animated with dynastic ambitions. In this matter the republican states uncritically imitate the dynastic ones so effectually as to make no grave exception from the rule. The historical tradition and precedents run that way. So that the ferment is always at hand. But in the absence of special provocation the commonplace body of the population, being occupied with other interests and having no natural bent for fighting in order to fight, will by easy neglect drift into peaceable habits of thoughts, and so come habitually to think of human relations, even of international relations, in terms of peace, if not of amity. Temperamentally erratic individuals, however, and such as are schooled by special class traditions or predisposed by special class interest, will readily see the merits of warlike enterprise and keep alive the tradition of national animosity. Patriotism, piracy and prerogative converge to a common issue. Where it happens that an individual gifted with an © 2004 Fanny Coulomb

extravagant congenital bias of this character is at the same time exposed to circumstances favoring the development of a truculent megalomania and is placed in such a position of irresponsible authority and authentic prerogative as will lend countenance to his idiosyncrasies, his bent may easily gather vogue, become fashionable, and with due persistence and shrewd management come so ubiquitously into habitual acceptance as in effect to throw the population at large into an enthusiastically bellicose frame of mind. (1915: 60) Therefore, all modern societies retain an inherent propensity for war, liable to rouse at any time. Veblen strongly criticized the capitalist society of his time. Debating England’s case, he disapproves of the importance acquired by the owners class: this ‘idle class’, directly stemming from the warriors class in the former society, is interested in the increase of pecuniary values (capital goods) rather than economic valves (industrial production). Therefore, not only do the ‘absentee owners’ receive an income without working, but they also tend to grow away from concerns of production, leading the society to a crisis (by hindering innovation and individual initiative) (1923). Therefore, social institutions cannot evolve so as to make the society benefit from technical evolutions; the living conditions of workers are thus worsened. But this situation paradoxically entails an intensification of the support the peoples give to national policies; workers are attached to the system, because of their patriotism. The feeling of identification of the individuals with the nation, i.e. nationalism and patriotism, is a mental habit inherited from the feudal era, favouring armed conflicts, which governments justify for reasons of defence of the population’s material interests or of national honour (1917: 22–23). In imperial Germany, the forces of the community are turned towards foreign aggression (1915: 157). The economic war also takes part in this process. The German foreign policy mostly answers political considerations, the people’s prosperity being of secondary importance. However, the aggressiveness of the German imperialist policy won’t guarantee the population’s attachment to the system. Veblen considers that the German ‘cultural community’ is in a phase of transition, the outcome of which is uncertain. It is very unlikely that this model will spread in other countries with more modern social structures; but a doubt remains regarding the modernization of the German archaic model. THE IMPLICATIONS OF THE OPPOSITION BETWEEN DYNASTIC STATES AND MODERN STATES FOR THE MAINTENANCE OF INTERNATIONAL PEACE

Veblen inferred from his comparison study of dynastic and modern States a set of principles for the preservation of international peace. However, the internal evolutions of societies towards more militarism or more pacifism remain fundamentally indefinite. © 2004 Fanny Coulomb

Nationalism and economic war play an important part in the preservation of the capitalist system. However, these weapons used by owners could well turn against them. Indeed, they awake the ‘dynastic instincts’ buried within social institutions. This resurgence can only be temporary, in the case of a war for example, and contribute to reinforce social cohesion when peace returns. But the intensification of such a logic can lead owners to call on the State to strengthen their position; a process can then get underway and enable a military class to come into power. However, Veblen is not determinist. He also expounds another scenario, which he favours. The crisis of a society, because of its institutional hindrances due to the ‘absentee landlords’, can be resolved by the establishment of a new system. Society can be governed by technical rationality and be transformed into a technocracy, within which economists and engineers would be dominant; they would in fact be an ‘elite’ in the Darwinian sense. The society will then be peaceful, because the existence of a foreign enemy will no longer be necessary to maintain social cohesion. We recognize here Saint-Simon’s ideas. According to Veblen (1917: 82), the imperialist ambitions of Germany and Japan will remain a cause of war in the future. The only solution for the other leading powers (except the unacceptable submission to a Pax Germanica) is to eliminate them, or at least to eliminate the ‘Imperial military clique’ within these societies, so as to guarantee a lasting peace of neutral nations (1917: 187). However, Veblen was hopeful that the modern economic conditions would be sufficient to make ‘the dynastic spirit’ disappear in both dynastic states. He appeals for the creation of a ‘League of neutrals’. However, he was opposed to the Treaty of Versailles, which he considered as a non-progressive measure of economic nationalism. From his point of view, the league of neutrals had, on the contrary, to ensure the equality of treatment in international trade and to abolish all trade discriminations and all preferential tariffs within colonial empires, thus removing all interest in the appropriation of new colonies (1917: 259). German industry and trade liberalization will result in the improvement of the population’s living conditions, and the acceleration of social modernization. Modern societies such as England and the United States will be encouraged to choose pacifism because of the aggravation of the economic consequences of war and of the increasing sophistication of military technologies; therefore, war becomes more and more impersonal and loses its capacity for social cohesion (1917: 310). Veblen considers that military expenditure, the level of which is particularly high in dynastic societies, is a waste; however, this waste replaces that of ostentatious consumption, which would have occurred if these sums hadn’t been levied for military ends. Therefore, military expenditures weren’t a cost for the Prussian society but, on the contrary, were useful to maintain a certain equality of living standards, which reinforces social cohesion (1915: 245). Veblen draws a parallel with the tremendous sums spent on sport in modern societies, especially in England. In fact, these wastes are used to divert energies and attention. The future of peace depends on the conflicting relations between the ‘dynastic’ bellicose tendencies and the peace© 2004 Fanny Coulomb

ful ‘modern’ ones. Even though he doesn’t exclude a lapse into conflicts, Veblen states that ‘modernity’ should eventually prevail, and with it international peace. Schumpeter: the understanding of war in a capitalist economy Schumpeter is confronted, in his work Capitalism, Socialism and Democracy (1942), with the difficulty of including war in his explanation of the historical evolution of economic structures. This seemed all the more necessary as his work was written in the context of the two world wars, but mostly because the Schumpeterian analysis is multidisciplinary, not only economic but also political and sociological. Such a methodology appears particularly appropriate to the study of war. Although he does not devote a specific chapter to its analysis, he often mentions it in his argumentation; his work is in fact of great importance in the explanation, based on social sciences, of wars in a capitalist system. But even if we only consider the strict economic field, to which this analysis will be limited, Schumpeter’s contribution is illustrative of the evolution in the economic study of defence issues, during the inter-war period. DEFENCE EXCLUDED FROM THE INTERNAL DYNAMIC OF CAPITALISM

Schumpeter insists on the evolutionary character of capitalism. Wars, as well as revolutions, are apprehended as a part of the ceaseless alterations of the social and natural framework, which modify the conditions of economic action. They can create the conditions of industrial changes, but can never be the mainspring of this process. Indeed, the driving force behind capitalism’s evolution is internal, it is represented by ‘new objects of consumption, new modes of production and transport, new markets, new kinds of industrial organization, all the elements created by the capitalist initiative’ (1942: 121). Schumpeter uses the term ‘creative destruction’. He doesn’t mention the role of the destruction caused by war. Moreover, he explicitly rejected the idea of explaining economic dynamics through wars, considering that only major technical innovations were liable to punctuate long-term cycles (1934: 246). Schumpeter (1942: 144–152) analyses the ‘capitalism of giant firms’, within which prevails the monopolistic or oligopolistic competition (or a combination of both), the ‘perfect competition’ being the exception. However, the end of capitalism won’t be caused by the ‘destructive competition’ which would result from struggles between giant economic entities, even if relations between giant firms are compared to war relations. The economic power of monopolies is not considered as a valid explanation of the problems encountered by capitalism, because, first, monopolies rarely remain in the long run, and, second, they benefit capitalism, contrary to what is usually thought. Indeed, the giant firm has become the mainspring of progress and production long-term growth. The perfect competition model is less effective. Schumpeter analyses the relations between nations, at the macro-economic level, with arguments similar to those © 2004 Fanny Coulomb

used for inter-firm relations. No country will ever possess a monopoly for a sufficiently long time to be able to exert a decisive influence on the international balance of power; monopolies of products are not sufficient either (1942: 143). The effectiveness of the ‘economic weapon’ is thus refuted. Therefore, ‘economic war’ as the result of an aggravation of economic competition between leading powers is not considered as a determining factor in capitalism’s downfall. Schumpeter considers that the success of capitalism is due to the action of entrepreneurs and to the role of innovation, and not to State intervention. Wars and other exceptional circumstances are of secondary importance in economic development (1942: 154). Germany’s economic development was mainly due to the economic union within the Zollverein, rather than to the French–German war, which nevertheless led to the foundation of the German empire. He does not consider war as a cause but as a condition for capitalist initiative. Implicitly, he rejects the idea according to which the struggle between capitalist countries for the conquest of new territories has been replaced by the struggle for a new division of capitalist territories, even though the theme of the ‘Lebensraum’ was important at the time. In Schumpeter’s opinion, the exhaustion of geographical outlets should stimulate international economic competition, because the new outlets would be mainly technical, and not geographical; the economic world would then be divided ‘in hostile national spheres’ (1942: 166–167). But as economic competition increases and capitalism develops, international relations should become more peaceful, because of the rise in the cost of war and because societies will be more and more characterized by pacifism and rationalism (1942: 181). Economic competition does not lead to military confrontation. This analysis seems appropriate to explain the current state of international relations, as well the proliferation of international agreements for peace-keeping or of trade agreements to limit economic conflicts. However, Schumpeter believes that the end of the geographical extension could endanger the long-term survival of capitalism. The saturation of new territories is one element (among others, such as population, technical innovations, the growth of the public sector) which leads the capitalist system to lack resources. However, some young countries have not yet been exploited up to the decreasing returns; moreover, other initiatives should be substituted for the territorial conquest, and notably the creation of new markets thanks to technological progress (1942: 167). An original aspect of Schumpeter’s thought is to minimize the importance of foreign outlets in the development of capitalism. In the same way as public action, geographical conquest constitutes a ‘special event’, and thus doesn’t contribute to the dynamic of capitalism. The opening of new countries (sources of raw materials and bases of new cities and industries) certainly enabled capitalism to grow rich, but in fact only the entrepreneurs’ actions have been decisive. The public policy is only there to establish a framework for their individual action (1942: 171). Even if geographical extension was an opportunity to develop private initiative, nothing proves that it explains the performances of © 2004 Fanny Coulomb

capitalism. The following arguments show the importance given to economic mechanisms, dissociated in the last resort from the political field. Thus, Schumpeter presents a very liberal conception of the evolution of capitalism: with time, the economy removes geographic boundaries. The real boundaries become technical. The future development of capitalism will depend on its capacity to face the decline in the rate of innovation. But he remains optimistic: nothing indicates that geographical limits are also economic ones. His analysis is very modern, in so far as it goes beyond the theory of imperialism while pursuing liberal theory. The opposition to Marxist theories of imperialism is an essential theoretical issue for Schumpeter. According to him, these thoughts are based on a false idea: the bellicose character of the capitalist system. He disapproved of this hypothesis on the basis of social sciences arguments and not only on economics: its lack of vocation to lead the international policy weakens the bourgeoisie; its fundamental pacifism harms its interests. Schumpeter expounded, in a study, ‘The Sociology of Imperialism’ in 1918, his thesis on the increasing pacifism of capitalism. He describes the military profession as ‘the most anti-bourgeois profession’. The more capitalism develops, the less wars have chances to occur for purely economic reasons. ‘Military exercises’ are totally extraneous to the ‘mentality’ and to the ‘capacities’ of the ‘men of the capitalist system’, who are also concerned with the cost of war. In fact, even when it could represent a financial advantage, the bourgeoisie would abandon the idea of war, because of its cost (1942: 182). This contradicts Marxist theory, according to which imperialism represents the last stage of capitalism. The fact that capitalist societies must devote a lot of resources to military expenditure is not contradictory, as their aim is defensive, and not offensive. Furthermore, the importance of military expenditures as an explanatory factor in the performances of capitalism is rejected (1942: 169). Schumpeter also develops a theory of the political dynamic of capitalism closely linked to the economic dynamic: as capitalism develops economically, its political base weakens. The bourgeoisie could lose the political leadership, because of its lack of political culture and of its incapability to create an efficient political class; most politicians are of non-bourgeois origins. The institutional consequence of the capitalist evolution is the destruction of the protective classes which support the system. Yet, the military class is one of them. Here is evoked the ‘almost mystic prestige of the seigniorial behaviour’ (1942: 191). Yet this erosion of capitalism’s political foundations can lead to war, because the bourgeoisie will seek a leader able to manage political issues. War would therefore result from a political dynamic inherent to economic development. The particularity of Schumpeter’s analysis is to place war in a non-economic category, i.e. the cultural characteristics of an economic system; therefore, capitalism and socialism can indifferently be pacifist or warmongering. Indeed, two economic elements, private property and contracts (plus the bank credit for capitalism) are sufficient to define a mercantile society; besides, the control of © 2004 Fanny Coulomb

the means of production and of production by a central authority define the socialist system. All the other characteristics of these economic systems are indeterminate. Therefore, no one can say what socialism’s attitude will be regarding war or military expenditures, because of its ‘cultural lack of determination’. The cultural characteristics of a civilization are, above all, the product of a specific historic evolution. Schumpeter is here in opposition with the Marxist theoretical interpretation: war does not lie in a system’s economic structures, but is the product of its historical evolution. Under these conditions, how can the fact that capitalist societies lead wars be explained? Schumpeter gives three main reasons for this: self-defence, the search for economic profits (in the period of colonial conquests) and the pressure of specific groups which do not represent the bourgeoisie’s general interest (1942: 181). But, all things considered, this entire analysis tends to demonstrate that wars led for economic reasons are not inherent to the capitalist system, they have only been favoured by a particular historical context. THE ROLE OF WARS IN THE LONG-TERM HISTORICAL EVOLUTION OF CAPITALISM

For Schumpeter, the lack of a democratic representation of economic interests is a factor of war. In the same way, economic changes stemming from international conflicts are a problem for economic analysis. In order to explain the permanency of wars between capitalist societies, it is necessary to distinguish the economic from the political sphere. The political mechanisms of capitalism can indeed favour a national foreign policy which is opposed to the fundamental interests of the bourgeois class. Two facts must then be considered (1942: 357): first, public opinion can be manipulated to benefit pressure groups, because the political process isn’t reliable; second, the bourgeoisie is not able to establish itself as a political class which would lead the national foreign policy to coincide with its own interests. Some pressure groups can therefore use the political system in their own interests. Yet, the problem is that capitalism’s political action is based on the ‘classic doctrine of democracy’, deriving from the utilitarian philosophy of the Enlightenment; but decisions of international policy should not follow the people’s will, which has no skills in such fields. Furthermore, this doctrine increases the influence of specific groups (representing particular interests, or political ideas, or idealists), which mobilize public opinion in their favour. It is all the more dangerous as war can be provoked by ‘militant nationalisms, [. . .] By the propaganda of such or such groups whose interests are at stake’ (1942: 407). The end of bourgeois democracy is thus predicted. In the long run, the economic internal dynamics of capitalism tend to run out of steam; the predominance of monopolies and the disappearance of small and medium-sized firms is an essential element in this evolution (1942: 189). This weakening of the economic dynamics has repercussions at the political level, by decreasing the capacity of the classes in power to face foreign aggres© 2004 Fanny Coulomb

sion; the ‘bourgeois fortress is demolished’ (1942: 190). Schumpeter’s analysis aims at minimizing the negative effects of the fiercer economic competition entailed by the lack of new outlets and of new major technological discoveries (likely to originate innovation clusters). Capitalism’s adaptability is immense; therefore, the scenario of its disappearance following a confrontation between imperialist powers is improbable, although war accelerates the march towards socialism. Internal decay will cause the end of capitalism: the bureaucratization of firms and the weakening of the enterprising mind are determining factors in last resort. Furthermore, both world wars have led to irreversible changes in the way of thinking about economic policy, with an increased interventionism, which is partially irreversible (this, moreover, explains the failure of the return to the gold standard after the First World War). Schumpeter states that this evolution confirms the main thesis of his work, according to which socialism will sooner or later succeed capitalism. Economic policy issues are certainly beyond the field of ‘pure economy’. But in so far as economic structures are less and less capitalist, the analysis of public action and thus of the economic consequences of war is more and more necessary to understand current economic changes. War is the only element among the ones Schumpeter considered as ‘exceptional circumstances’ which he develops a little in his analysis, in an appendix to his work, written in 1949 and entitled The March Towards Socialism. In this work, the author broaches at length the subject of war and draws a parallel with the changes that have occurred in the capitalist economic structures. Great wars can accelerate the transformation of a social system into another (socialism, in this particular case), which otherwise is too slow to be analysed in the short term. The First World War had already greatly contributed to the progress towards socialism; the world crisis and the Second World War acted as ‘additional accelerators’. The new regulations and new tax burdens implemented to prevent another great economic crisis show the submission of the business class to the working class. However, the transformation due to the First World War can go against the interests of the socialists themselves: inflation, in particular, can weaken social structures. Schumpeter is strongly opposed to the inflationary policies of just after the war, and pursued the following years, which favour wage claims and interventionism, therefore discouraging private initiative. In the same way as Schumpeter underlines the catalysing role of war in economic changes, which are the result of ‘much deeper forces’, Keynes considers war as a historical opportunity to durably modify the conditions under which capitalism is organized: in this respect, he criticizes the return to pre-war economic policies, in particular deflation and the gold standard. But both analyses conclude on the necessity of peace at the international level and of State intervention to prevent capitalism from collapsing; indeed, even if Schumpeter considers it regrettable, he concludes his work on the idea that public action can enable the capitalist economy to last, even in stagnation. He notably presents the high American military expenditures after the Second World War as a way to fight against inflationary trends. Schumpeter’s work, as well as Keynes’ or those of © 2004 Fanny Coulomb

other economists of the time, is a good example of the new interest economists had in defence issues. Werner Sombart: or the civilizing effects of conflicts and military expenditure Werner Sombart was influenced by the German historical school but also by Karl Marx, as shown by this quotation: ‘Capital . . . dominates the world and makes our statesmen dance as puppets on a string’ (1886: 31). Capitalism is presented as a historical category, a result of progressive changes, led at least partially by the class war. Individualism, competition, acquisition and the rationalization of ideas constitute in this respect its main elements. The development of capitalism and state intervention are two interdependent elements. Public action leads, by military means if necessary, to the imposition of capitalism as the dominant form of social organization and exerts imperialist influences over all other systems, the economic and social structures. THE MILITARY SECTOR: A STIMULATING FACTOR OF CAPITALISM

In his study of capitalism, Sombart insists on the role of the State, which has first asserted itself as an organization of power necessary to strengthen national economic prosperity, often by coercive means, such as war, colonialism or trade restrictions (1932: 83). Furthermore, he considers that the warlike spirit still spurs the heads of big commercial firms, showing in this way how similar the skills required to be a business leader and a war chief are. As a matter of fact, the State favoured the development of the capitalist spirit, because in periods of money shortage, it alone had at its disposal the sums necessary to create new firms as well as an unequalled organization apparatus and it alone could undertake long-term projects, with distant consequences (1913b: 109). In Sombart’s opinion, war is a necessary evil for economic development and the army is a productive force which stimulates capitalism (1886: 24–26). The military factor has two main consequences on the domestic economy: on the one hand, if the permanent army represents a cost, it is also an economic opportunity which exerts important macroeconomic effects on national economy; on the other hand, wars favour the reorganization and initiative needed for industrial revolutions. Sombart states that the European industrial revolution and the capitalist system were yielded by war. At first, owing to the army, the modern States achieve national unity. Then, the military’s need for armed conflict creates the prerequisites for the development of capitalism. They notably contribute to (1913b; 1932): 1

create big markets. The centralization of the State orders changes the conditions of production, favouring technological innovations, standardization, the rational organization of work, the merging of businesses, mass consumption and the systematic search for economies of scale. The increased


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demand in weaponry also favoured the expansion of the armament industries, which generated a prodigious development of the heavy industry, one of the most important sectors of capitalism. create fortunes. According to Sombart, fortunes are the result of land incomes, interest loans, trade profits, but also of victorious conflicts. improve the spirit of competition and the search for profit. The military administration is among the State sectors which exert a positive influence on the capitalist spirit. The existence of a permanent army is a major social event in modern history, enabling the bourgeois ruling class to only deal with economic issues. On this matter, Sombart insists on the particular part played by the Jewish people, the best example of a merchant people, condemned to live out of all military activity during twenty-three centuries, apart from the trading activities required to provide the goods necessary for the running of armies. encourage industrialization and industrial integration. The more countries are impregnated with the principles of military organization, owing to the existence of a permanent army, the more they are effective from an economic point of view. This is the case of Germany. develop the financial sector. If military expenditures entail public debt, they also contribute to the development of financial factors and institutions, by the establishment of a stock exchange and the growth of private fortunes. However, war leads to serious budgetary disorders, considering the effects of eviction and the necessity to increase taxes or to strengthen the floating debt by long-term loans. Yet, an excessive taxation, as well as wrong industrial and trade policies, can hinder or even completely suppress the enterprising mind, essential to the contemporary economic development. develop the value of competition and of permanent struggle. The modern foreign policy leads to a continual increase in State militarization, to the rise in military expenditure and to an arms race: ‘There has been, besides the capitalist evolution, a militaristic evolution, obeying laws independent from those which rule over the succession of purely economic facts’ (1932: 88).

Sombart does not believe in the pacifying power of international agreements. The First World War revealed their powerlessness: ‘Internationalism is not the road to peace: on the contrary’ (1932: 94). Moreover, State militarization is due to the pressure of some interest groups, the influence of which is all the greater as the State is weakened by the class war. Therefore, capitalism also leads to imperialism. THE IMPERIALIST STATE

Sombart (1932) considers that, since the 1880s, industrialized nations have adopted a ‘neo-mercantilist’ policy, with the return to the idea of national © 2004 Fanny Coulomb

economy, the establishment of trade barriers, the contribution to the development abroad of important national monopolies, and an increased political control over colonies: ‘Long ago, the State used to govern the economy; this time, the economy rules the State’ (1932: 86). This reorientation of the State occurs after a period of free trade which began in the middle of the nineteenth century. In spite of the assertions regarding the peacefulness of the creation of a world trade community, England, which started the movement, never gave up defending its interests. Moreover, it benefited from free trade as long as it did not fear the competition of foreign imports. The return to a ‘more realistic’ policy is the result of the pressure of the dominant groups which do not find advantages in capitalism. The imperialist State first seeks to increase its markets in the least developed countries, sometimes imposing a law very far from the Smithian principles. As an example, Sombart evokes the destruction of the Indian textile industry by the imports of English ‘cotton goods’. However, he criticizes the Marxist interpretation of imperialism, according to which it is totally determined by economic factors. The opening of new outlets, the supply in cheap raw materials and the exploitation of producers in colonized territories, certainly prevented the stationary state announced by Ricardo. But several extra-economic causes also determine the phenomenon of imperialism (1932): 1 2 3 4 5

political ‘motives’, such as the growth of national power or the need for foreign security; military reasons, the military machine urging the State to expansion and conquests; nationalist factors, with the specific ambitions of a race or an ethnic group; religious bases, as shown by the expansionism of Moslem States; demographic justifications (search for colonial territories to absorb overpopulation).

However, the capitalist economic system will spread beyond Western Europe, which will weaken its economic foundations, established in the nineteenth century through the exploitation of other peoples. Europe will soon only have to rely on its own economic forces (1913b). Besides, the capitalist system will not develop any more within its sphere of influence, because the non-capitalist forms will remain, and even develop. Indeed, capitalists tend to become a leisure class and to adopt seigniorial behaviours. Furthermore, the increasing bureaucracy further reduces the capitalist initiative and the enterprising mind: ‘I believe that the capitalist spirit contains the germ of its own destruction and of its death’ (1913b: 432). Highly influenced by Marx, Werner Sombart later supported the Nazis theses. As a theorist, he presented a ‘non-specialized’ analysis of war, by showing its various forms (from armed conflict to economic war) and its various causes. He moreover insisted on the important economic role of the State, and on the influence of the bourgeois class on its objectives and management. © 2004 Fanny Coulomb

The Keynesian revolution: an unexpected consequence of the analysis of international security during the inter-war years Even if he restricted the field of his General Theory of Employment, Interest and Money published in 1935 to the domestic economy, Keynes always took into account the international level. His work, The Economic Consequences of the Peace, published in 1919, as well as numerous articles and letters of the inter-war years, show the interest he took in the analysis of the implications of the economic interdependence of nations, notably from the point of view of national and international security. At the time, war and the economic crisis gave rise to totalitarisms but also to some original initiatives of economic interventionism, notably in the United States and Germany, which led the way to a renewal of economic theory. The old theoretical convictions remained, however, the reference for European democratic governments; notably, the implementation of deflationary measures in the context of a return to gold parity. Keynes gives great importance to war and security issues in his political and economic thought. The economic crisis reminds him that some decisions of economic policy can modify the market’s short-term negative excesses, therefore changing the course of history. Behind the theoretical concepts, Keynes expounds governments’ practical duties and thus goes beyond the simplistic debate between peace–liberalism and war–protectionism. He mentions that political leaders have to deal with several different and sometimes contradictory objectives; in addition to the economic crisis, which requires short-term measures, there is a moral crisis which calls on governments to take into account the long-term consequences of such measures on international relations. The imminence of the world conflict shows that democratic nations should unite in order to defend their social model. Between national economic interest and international solidarity, Keynes studied in an original way the strong links existing between security and economy and based his analysis on two main proposals: • •

democracy and peace benefit from economy; peace cannot last in a situation of economic crisis.

Democracy and peace benefit economy The Keynesian analysis is based on the defence of political liberalism and peace. Given the international and social (even societal) chaos of the time, Keynes makes politico-economic proposals so as to help the market economy to fight against fascist or communist totalitarianisms. Keynes writes in a strained international context, marked by the world economic crisis and the rise of totalitarianisms. He considers that the stake is, above all, political, the economy being only an instrument of higher moral purposes, i.e. the defence of democracy and of individual freedoms, clearly differentiated from the Marxist formal freedoms. Yet, communism is particularly dangerous (1982 [1934]: 34). The liberal and Marxist ‘standard system’ must be © 2004 Fanny Coulomb

abandoned, and a new ‘scientific paradigm’ established: ‘The standard system is based on intellectual error. [. . .] Our pressing task is the elaboration of a new standard system which will justify economists in taking their seat beside other scientists’ (1934: 32). Keynes believes that the economist’s existence is only justified if he or she elaborates concrete solutions to ensure the smooth running of the free- market economy; it is therefore necessary to use a methodology where economic theory is based on the observation of concrete issues. As far back as 1919, in The Economic Consequences of the Peace, he forecasts a revolution in Europe if nothing is done to educate public opinion, whose hidden currents are, in the last resort, far more decisive factors than political actions in the system’s survival. He reasserts similar ideas on the eve of the Second World War: We are seeing and enduring events, worse than which have not been seen and endured since man became himself. If we still recognise the difference, not merely between peace and war, but between good and evil, and between right and wrong, we need to rouse up and shake ourselves and offer leadership. (1982b [1938]: 99) Keynes does not believe that the confrontation between democracy and totalitarianisms can be solved by armed conflict. Convinced that public opinion support can only be obtained from a new moral ideal, with notably a new economic theory, he denounces the uselessness of a new ‘war of religion’. Keynes defended pacifism, considering that war is opposed to human nature and that it should be avoided by establishing adequate politico-economic structures. In 1921, he appealed for disarmament and expounded the advantages of the resulting savings for national economies. A general disarmament that would favour the economic post-war recovery was indeed a wide-spread idea at the time: when the American Treasury refused to grant Europe a new loan in 1919, it recommended disarmament, adequate taxation and domestic loans. Keynes proposed in vain the limitation of military expenditures to the Sub-committee of the British League of Nations for the arms limitation (1977 [1921]: 241). He worked for peace throughout the inter-war years, refusing to consider the eventuality of a war against Germany until 1938 (1982b [1936]: 56); however, he rejected the socialists’ proposal to call on the nation to refuse to fight, pay taxes or work if war occurred. Considering peace as a necessary condition of economic development, Keynes asks for an international economic agreement during the Genoa Conference of 1922 for the normalization of economic relations, so as to limit political risks in Europe (1982b [1938]: 102). In 1929, he contributes to a ‘Scheme for the rehabilitation of European credit and for financing relief and reconstruction’ which suggests to the League of Nations the use of financial weapons to prevent future conflicts. The prospect of financial support for one of the warring factions in a potential conflict should dissuade the other one from opening hostilities (1981b [1930]: 332). A few years later, in 1935, he defends the prin© 2004 Fanny Coulomb

ciple of economic sanctions against Italy, for which he believes war would be a reckless solution (1935: 370). Finally, in 1937, he asserts that there are nine chances in ten that the threat of sanctions against Japan would have a positive effect (1982b [1937]: 82). More generally, he declares himself convinced of the efficiency of economic sanctions. In 1935, he suggests the strengthening of the League of Nations, by limiting its members to countries really willing to preserve international peace; moreover, he proposes a consolidation of its economic and military power (the time for disarmament being now over) so as to become a deterrent power for ‘law-breakers’ (1982a [1935]: 374). He regrets, with a caustic irony, that this project has reached an impasse, because of the United States’ refusal to take part in it. A few months before the Munich Conference of 29 September 1938, he criticizes the wait-and-see policy of the allied governments, and he recommends a ‘positive pacifism’ against the ineffective ‘negative pacifism’ that Lloyd George and Chamberlain opposed to Hitler’s ‘positive militarism’. He then suggests the creation of a new League of Nations (1982b [1938]: 99) with wide-ranging powers and the creation of a new ‘European Pact’: this one would be responsible for defence as well as for the prevention of conflicts, by means of deterrence, and would guarantee European collective security by channelling forces towards a concerted action. Its functions would be a: financial assistance, the use of a blockade and a total military alliance. In addition to this ‘European League’, similar institutions could be created in America (‘American League’), in the Pacific (‘Pacific League’), or in Africa (‘African League’). But the fact that economic crisis in Europe and the United States persisted throughout the inter-war years led Keynes to suggest other solutions, particularly a public economic policy, so as to save the capitalist system from external or internal destabilization. In 1932, Keynes refutes the idea that economic liberalism is synonymous with international peace. He accuses the search for a maximal international specialization and for a geographic spreading of capital of being responsible for aggressive national policies led in order to protect particular interests, conquer new markets and increase economic imperialism. He has doubts as to the economic advantages of an increased dependence of national economic structures on foreign capital and on changing foreign economic policies. He considers that capital outflows (notably when the ratio between the marginal efficiency of capital and interest rates is more advantageous abroad) prevent the implementation of good national economic policies, and he denounces the separation between real property and the management of firms. He therefore proposes in 1933 a radical break with the orthodox model: For these strong reasons, therefore, I am inclined to the belief that, after the transition is accomplished, a greater measure of national self-sufficiency and economic isolation between countries that existed in 1914 may tend to serve the cause of peace, rather than otherwise. (1982a [1933]: 237) © 2004 Fanny Coulomb

With a regard to economic policy, this argumentation would notably imply fewer incentives to develop economic links abroad; and in fact, in 1930, Keynes recommended a bank rate policy so as to discourage foreign investment and encourage ‘domestic’ investment in order to improve the British balance of trade. However, he remarks that such a policy could only work if public opinion adheres to a feeling of ‘economic patriotism’. In 1943, during the first debates on post-war trade agreements, he advocates the regulation of imports, so as to stabilize the balance of trade, but also in order to favour the development of ‘new staple industries’ (1980a [1943]: 261). Keynes’ analysis is in fact very pragmatic; he isn’t opposed to international trade, but only to its short-term negative effects. Indeed, in the 1920s, he denounces the limits of a simplistic economic nationalism and recommends a recognition of international economic interdependencies. He hopes that his ‘import and export programs’ of 1944 won’t entail trade restrictions and that domestic prices will remain close to world prices. Moreover, he criticizes many forms of economic nationalism, notably the American isolationist withdrawal and the refusal of French public opinion to export gold to Germany. Even if Keynes questions the links between liberalism and pacifism, he warns against the risks for world peace of a too-aggressive economic behaviour of one or several nations towards other countries, as shown by the example of the Allies’ policy towards Germany after the First World War. More generally, he denounces the political risks of a restrictive trade policy. If Europe doesn’t regain economic prosperity, its security could be threatened, because the economic crisis will lead to war. This idea first appears in his study of the reparations imposed on Germany after the First World War, by the Treaty of Versailles. From his point of view, these measures are likely to definitively lead Germany into a crisis and even to starvation. Yet, the reaction can be terrible; economic exhaustion added to the political humiliation of the Treaty of Versailles could enable military leaders to come to power in Germany (1977 [1921]: 241). The Allies should fear this ‘authoritarian reaction’ at least as much as they fear Bolshevism, because it is likely to lead to a European war (1971a [1919]: 184). Keynes even left the British Treasury so as to protest against the reparations imposed on Germany, and he strongly militated in favour of a revision of the Treaty, and later even recommended the cancellation of all reparations. On this matter, he was strongly criticized by some American economists, but above all by the French economists, notably when he condemned the French project to occupy the Ruhr (the French government considering that Germany was voluntarily failing in its payment obligations). Keynes regrets that economic science has not spread in France within academic and official circles (1981b [1930]: 154): according to him, the main issue is not whether the reparation claims are morally justified; only the economist’s pragmatism should influence the political choices of the Allied governments. And, precisely, Keynes put forward the argument of international economic interdependencies: political measures which intend to weaken Germany’s economic potential are short-sighted. Indeed, an economic recession in Germany would spread to the rest of Europe, for two reasons: © 2004 Fanny Coulomb

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before the war, Germany was the economic heart of Europe. Other countries of central Europe need a strong German economy to be able to recover (1919: 145). Keynes underlines the possible pernicious effects of reparations, which could force Germany to develop its foreign trade, thus worsening international economic competition; reparations should therefore only absorb Germany’s normal surplus which otherwise would have been devoted to foreign investment and foreign trade (1971b [1918]: 380).

Keynes strongly criticized the national self-sufficiency policies followed during the inter-war years, along with the development of fascism, Nazism and communism. He denounces three great dangers of economic nationalism: the doctrinarian’s foolishness, hate and most of all intolerance. Protectionism must be considered with circumspection: ‘For I must not be supposed to be endorsing all those things which are being done in the political world today in the name of economic nationalism. Far from it.’ (1982a [1933]: 244). Because of his pacifist convictions, he wishes to lower trade restrictions. In 1930, he approves of the project of international co-operation outlined at the Genoa Conference of 1922, even if it is delayed by discussions on reparations and on the return to the gold standard. As regards Central Europe, Keynes recommends an economic union to compensate for the loss of efficiency due to the political division in small national entities after the First World War. Generally speaking, he is fundamentally opposed, on principle, to the establishment of a protectionist system, which wrongly claims to act in favour of national interests, notably by advancing the arguments of key and of infant industries. Generally, these are false excuses aiming at applying restrictions to all industries (1981a [1923]: 147). But, owing to his empirical methodology, Keynes believes it is not yet time to significantly reduce trade restrictions. In this respect, he asserts, about the World Economic Conference of 1933, that trade liberalization, although desirable, is less urgent than the limitation of the risk of a world financial crisis due to the competitive struggle for liquidity (1982a [1932]: 39). Just like List, he considers that liberalism is only a long-term objective. However, unlike him, he does not consider that national economic interests are fundamentally conflicting and he appeals for the development of international economic co-operation, while establishing national solutions of economic policy to overcome the crisis. The difficult management of both these objectives in parallel, although sometimes contradictory, is the major issue of economic policy, and future international peace depends on its success. A lasting peace, without economic crisis In order to better reconcile the imperatives of international peace and the defence of national economic interests, Keynes appeals for an international agreement to cancel the inter-Allied debts and reparations, in his work, The Economic Consequences of the Peace (1919). His analysis relies on the argument © 2004 Fanny Coulomb

that the world economy is in serious danger of a debt crisis and that it is all the more likely to occur as, for the first time, the debt burden is not represented by real capital and is not limited by the property system. A large indebtedness isn’t in keeping with the human nature and no people will agree for long to work to fulfil a foreign payment (1971a [1919]: 178). The cancellation of the interAllied debts would be a sign of solidarity among Allies and would contribute to the emergence of a new Europe. In the same concern for international co-operation, Keynes asks in 1919 for American financial assistance, through an international loan, to help the recovery of European production, hindered by import surplus and monetary chaos (1971a [1919]: 180). When the Amsterdam Financial Conference took place in 1919, he also suggested the creation of a new world currency and of barter payments. However, international collaboration is difficult to implement. In 1933, he defends international co-operation in order to increase prices and purchasing powers, and he denounces the sterile monetary policy followed by European countries which uselessly hang on to gold, ignoring the economic profits which could be gained from expansionist policies, based on the development of international trade. He recommends that Great Britain should follow the American example, and consolidate a sterling–dollar block (1982a [1933]: 257–277). After the Second World War, Keynes reasserts the necessity of international cooperation. As stated in his speech in favour of the Beveridge Report in 1942, the return to economic prosperity is worthless without co-operation and friendship agreements between peoples, which guarantee future international peace. In September 1945, he calls on Europe to work at its economic recovery, with the help of the United States, to return as quickly as possible to liberal trade practices allowing an expansion of world trade, which is in the long-term interest of all countries (1979 [1945]: 465). The same idea underlies the first outlines of an international project, in which Keynes participates, in order to regulate staple commodity prices and, more particularly, agricultural products. On this issue, he defends a centralized international action substituting itself for the traditional laissez-faire, so as to effectively fight against the negative effects of the fluctuations in raw material prices, notably through commodity controls, the control of stocks becoming the most effective way to prevent trade cycles (1980b [1942]: 113). This technique later gave rise to numerous debates at the international level, notably within the UNCTAD. The issue is to succeed in harmonizing various national economic interests, which should later contribute to a military and economic disarmament. Governments shouldn’t choose to withdraw from the economy, even if the search for solutions of economic policies appropriate to specific national economic problems becomes more problematic when the economy opens up to international trade. Keynes implicitly considers that the economic policy he recommends will be all the more efficient as it will be followed by numerous countries. Unlike the mercantilists, who considered that one gains only what the other one loses, Keynes has a dynamic conception of international economic growth, © 2004 Fanny Coulomb

contributing to the wealth of all, as long as international economic relations are stable. Keynes’ pacifism is based on the idea that an economic interdependence of nations is necessary. A new equilibrium in international economic relations must accompany the search for an economic internal coherence through public policy. He suggests that the United States abandon their policy encouraging exports and limiting the tariffs of imports, which prevents Allies from repaying their debts (1977 [1921]: 272). Besides, he recommends the development of economic relations between Germany and Russia, weakening in this way Germany’s competition on other markets, in a context of globalization. He also criticizes the blockade imposed on Russia, which is not economically profitable, and suggests to raise it (1971a [1919]: 186). He didn’t consider the British economic crisis as a direct consequence of the conflict, which only delayed economic growth (1977 [1921]: 259). The crisis has more fundamental causes, i.e. the difficulties resulting from the fact that the economic forces of the nineteenth century have reached their term, that economic motives and ideals are no longer suitable and must be renewed (1971a [1919]: 161). He puts forward two priority objectives: guarantee food security to the population and fight against the rise in unemployment. State policy should give a new impulse to business, which is slowed down by the timidity of both entrepreneurs and public action (1981a [1924]: 219). He accuses European deflationary policies of the post-war years, based on an erroneous conception of economic mechanisms, of being responsible for the persistence of the crisis. Notably, although the policy of high interest rates for long-term loans may have been justified a few years after the war, it was wrongly maintained afterwards, disregarding the needs for productive investment; in fact, the underestimate of the war’s economic depressive effects wasn’t well perceived because of two events: on one hand, the agreement on reparations and war debts, and on the other hand the return to the gold parity. Keynes states that problems linked to war debts shouldn’t prevent the governments from encouraging productive investment. In the long term, economic prosperity leads to a fall in interest rates. In 1929, Keynes considers that the only way the Allies could receive ‘reparations’ from Germany, apart from lending it these sums, was to lower German wages; this would contribute to the development of export industries, thus resolving the problem of ‘transfer’ (which, for foreign countries, consists of the conversion of the sums received from Germany into their own currency) (1983 [1929]: 451). But, in 1931, he comes back to this idea, asserting that the international economy would be penalized by the fall in demand due to the salary cuts in Germany (or in any other country), aggravated by the burden of monetary debts stemming from war, which would be increased by such a measure. He then recommends the bringing down of interest rates rather than salaries (1973b [1931]: 358). Keynes later developed other theoretical justifications, notably in the General Theory: the fall in effective demand due to cuts in salaries, in spite of their rigidity to decrease, is presented as the major cause of recession. The return to gold parity is economically disadvantageous, because it © 2004 Fanny Coulomb

increases the war debt burden. Keynes suggests the stabilization of the currencies at their present value, through a capital levy rather than through a depreciation which would increase the monetary debt burden. From Keynes’ point of view, war shows that prices cannot remain stable only by keeping the volume of money constant; he therefore contests the quantitative theory of money (and future monetarist theory) (1981a [1924]: 206). Since the war, gold no longer guarantees monetary stability, because the gold quantity circulating throughout the world has declined and because the system of credit has been extended. He thus recommends a monetary reform, to channel national savings towards national investments, and more particularly towards civil engineering (1981a [1924]: 223), within an active policy of great autonomous investments (1981b [1930]: 323). The government must aim at satisfying its citizens’ economic and social objectives and its economic policy is essential for collective prosperity. According to Keynes, overcoming the current economic crisis implies the generalization of public spending financed by loans (1980b [1943]: 320). He thus questions the restrictive liberal conception of State intervention limited to a few fields, notably defence. Ensuring prosperity in peacetime is also a State duty, which should mobilize as much energy as the preparation for war. Regarding military expenditures as specific public expenditures, he is concerned with their possible effectiveness against unemployment (1982a [1939]: 528–532). The stimulation of armament economic activities due to a rise in military expenditure should induce a correlative rise in employment and wages. This should lead to a rise in demand and thus in production and to a decline in unemployment. Making the hypothesis of a 150 million pound sterling increase in military expenditures Keynes (1982a [1939]: 528–532) concludes that this will help to overcome unemployment, because of a multiplier effect: ‘If so, the direct effect of the armament expenditure may be to take 300,000 men off the dole. I fancy that even the pessimists would reckon that a fairly conservative figure’ (1982a [1939]: 528–532). However, the rise in arms production is only a stop-gap solution, which does not in itself meet social needs and which slows down the national potential of long-term economic development. Military expenditure is the most unproductive (but useful for national defence) of all public expenditures. Arms are either unemployed or destroyed in case of war; thus, their production does not represent an inter-temporal transfer of purchasing power, but a definitive exclusion of production factors from the economic process. It is thus an unproductive consumption. The preparation for war, more than war itself, is a temporary incentive to economic activity. But Keynes disapproved of what is now known as ‘military Keynesianism’, because it only had short-term effects. It is better to guide public investment towards the building industry or civil engineering which are socially useful: I have a special extra reason for hoping that trade-unionists will do what they can to make this big transition to fuller employment work smoothly. I © 2004 Fanny Coulomb

began by saying that the grand experiment has begun. If it works, if expenditure on armament really cures unemployment, I predict that we shall never go back all the way to the old state of affairs. If we can cure unemployment for the wasted purpose of armaments, we can cure it for the productive purposes of peace. (1981b [1939]: 532) In fact, Keynes regrets that the only public spending of his time which helped to overcome unemployment was military expenditure; without this, the British government would never have resorted to loans. Yet, their effectiveness in overcoming the economic crisis can only be temporary; a policy based on other public expenditure would be more effective. Besides, in 1941, in his thinking on European economies after the Second World War, Keynes emphasizes the lack of productivity of military expenditure and the burden this represents for the national economy, in so far as public finance would be better employed if it encouraged the national productive capacities. Therefore, he denounces the fact that, if Germany had no right to keep its army and armament industry after the war, its economy would be relieved of a considerable economic burden (1942: 339). Germany would thus benefit from a relative advantage in the postwar economic competition, at the expense of countries such as Great Britain, which share the burden of international security. He suggests that, in compensation, Germany contributes to the cost of world peace-keeping. Numerous economists will later side with Keynes on this point. But when a second world war seems inevitable, Keynes starts studying the best way to finance the conflict, without weakening the British economy. In a short book published in 1940, How to Pay for the War (1978 [1940]: 3–155), he applies to this subject the principles expressed in 1936, in the General Theory. Public action is necessary to curb inflation, in the context of a renewed economic activity because of the conflict. Keynes recommends an equal distribution of the financial burden among all social classes, for justice as well as social peace. Renewed economic activity generates important private savings, half of which will be levied through taxation, so as to finance war. The remaining financial needs could be satisfied by delaying individual consumption, owing to State measures decided in agreement with the syndicates, such as the postponed payment. These measures should curb inflation by restricting purchasing power. While ideas on economic and political issues raised by the First World War gradually led Keynes to elaborate an original theory, the Second World War enables him to apply his new principles, and to prepare the thought on the desirable orientation of the economic policy after the conflict. The successes of German industry had, in fact, been observed by European democratic countries since the mid-1930s; in 1938, Keynes explains these successes by the fact that this country uses its full production capacities, and asserts that Great Britain should follow this example. He is in fact favourable to a smooth State economic planning (1982a [1932]: 90). But even if he rehabilitates interventionism, this doesn’t mean he is favourable to a militarization © 2004 Fanny Coulomb

of economic life; in 1915, he had already denounced the ‘German myth’, shared by a minority of the German population, which recommends economic isolationism, ‘permanent war’ (and thus economic militarization), and the refusal of individualism, with a regulation system based on the State apparatus, aiming at an increasing effectiveness rather than human welfare. Keynes condemns this ‘hideous doctrine’. This permanent refusal to alienate personal freedom to the State remains present throughout all his work; interventionism can only prevent the political liberalism system from being challenged by a too-violent economic crisis. We can consider that Keynes contributed in a very original way to the evolution of economic theory on defence and security issues. Rather than studying the internal conflicting character of capitalism, he tries to improve its imperfect running, therefore giving up the orthodox conception of the ‘invisible hand’. By this very fact, he widens the concepts of defence and security: from now on they don’t only concern war and its preparation, but also economic security, i.e. national economic independence but also the smooth running of the world economy. Indeed, economic misery can lead to a change in the economic system, such as the replacement of democracy by militarism or socialism. Strictly speaking, defence is no more than a particular production sector; the defence sector even becomes a way for governments to achieve their economic policy objectives. The hierarchy between defence and economy is thus, at least partially, reversed. However, the economy can also become an instrument of defence: although he condemns the ‘trade war’, Keynes is still favourable to the use of economic sanctions, notably as a mean of deterrence. Keynes was a precursor of the contemporary analyses of defence, by introducing economic issues into the security conception of capitalist and democratic States. His concern for security issues is evident throughout his entire analysis, which was developed in several emergency situations, with the necessity of defending the country against economic crisis, war and totalitarianism. Economic interventionism is a preventive remedy for democratic systems, in a strained context. Beyond his proposals, it is Keynes’ methodology which proves to be ‘modern’ today: the economist must not hang on to ready-made truths, he or she must play a citizen’s role, i.e. find short-term solutions to preserve the stability of the democratic system. By his political convictions, Keynes is fundamentally liberal, defending the right of free enterprise and democracy.

The economic study of both world wars and their theoretical repercussions Both world conflicts gave rise to an unprecedented wave of economic studies on war, peace and defence, from 1914 to 1945. These thoughts greatly contributed to underlining the limits and advances of economics, notably on the issue of international economic relations.


The studies of the economy of war: a new challenge for the economic analysis Both world conflicts gave rise to numerous economic studies on the economy of war. Financial considerations prevail in the works of the 1920s, but the implications of state interventionism are gradually more and more often analysed.

War finances: a central issue for the liberal economists of the inter-war years Liberal economists, usually opposed to economic interventionism, admit that, in case of war, their principles could be temporarily abandoned, provided that the return to a normal economic situation after the conflict is guaranteed. A.C. Pigou devoted an entire work to the political economy of the war, with a first edition in 1921 and a revised one in 1940. He had previously written The Economy and Finance of the War (1916) and A Capital Levy and a Levy on War Wealth (1920). In The Political Economy of the War (1921), he considers that the First World War assigned to the economist the duty to study the economy in wartime, which is completely different from the economy in peacetime. He was himself a convinced pacifist, who refused to fight in 1914 and served as an ambulance driver in France. However, he rejected the argument according to which wars will progressively disappear because of their increasing cost: in his opinion, wars are partially led for irrational reasons, notably a nation’s wish to dominate others. Ensuring national defence is therefore a priority and military expenditures must be considered as economically beneficial, in so far as they represent a kind of ‘insurance’ to protect wealth. However, free trade and foreign investments are among the best guarantees of international peace. Pigou doesn’t believe that the free-market economy automatically leads to an optimum; costs and advantages in the sphere of social economy are different from those of the private economy; interventionism can therefore be justified regarding the distribution of incomes (c.f. Welfare economics (1920)). In wartime (1916), the economist should aim at maximizing the war fund rather than economic prosperity. The rate of participation of the workforce can be raised above its peacetime level, as can the utilization ratio of productive capacities. The reduction in investment and consumption may also prove to be necessary. Private capital is then likely to run out, expenditure usually devoted to thwart capital depreciation being delayed. In the same way, a part of the national portfolio abroad is sold off. Thus, such measures heavily affect the population’s present prosperity, but they also limit future economic development by transferring costs to the future. Therefore, neither the capital stock increase nor its renewal are financed. Pigou moreover distinguished the ‘economic cost’ of war from its ‘total cost’ (1916). In peacetime, economic prosperity does not represent total prosperity, but only the part of it that is measurable in money; and in wartime, the total costs are much higher than their monetary estimation, as they are also partially moral. In the Political Economy of War (1921), Pigou explains that, in wartime, the © 2004 Fanny Coulomb

State must substitute for the market, in order to control the supply of essential goods and services: it therefore exerts a strong intervention on key economic sectors and runs firms, the owners being given compensation at negotiated prices. This intervention generates important economic profits and maintains prices at a rather low level because of the abolition of profits, in order to prevent producers from excessively increasing their prices, which would entail a rise in the credit and the money supply, as well as in the national debt. Other kinds of intervention can also be undertaken, notably a system of licences, bonds or certificates for the private purchase of some major goods, so as to prevent competition between public and private demands for these goods. Citizens must also be encouraged to lower their consumption, notably through propaganda and the appeal to patriotism. War expenditure must be financed through exceptional measures, tax revenue being insufficient; a governmental loan seems inevitable, as a tax increase would exhaust the economy. In order to attract lenders, the State must diversify the available portfolio of options; but the ‘negative indirect method’ is the most effective one, i.e. private individuals freeze many other possibilities to invest their capital; capital exports should also be limited. Bank loans must be avoided as long as possible, because they would entail inflationary trends. The debt financing of war is however regrettable because it weighs heavily on the economy. National debt would be held by social groups with a high level of income, whereas the poorest classes would be taxed to cover the debt’s interests. Such pernicious effects could be avoided by the implementation of a capital levy with the return of peace, which would serve to immediately extinguish the debt (1920). This tax would be exceptional; it would bring about an allocation of incomes which would be more favourable to the poorest classes, with no capital, while enabling the nation to quickly reach a high level of employment, of savings and of economic productivity. Pigou foresees a post-war period of deflation in Great Britain, which he considers as necessary to recover economic competitiveness, under the gold standard system. The resort to a capital levy is all the more possible as the main part of the debt is held at the domestic level; it would thus only represent a transfer of purchasing powers between the various categories of the population. Other economists studied the issue of the financing of war, notably Keynes, whose contribution we previously evoked. It is impossible to restate here all the numerous analyses which have been made on the subject. We shall only mention the contribution of Wicksell, who, in 1919, gave a lecture on the economy of war, which was only published in 1978. In this work, he presents his views on war’s economic consequences, a subject he finds very interesting for the future developments of economic analysis. War leads to higher expenditure and to a reduction in the available productive power, the normal replacement of capital not being achieved. Like Pigou, Wicksell (1919) emphasizes the importance of the monetary problems raised by war, the more or less rapid solving of which conditions the success of the return to normal economic activity after the war. The best way to thwart the inflation generated by war would be a decline in the population’s purchasing power, and a rise in the govern© 2004 Fanny Coulomb

ment’s purchasing power in the same proportions, owing to war taxes and domestic loans at very high interest rates. Another solution is that States increase the quantity of money, so as to create the purchasing power necessary for war. The rise in prices yields important profits for owners and businessmen, who then subscribe to governmental loans. But he denounces the injustice of this system because, after the conflict, the ‘general public’ must pay the interest and the redemption of these loans with its taxes. Post-war inflation is the result of a poor running of the gold standard, due to an excessive issue of paper money by belligerent countries. He recommends a future reduction in these issues, so that the level of prices remains constant. We find in this work some of the originalities of Wicksell’s analysis, which presents several analogies with Keynesian theory, in particular the importance given to the productive capacities, a reference to the quantitative theory seen from the angle of income, the importance of money in the relation between global supply and demand, therefore questioning the theory of money as a veil. Pigou’s and Wicksell’s analyses on the financing of war show that the economists of the time wished to limit as much as possible the financial consequences of conflicts, in order to ensure the return to a ‘normal’ economic situation in peacetime. But thinking on the economy of war gradually led to a new conception of economic policy. The rise in State interventionism during the Second World War is so important that a complete return to laissez-faire seems henceforth impossible. The Second World War and the rise of economic interventionism The Second World War was marked, even more than its predecessor, by State interventionism. Several economists recommended a perpetuation of it, even after the end of the conflict, so as to avoid restructuring problems. Lauterbach, an American economist, asserts in his book Economics in Uniform: Military Economy and Social Structure (1943), that the economy of the Second World War is likely to outlast the conflict because, unlike the First World War, the world economy before the conflict was in economic depression, with an underemployment of productive capacities. Yet, militarism contributed to a rise in the population’s living standards. In addition, governments learned from the First World War to be better prepared for a second war, by underlining the importance of economic self-sufficiency and of the use of governmental agencies of control of production goods, as well as of the industry’s monopolized organization. Besides, the Second World War is characterized by the confrontation between two different models of society, totalitarian and democratic, which do not share the same conception of State–individual relations. Lauterbach criticizes the wait-and-see policy of democratic countries faced with totalitarian ones (Germany, Italy, Japan), the latter having led a ‘unilateral war’ several years before 1939. The reaction of democratic nations was slow in coming and forced them to implement massive State economic interventionism, which deeply transformed the social structures, in a partially irreversible way. Indeed, © 2004 Fanny Coulomb

he doesn’t believe that the Second World War will be the last one and the preservation of a ‘military economy’ could be necessary, therefore creating a ‘new economic system’. We can consider today that such an analysis foreshadowed the theories of a ‘permanent arms economy’ or the explanations of the Cold War and of the American–Soviet arms race. It is unfortunately impossible to undertake a detailed presentation of all the analyses made during the inter-war years on the economy of war, which notably compared its different characteristics and implications according to social structure, whether democratic or totalitarian. The great economists we evoked pursued this thought. In 1940 Pigou published a new version of his The Political Economy of the War’. Keynes devoted numerous articles to the description of the economies of war in the various belligerent countries. The studies of the economic conditions of peace: the Treaty of Versailles, the debate on the reparations and the resurgence of internationalism In the 1930s, the study of international economic relations developed a great deal. The reasons for these new theoretical developments lie in a question connected to the war: the reparations and the inter-Allies war debts. The debate on this issue was very lively, not only in France but also in England and the United States. The French disagreements on the question of the reparations: the example of Charles Rist After the First World War, the French economy was very much weakened and the idea of reparations paid by Germany was then dominant. ‘Germany will pay’: this political, but also moral, conception was questioned by Keynes, as well as the issue of the inter-allies debts (like several liberal economists, he wished for a moratium of these, on the basis of rigorous economic argumentation). In 1921, the French economist Charles Rist underlined the concrete difficulties there were in implementing the measures which were provided for in the Treaty of Versailles. And indeed, German payments to France were very low in the first post-war years, and in 1924, the Dawes Plan decided to suspend them until the recovery of the German financial situation. When revealing the reparations’ pernicious effects, Charles Rist was influenced by the economic principles of liberalism and solidarity expounded in Keynes’ The Economic Consequences of the Peace (1919). However, he rejected the British economist’s pessimistic forecasts as to the non-payment of the reparations, and attempted to look for the practical means which would enable Germany to pay. Rist’s analysis was different from another more orthodox liberal view, defended by Jacques Rueff. After the First World War, numerous French economists (notably Biard d’Aunet, Blondel and André Tardieu) denounced the aggressive military culture of the German people, and judged that the definitive dismantling of © 2004 Fanny Coulomb

Germany was a condition of world peace. This view was sometimes contested; for example, Yves Guyot (1921), editor of the Journal des économistes, recommended a moderation of the conquerors’ requirements, so as not to favour the spirit of revenge of the vanquished. However, he was favourable to the dismantling of the German and Austro-Hungarian empires. Charles Gide (1919), another French economist, criticized the suppression of the German colonies, because it hindered its industrial reconstruction and its capacity to conquer new markets in South America and Asia. Charles Rist (1921) attempted to demonstrate the lack of economic justification for some excessive French requirements regarding reparations. On this point, he criticized the inaccuracy of the Treaty of Versailles, notably in regard to the exact amount of the reparations. The ideas expressed by Keynes in The Economic Consequences of Peace in 1919 nourished the debate on the opportunity of German economic recovery, which most French economists considered to be dangerous. For Keynes (1919), the Treaty of Versailles was destroying the ‘economic heart of Europe’ (notably by suppressing the external bases of the German economic system, i.e. shipping trade, colonies and exports), and thus the potential for economic recovery of the whole continent. Many French economists accused him of being pro-German; but others defended him, notably Rist, who welcomed Keynes’ proposal of a European economic reconstruction owing to a free-trade policy. Rist shared Keynes’ conviction of the necessary reconstruction of the European economic equilibrium, in order to ensure the economic development and security of all States. Moreover, like Keynes, Rist (1921: 270) criticized the deflationary policies followed after the First World War, and recommended the financial stabilization of Germany, considered as an indispensable preliminary to the payment of reparations (this was indeed one of the Dawes Plan’s main arguments). He defends a policy of financial austerity to limit the fall in the German exchange rate; he also proposes Allied loans to Germany, since the financial crisis in this country used up all its savings and credits, and considerably reduced its incomes. If Rist’s conception was closely akin to Keynes’ and to the authors of the Dawes Plan, another analysis was developed at the same time in France, which denied the existence of an ‘economic problem’ regarding reparations. The debate on reparations developed during the 1920s in France but also in Great Britain and the United States, notably on the problem of the ‘transfer’. In 1924, Rist considered that Germany’s financial recovery would not be sufficient to ensure the payment of the indemnities, because of this problem of transfer: following Say’s law, according to which products are exchanged against products, he considers that the reparations would necessarily correspond to a transfer of goods and services, which represented the only transferable wealth. In his opinion, the main difficulty raised by the reparations was the conversion by Germany of paper Marks into gold dollars by selling goods or services abroad. The payment of reparations thus depended on the exportable part of German income, obtained by import restrictions, a rise in exports and a fall in capital exports. Rist then underlines the pernicious effects of the indemnities paid mainly in kind, as German products would compete with domestic ones; this is © 2004 Fanny Coulomb

the ‘paradox of the indemnity’. However, Rist considered that the national interest (which was to be paid by Germany) shouldn’t be sacrificed to the protectionist interests of a few industries (1924: 163–181). His view thus differed from Keynes’, who had adopted a ‘Listian’ conception of the protection of infant industries, and was thus opposed to the delivery of German products, even free ones. Keynes also feared that the payment in kind of the indemnity would stimulate the German industry and trade, therefore worsening long-term international competition. These critics found a significant echo among British industrialists, willing to recover their access to the German market, but in France the opinion remained favourable to the maintenance of the Allied requirements. According to Rueff (1922), on the contrary, there was no problem of transfer, because of the mechanism of automatic adjustment of the balance of payments; Germany could obtain foreign resources through an international loan, or through new taxes or domestic loans. As Germany will have to seek foreign currencies on financial markets, in order to ensure the transfer, the Mark exchange rate will fall, without generating either an inflation or a sensitive variation of domestic purchasing power; this fall in the exchange rate will favour the rise in its exports. Jacques Rueff was thus opposed to the principle of the Dawes Plan, limiting the sums transferable in cash and allowing them to be lower than the amount of the tax levies for the indemnity, in case of a monetary turmoil. Rueff considered that there was no problem of transfer, but only a budgetary problem, which had to remain in balance (1922: 173). Rueff’s argumentation, widely approved by the French liberal economists, seemed to support the defenders of the solution ‘to make Germany pay’. Louis Baudin (1922) explained that a rise in taxes and a cut in costs by export industries should entail a fall in Germany’s living standards, which he welcomes as a ‘kind of punishment for the aggressor’. As for Yves Guyot (1924), he suggested that Germany devotes to the reparations the sums which were beforehand given to the military sector. Although liberal, Rist did not conform to the classical theory of the automatic adjustment of the balance of payments, because he considered that the development of an ‘exportable surplus’ was a necessary preliminary to German payments. Besides, his pragmatism led him in 1922 to warn against the risk of a tax evasion or of a flight of the German capital. In his opinion, ‘financial solidarity, disregarded by the authors of the treaty of Versailles, remains the only practical solution’ (1922: 469). The debate on the ‘transfers’ in Great Britain and the United States The views of Rist and Rueff thus differed on the issue of reparations; however, there was no direct theoretical debate on this subject in France, unlike in Great Britain and the United States. In these two countries, the debate developed on the possible deterioration of the German terms of trade because of reparations, and on its impact on international economic competition. The American © 2004 Fanny Coulomb

economist H.G. Moulton (1926) rejected the classical theory of the automatic adjustment of the balance of payments and supported the Dawes Plan. According to him, the weight of the reparations, given the lack of exportable surplus, disrupted Germany’s economic and financial system, unbalanced its budget and entailed a depreciation of its trade, a factor of temporary instability. In answer to Moulton, Jacob Viner (1926) attempted to demonstrate the validity of the classical theory of the ‘automatic adjustment of international balances of trade’: if the depreciation of trade proved to be insufficient to develop an exportable surplus in Germany after the war, it was because all conditions of the running of the classic economy were not fulfilled (notably because of a budgetary imbalance and domestic inflation). But he stated that Germany’s payments would automatically enable it to show an export surplus. He also condemned incentives to export, which would hinder this mechanism, by stimulating imports at the same time. Keynes’ contribution to the debate was decisive, though controversial (1929: 451, 460). He considered that the classical theory of the automatic adjustment of the balance of payments did not work; the creation of an exportable surplus could only arise from a modification of the German economic structure, with a reduction in real wages, the development of export industries at the expense of capital goods industries, etc. In this way, he disagreed with Ohlin, according to whom the Allied loans to Germany led to a rise in the purchasing power of its population. It is today acknowledged that Keynes’ arguments were opposed to the principles of the General Theory, as they did not consider the role of the effective demand. The discussion on German indemnities thus gave rise to a debate on the causes of the international economic crisis. The French economists, apart from Rueff and Rist, didn’t contribute much to it. The issue of the reparations was too closely linked to the political field, as France had been vanquished in 1870 and obliged to pay reparations to Germany at the time. The League of Nations as an instrument of peace After the First World War, many economists declared themselves in favour of a more active role for the League of Nations, so as to avoid future international conflicts. We previously evoked Keynes’ contribution to this subject. In contrast, a liberal economist like Pigou did not mention this issue, leaving it to politicians. Wicksell (1919) is an example of the economist who supported the League of Nations: he asserted in 1919 that the societies of his time could durably remove war, owing notably to the intervention of the League of Nations, which must be conceived as a factor of economic internationalization, with a gradual abolition of national borders. He called for a fast removal, after the war, of the burden represented by the military budgets, instead of an immediate rearmament. He also recommended international agreements of economic co-operation, such as the ones existing for mail, telegraph or the railways. Measures of economic reprisals and protectionism against central powers, and © 2004 Fanny Coulomb

especially against Germany, could prove to be useful after the war, if these countries still represent a danger for the stability of international relations. However, Wicksell remains pessimistic as to the future of world peace, in so far as it is constantly threatened by the phenomenon of overpopulation, as Malthus had already pointed out at the beginning of the nineteenth century. Each country should aim at limiting the level of its population, and all the more so as it should reinforce social peace, by generating a rise in wages and a fairer distribution of property. It is impossible to make an exhaustive presentation of the numerous calls from liberal economists for an increased role of the League of Nations or for the establishment of international political and economic agreements. We shall just mention the example of Lionel Robbins, who concludes his work on the causes of the war (1940) by proposing a limitation of national sovereignty which would benefit an international institution guaranteeing peace; even if national economic interests are not antagonistic in the long term, in the absence of an international law preventing them, conflicts could reappear at any time, because of the possible resurgence of the ‘errors of the particular interest’, stemming from the pressure of particular interest groups. Robbins suggests the creation of the ‘United States of Europe’, the creation of limited federations not being Utopian, unlike the project of an international union. Calling for the victory of democratic countries, he states that in the future only the implementation of such international political relations could guarantee a lasting international peace. The ideas of some of the liberal economists of the nineteenth century, and particularly those of the French current, were thus pursued. New economic thoughts on the causes of war During the inter-war period, analyses on the economic causes of war by liberal economists were numerous. They mostly aimed at refuting Marxist or fascist arguments and at reasserting the classical conception of defence. But a new field of analysis, more heterodox, developed at this time; it used the most modern statistical techniques to reveal the recurrence of ‘war cycles’, corresponding to ‘long economic cycles’. Kondratieff and Schumpeter notably dealt with this subject. Liberal theory and the issue of the economic causes of war Lionel Robbins blamed Leninist theory for its excessive simplifications and generalizations and presented another explanation of war’s economic causes. This subject was indeed very much analysed by the liberal economists of the interwar period, notably by Spiegel, who pursued the main liberal ideas on this issue during the 1940s. In a short book published in 1940, entitled The Economic Causes of War, Lionel Robbins wished to provide an answer to the imperialist theory of war, © 2004 Fanny Coulomb

which considers war as inherent to the running of the capitalist system. Without denying that international conflicts can have economic motives, he aims at demonstrating that the postulates of imperialist theory only rarely proved to be true in the facts. Robbins denounces the cost for Western economies of a permanent state of preparation for war, with a high level of military expenditure. He considers that the causes of war must be eradicated; it is therefore important to identify them, and especially to determine the importance of economic causes, admitting that other causes can also explain wars (notably the pressure of particular interest groups, or national hatreds). Implicitly, Robbins’ project is to criticize the theories according to which all social phenomena have economic causes. Recognizing that Lenin’s theory of imperialism has no ‘logical deficiency’, Robbins tries to question its appropriateness with reality. With regard to capital exports, Robbins admits that they may have caused international tensions; however, the Leninist theory of financial capital cannot explain the First World War, nor any other conflict between powerful States. It is only interesting for the analysis of the relations between strong States exporting capital and weak ones importing capital. As to conflicts such as the Russian–Japanese war, the conflict between Turkey and Italy (1911–1912), or the political crises in Morocco (Tangier 1905, Agadir 1911), the defence of foreign investments was only an excuse hiding the leaders’ imperialist political ambitions. The same conclusion may be drawn on the First World War: the struggles of the financial capital and of foreign investors were not responsible for this conflict (1940: 57). It is also erroneous to assert that German militarism before the First World War, or Hitler’s accession to power in 1933, was due to the pressure of armament industrialists. In both cases, their influence was too limited to be determining. Robbins concludes his analysis by relativizing the responsibility of international finance in the triggering of international conflicts (1940: 54–55). As a supplementary argument, he mentions that a few advanced capitalist countries (Holland, Switzerland and Scandinavia) have never followed expansionist policies, whereas some of the most expansionist countries (such as Russia and Italy) are capital borrowers and importers. Finally, the author also mentions that high finance generally loathes political complications. Regarding foreign investment, Robbins’ argument is that the national investors’ interests abroad don’t always coincide, which is in opposition to what the Marxist theoreticians asserted. Besides, modern States leading a liberal policy are little concerned with territorial expansion, in so far as the costs of political domination are generally high. In fact, the author approves of Schumpeter’s idea that most capitalist societies are not interested in war. However, Robbins presents several specific cases which can encourage these societies to go to war, notably the threat that the restrictive trade policy of a hostile power represents for national economic security, or the risk of disruption of international trading relations necessary to the domestic economy, or even the limitations of international migrations in a situation characterized by the lack of ‘Lebensraum’ (1940: 63–74). Robbins © 2004 Fanny Coulomb

therefore considers that economic motives often explain wars; in modern times, trade restrictions are the major economic cause of wars, but, as stated by Marxist theory, these protectionist measures are established under the pressure of particular interest groups within the nation and not of capitalists as a class. Henry William Spiegel, famous for his work The Growth of Economic Thought, published a work on The Economics of Total War in 1942. Before detailing the characteristics of an economy of total war, he devotes a chapter to the analysis of the economic causes of war. Spiegel refutes the motive developed by the theorists of imperialism according to which war stems from competition on capital exports; he asserts that the theory of the work value and the concept of surplus are erroneous. He follows Schumpeter’s ‘sociological’ explanation of imperialism, which underlines the influence of old feudal habits. Like Robbins, Spiegel considers that wars are often waged for the economic interest of some particular groups (notably armament manufacturers), without any economic justification at the general level. But the originality of his argument is to show how the warlike tendencies evoked by Schumpeter are stimulated by specific economic conditions, especially unemployment and the economic insecurity of modern societies. From his point of view, the strictly economic motivations of human actions tend to decline, which explains why aggressive wars can occur. Spiegel’s theory, as well as Robbins’, shows the strong impact the theory of imperialism had on liberal economists. While trying to refute the logic of Leninist theory, its opponents questioned the hypothesis that conflicts have exclusively economic causes; besides, even when they acknowledged the economic nature of these causes, they underlined the fact that capitalist interests weren’t united, but that, on the contrary, they were divided between various interest groups, the major part of which had no interest in an international conflict. These liberal economists often quoted Schumpeter’s ‘sociological’ theory of imperialism to explain the warlike national policies that seemed to have no economic rationality; imperialism would thus represent a resurgence of feudal habits. This point of view explains why the liberal movement failed in their attempt to provide an explanation of inter-imperialist conflicts as unified and systematic as the Leninist theory. War can have economic causes, notably a use of public policies for some particular interest or trade restrictions; unlike in the Marxist interpretation, war is not a vital necessity for capitalism to continue to develop. The liberal economists of the inter-war years thus reasserted the fundamental principles of the Smithian theory of defence. Studies of the ‘war cycle’: a heterodox field of analysis Schumpeter (1934: 246) rejected the explanation of the economic dynamics by wars, stating that only major technical innovations could explain the rhythm of long cycles. Although international conflicts do have an economic incidence, they do not govern the long-term economic dynamics. However, other authors considered that wars had an important role in long-term economic cycles. At the time, economists were interested in long-term price fluctuations; studies © 2004 Fanny Coulomb

were based on the observation of raw statistical data or smoothed by a moving average process (Kondratieff). From the 1920s until the end of the Second World War, several analyses were developed relating to the influence of wars on long-term economic cycles, following Kondratieff’s work. They concluded that capitalist economies were governed by the rhythm of forty to sixty-year cycles. Kondratieff (1935) considered that cycles, and thus economic crises, were inherent to capitalism; indeed, a period of economic expansion in advanced capitalist countries entailed a greater demand for raw materials and the search for new markets, therefore increasing international tensions. At the domestic level, internal economic contradictions were also worsened, leading to political instability. In this way, Kondratieff’s theory is Marxist. Wars, revolutions and conquests of new territories are considered as consequences and not causes of the long-term cycles; such phenomena generally occur at the peak of an ascending phase – wars generate destruction and a rise in unproductive consumption, therefore increasing the demand for capital. This idea of a relation between wars and long-term economic cycles was notably carried on by Imbert, Rose, von Ciriary Wantrup, Wagemann and Hansen. Tarascio compares Kondratieff’s theory to the one presented by Davis in 1941 and revised in 1963. From a theory of fifty-year war cycles, Davis (1963) shows that major wars (i.e. for the United State, the war of the American Revolution, the Civil War, the First and Second World Wars) begin at the peak of a long period of expanding trade (and of a general rise in the level of prices). Minor wars exert only a weak influence on economic trends. Major wars increase the demand for resources, thus exerting an inflationary tension. Davis even calculates a coefficient of the intensity of war, by comparing the level of prices in wartime to average prices before the war. He thus describes an economic warlike cycle, i.e. the mutual interaction between war cycles and economic cycles (while Kondratieff’s theory only considers a unilateral link of causality). Akerman (1944) went beyond these analyses of the role of war in long-term economic cycles, by asserting that political cycles caused long-term economic cycles. This idea is based on the similarity between the two types of cycles. Technical progress is cumulative and therefore cannot explain long-term movements, unlike Schumpeter asserted. On the other hand, economic crises are consequences of the economy of war, at least in the long term (in the short term, war boosts economic activity). Political crises and economic crises are positively correlated in the long term. Other authors developed theories similar to Akerman’s. Hansen (1951) attributes the reversal of an ascendant economic cycle to the violent succession of inflation caused by war and of the post-war deflation which follows the return to the gold standard. In the same way, Bernstein (1940) considers that the overestimation of the national currency inherent to war is an explanatory factor for the economic depression on the return of peace. Dickinson (1942) states that the First World War has had fatal economic consequences which explain the © 2004 Fanny Coulomb

inter-war crisis. His statistical tests reveal long-term economic cycles; he foresees that the Second World War will have even more negative economic effects, given the loss of flexibility of the domestic economy, because of interventionism. In the same way, Barrère (1947) underlines that war has prolonged depressive effects, which explains why it is followed by a downward phase in the economic cycle. He also insists on the post-war difficulties in restructuring the economy, because of the loss of economic flexibility due to state intervention; another difficulty is that the important needs of post-war years lead to the development of productive capacities, which later turn out to be excessive. Not all economists shared this conception of the central part played by wars in the reversal of the cycles. In this respect, in one of his last works, Lescure (1947) admitted that he hadn’t given enough importance to war in the explanation of long-term movements. However, he does not acknowledge the existence of a direct link of causality between war and long-term economic cycles. In his theory, economic cycles depend on profit: the disequilibrium between supply and demand is the first explanatory factor of these economic fluctuations. From an observation of price series, he presents the characteristics of economic fluctuations. Wars entail an economic disequilibrium, because the demand for consumer and capital goods increases, until it exceeds their supply, generating a rise in prices. The significant rise in production, prices and incomes resulting from the State’s use of the war funds durably destabilizes the economy. The normal interplay between supply and demand is no longer valid. On the return of peace, an important lapse of time will be necessary to resolve the disequilibriums on the various markets. Moreover, a new difficulty will appear: the reconstruction works imply a development of the productive capacities greater than those required by a ‘normal situation’, and thus an overproduction is likely to occur. Economic studies of the inter-war period were characterized by theoretical changes compared to the previous analyses and by the rise in the studies on the causes of war and its economic consequences. So as to explain why wars occur, economists developed new analyses of capitalist institutions. Studies on the economic consequences of war also gave rise to new debates on the way the international economy and the gold standard worked; they also provided a new conception of State intervention to avoid economic crises. The relation between major conflicts and great economic crises was also studied. Both world conflicts therefore transformed the economic analysis, strengthening the economists’ will to contribute to the explanation of current political phenomena. The world’s division into two blocks after the Second World War and the subsequent arms race maintained economists’ interest in defence issues. Benefiting from new statistical techniques and from econometric modelling, defence economics gradually became an autonomous field of analysis.


The diversity of post-1945 heterodox analyses on defence and war After the Second World War, apart from the neo-classical econometric analyses and the Marxist and Third World theories, a few thoughts were developed on war and peace, which can be described as ‘heterodox’. They partially revisit the inter-war studies, but add new concepts, such as the militaro-industrial complex or military Keynesianism. The sociological and historical role of war is also studied in an original way.

The analyses of the militaro-industrial complex (MIC) After 1945, the only direct developments of the ‘classical’ analysis of defence consisted of reasserting military expenditure’s lack of productivity and the refusal of an excessive militarism implying a strong interventionism, or in pursuing the idea of peace owing to free trade, with studies on economic globalization. A new concept, which can be connected to the liberal current, was developed after the Second World War: the militaro-industrial complex. This concept is rather polemical, but unlike what is usually stated, it shouldn’t be considered as a Marxist interpretation of the running of the military sector. President Eisenhower was the initiator of this concept and denounced at the end of his mandate the danger of the growing reinforcement of the MIC’s power in the United States, resulting from the unprecedented increase in military staff and armament industries, which was likely to question democratic methods. The MIC concept includes the idea of an autonomous running of the military sector, of a close coalition between the interests of the defence industrialists and those of the military, both being interested in a rise in military expenditure. Its main members are the Department or Ministry of Defence, pressure groups in Parliament or Congress, the armament manufacturers, the army’s prescribers and specialized, notably academic research institutions. Even if the concept of the MIC is rather controversial, many economists acknowledge that the military sector’s specificity limits internal competition, favours a rise in costs, sometimes with the pressure of influential networks which are not willing to reach an economic optimum. Nevertheless, the military sector has considerable economic weight, notably in terms of emplacements, which increases the power of pressure the defence manufacturers have on political decisions. Seymour Melman (1971) was one of the first economists to put forward the negative economic effects of military expenditures in the United States, especially the loss of competitiveness, the development of bureaucracy, the fall in productive investments and the creation of the MIC. He even mentions a state of ‘permanent war’ (1974). Military expenditures are a waste, especially since the ratchet effects of the military sector on the civil sector, notably in the technological field, are very weak. However, economists don’t all agree on the expression of the MIC. Some economists of defence prefer to refer to the ‘defence industrial basis’. One of the © 2004 Fanny Coulomb

major criticisms against the MIC concept was that it didn’t particularly help to understand the interactions between the economy and the military sector, because it’s an empirical, descriptive and static concept, unsuitable for the study of dynamic effects; it would notably lead to a neglect of the long-term consequences of the arms industries, especially technological ones. Moreover, it is difficult to empirically reveal the MIC’s real influence on military waste. ‘Military Keynesianism’ and its criticisms The Keynesian analysis emphasizes the role of demand in the explanation of the relation between economic growth and military expenditure. Military expenditure is considered to be one area of public spending liable to be used by the interventionist State to increase the national product, owing to a multiplier effect in a situation of insufficient global demand. If the aggregated demand is weak compared to the productive potential, the increase in military expenditure leads to an increase in demand, a development of profits and boosts economic growth. However, economists also used ‘Keynesian’ reasoning to demonstrate how military expenditure exerts a negative effect on economic growth. In 1944, Beveridge showed that unemployment had decreased during both world conflicts and considered that a total war could be seen as a radical solution against underemployment. He believed that State intervention in the economy in wartime explained these good results and that it should be maintained, even after the return of peace. Full employment is a necessary condition of international trade expansion and a social imperative; but this aim should be reached through peaceful measures of economic interventionism rather than through war or a rise in military expenditure. Beveridge therefore recommended the use of national economic planning and the control of prices, wages and profits, as well as the development of public spending, even if this implied a budgetary imbalance. Other theoreticians, especially Robinson and Eastwell (1973, book 3, Chapter 1), contested the ‘Keynesian militarism’ principles more systematically, according to which military expenditures are a decisive factor in the economic stabilization of capitalism. In Robinson’s opinion, the Keynesian analysis doesn’t give enough importance to the utility of each investment. Governmental investments in armaments to fight against unemployment and the fall in profits can only have short-run positive effects. In the long run, military expenditures turn out to have a negative economic effect; they are fundamentally useless and represent a waste. Even if an arms race can contribute to limit certain cyclical economic crises, capitalist societies are still unable to eradicate internal poverty and to help developing countries to reach a minimum level of prosperity. In opposition to the theories of the permanent arms economy (in Melman’s own words), some authors of the Keynesian–Marxist movement consider that militarism represents an economic parasitism, and that only a small part of capital benefits from military expenditure, at the expense of the other capitalists and of the entire population. Defence manufacturers benefit from a permanent © 2004 Fanny Coulomb

levy on the federal budget and they have an interest in the continuation of an arms race. Mary Kaldor (1982) and E.P. Thompson (1967) consider that the system of arms production is the cause of militarism; an arms race would thus be mainly internally, not externally, determined. This explains several characteristics of the military sector, notably the length of the production cycle, the nonsubmission to market rules, or the pressure of particular groups at the expense of the general interest. McKenzie also analysed the specific characteristics of arms production, which can turn out to have negative economic effects: the lack of competition, the limited number of suppliers, the State as the only buyer, the lack of respect for time limits, an overestimation of costs. However, McKenzie (1983) mentions that the militaro-industrial complex is not all-powerful, and that the evolution of American military expenditure still strongly depends on the international situation. The MIC’s power interacts with other, bigger structures, the State and the international system of States. In fact, militarism is a complex phenomenon, and not an exclusively economic one, which raises the problem of its definition. McKenzie also debated on the idea that the technological innovations of the military sector have important positive effects on the civil sector. In his opinion, the economic effect of military expenditures differs according to the period considered. At the end of 1940s, the spinoffs of the military research on the civil sector were important (notably for the aircraft industry, electronics or nuclear energy). At the time, military expenditure contributed to encourage domestic demand in the United States; they favoured the absorption of the surplus, therefore preventing crises of over-accumulation. Furthermore, owing to their international economic and military hegemony, the United States captured new markets through economic assistance, like in Western Europe with the Marshall Plan. But afterwards, the beneficial economic effects of military expenditures decreased. Military products became more and more technologically complex (‘baroque’), and thus less and less liable to benefit the civil sector. However, McKenzie considers that the loss of economic efficiency for American military expenditure is mainly explained by the contesting of American supremacy by Japan and Europe. Besides, nothing proves that the alleged positive economic effects of military expenditures could not be reached through other public expenditure, in the civil sectors. From the 1970s onwards, numerous econometric models and analyses enriched the debate on the impact of military expenditure on the main macroeconomic variables (unemployment, inflation, growth, etc.) and strongly contributed to the establishment of defence economics as an autonomous field of analysis. War, an essential factor for the American model’s durability: the report on the ‘undesirable peace’ prefaced by Galbraith In 1967, a secret report written by a group of anonymous economists and prefaced by J.K. Galbraith, on the question of the utility of wars was published in © 2004 Fanny Coulomb

the United States and entitled Report from Iron Mountain on the Possibility and Desirability of Peace. It aimed at determining the possible implications of a lasting international peace on the American society. It studied the hypothesis that the world wasn’t ready to face all the economic, as well as political, sociological, cultural and ecological consequences of a large-scale disarmament. The authors put forward the hidden functions of war, such as social stability or the promotion of national interests. Thus, the important problem is to determine how to minimize the consequences of world demilitarization, in particular to find institutions (or expenditures) liable to replace the military sector. The methodology and the arguments of the report are both connected to Keynesian and Marxist theories, but also to ‘neo-mercantilism’. Halfway between political economy, political science and sociology, the report considers military expenditure as one of the major bases of the contemporary capitalist system. The economic effects of disarmament are difficult to estimate, notably because the non-military functions of wars in modern societies should be taken into account: •

• •

an economic function: war (or its preparation) entails the implementation of a ‘safety margin to stabilize the economies in their march towards progress’, it is a factor of ‘inertia’. War is a major factor in the rise of the gross national product, because it contributes to solve the problem of the stock surplus. a political function: the international policy diverts the public’s attention from internal political problems, therefore reinforcing social cohesion. a sociological function: war and military institutions are used to channel the ‘antisocial elements’, they represent ‘safety valves’ against movements of social unrest. Indeed, military service strengthens patriotism and the control of hostile elements. Moreover, conscription contributes to the regulation of the unemployment rate. Finally, the government often resorted to military principles or measures when serious social crises occurred or so as to make certain measures of social reform accepted.

The report ascribes other important functions to war, especially an ecological rule, in so far as war contributed to the survival of human kind in the past, and a cultural and scientific one, inasmuch as war favours numerous discoveries in these fields. Thus, a system based on war cannot disappear without creating irreparable damage, unless substitutes are found. Social programmes (health, education, housing, transport) or space research are only imperfect substitutes for war, the main function of which is political; a substitute for war implies the existence of ‘enemies of replacement’. Some ideas, however, seem more promising than others, such as space research or technological competition in the context of an economic war. The authors of the report regret that the military sector is ruled according to the principles of ‘laissez-faire’, and that nothing is done to determine: © 2004 Fanny Coulomb

• • • •

the level of arms production that is most favourable to price control; the factors of correlation between the policies of military conscription and social discords; the minimum population decrease necessary to maintain the credibility of a war threat; the most appropriate cycle of frequency for the triggering of ‘warm’ wars.

As a conclusion, the report recommends the creation of a research agency on war and peace. This very original analysis, which found a wide echo when it came out, hasn’t been pursued; it stands on the borderline between economic analysis and political sociology, but it can also be considered as a continuation of some of the heterodox analyses developed after the First World War, which studied the part played by war and military expenditure in the stability of capitalist structures. Some other heterodoxies Pursuing a certain ‘heterodoxy’ born in the 1920s, which analysed the structural characteristics of capitalism and the role of war in its development, Walt Rostow (1960) has developed an original theory, according to which war represents an important moment in national economic development. He believes that economic development is characterized by a succession of five stages. The first one, agricultural, is the traditional society. The second stage creates the conditions of economic development, owing to agricultural progress, to the development of a centralized State based on nationalism and to the conflicts with the other ambitions. The starting stage leads the society towards a cumulative and irreversible economic growth. The society is often characterized by political revolution, new markets, as well as armed conflicts. Society then reaches the stage of maturity, followed by one of mass consumption. Conflicts and wars accompany this historical evolution. Therefore, colonial wars characterize the first stages of development; they widen markets and limit the power of possible competitors; regional wars are provoked by new developing nations; mass wars are the result of a gap in the nation’s process of maturity. When a disequilibrium occurs in a given area, a conflict appears. Germany, Japan and Russia wished to use their new economic maturity but the leading power, the United States, put an end to these attempts. Rostow criticizes the Marxist analysis, even if analogies with his theory can be found. From his point of view, people are not only interested in profit, but also in power, security, employment, family, and solidarity. The communist experience must be rejected because it leads to dictatorship and is in fact only a disease of the transition period. It is impossible here to make a complete presentation of all specific analyses on the causes of war and on defence that have been developed since 1945. We shall just quote the analysis of the French economist F. Perroux (1958), on the ‘peaceful coexistence’ between East and West. He showed that the national, © 2004 Fanny Coulomb

regional or international logic of war exerts strong tensions on economic structures and they establish class or domination relations between nations. The rise in military budgets, because of the influence of the militaro-industrial complexes, diverts wealth and reduces the means of development. Even the development aids benefit the struggle between both systems and mainly consist of the export of weapons, ideologies and people, enabling the dominant economy to widen its sphere of influence. Therefore, this ‘paradoxical’ aid favours the destabilization of the rest of the world. The twentieth-century economy hasn’t succeeded in feeding, treating or freeing everyone. The poles of growth provide a strong impulse, but the economic development is unevenly distributed throughout the national territory. In fact, the domestic economies should break up and trade should develop until the sovereign State becomes old-fashioned. The gaps between the socialist and capitalist systems should gradually disappear, owing to peaceful coexistence.


Part 3

From new debates opened by economics on peace and war factors to a resurgence of the political economy perspective The analysis of war and peace greatly changed from the 1960s, with the use of mathematical and formalized methods, to study several questions linked to strategic matters, as well as the economic impact of the military sector. With analyses which become more and more technical over time, defence economics establishes itself as an autonomous field of analysis, as does peace economics, with thoughts on military expenditures and on arms races. As well as this high specialization of the study on conflicts and on the military sector, a more traditional debate reappeared, which is based on previous analyses, in particular on the issue of the relationship between trade and conflicts. Indeed, besides the liberal analyses on globalization, several studies focus on economic power relations, notably with the concept of economic war. The link with the analysis of war is two-fold: some analyses deal with the use of the economic weapon as an instrument of political or military pressure; the relationship between the military sector and the civil sector, in a historical and institutionalist analysis, is once again discussed. Thus, the debates of ‘economic science’ and a political economy coexist.


6

Peace and war factors revealed by economic science

Neo-classical theory ignored defence issues from the end of the nineteenth century, as if international security and even war were outside the field of economics. This caused a relative disinterest in defence economics and a lack of debate on the economic bases of violence and on conflicting interstate relations. Economic studies focusing on economic variables of arms races, or more generally on the strategic decisions of national and international security, only developed at the beginning of the 1950s. Defence economics therefore established itself as an autonomous field of work, owing to modelling, statistics and econometrics. Other questions have been studied with these mathematical techniques, and particularly the economic impact of military expenditures. Until the 1960s, economists had never thought about demonstrating that the sums allocated to defence could have a negative economic effect, except through the denunciation of their unproductivity, in a deductive reasoning. The fact that the defence budget can exert an autonomous economic role, as a separate element of the economic policy, was not taken into account. The development of empirical studies on war and military expenditures opened new perspectives to economic thought on these issues.

The economic analysis of defence strategies The prevalence of neo-classical theory in the twentieth century entailed a relative lack of interest of economists in defence issues or interstate conflicts. However, in the context of the Cold War, economic methods of formalization and econometrics were used to study issues of national and international security. Arms race models, notably Richardson’s, opened up the way to numerous studies underlining the interdependence of economic, political and strategic variables in situations of interstate conflicts. The economy is then perceived as a factor of conflict ‘reduction’, as it has a ‘stabilizing’ effect.


The economic factor: an only weakly explicative variable of military strategies Richardson’s model and its repercussions: the ‘stabilizing effects’ of economic variables in the arms race An arms race can be defined as a dynamic process of interaction and of competitive increase of the quantity and/or the quality of armaments between two or several States (or a coalition of States), resulting from conflicting objectives or from mutual fears of nations. The first arms race model was developed by Richardson: it opened the way to a renewal of economic studies on defence and peace issues, in the particular context of the Cold War. However, even if the reference to the competition between the Warsaw Pact and NATO seemed implicit in many analyses of an arms race, the models contained no variable specifying the type of economic organization (market or planned economies). The arms race models can be more generally used to explain phenomena such as guerrillas, regional conflicts, but also international disarmament. In Richardson’s model, the economy represents a constraint in the unlimited increase of armaments. Some analyses later tried to better integrate the economic constraint into the model. However, most of the literature on arms races concentrates on strategic issues, and the link with the economic theory is, above all, methodological. However, in his work of 1960, Richardson already insisted on the importance of studying the links between peace and international trade development. RICHARDSON’S MODEL (1960) AND ITS CRITICISMS

Lewis Fry Richardson was a British meteorologist. As a Quaker, he had strong pacifist convictions. His studies on ‘arms races’ aimed at showing their importance in the triggering of international wars, particularly since the beginning of the twentieth century. His first differential equations were published in a series of articles written in 1919, and then combined in a book in 1939. However, his work Arms and Insecurity, published in 1960, which resumed and enriched the previous studies, is the one that became the most famous. On the eve of the Second World War, Richardson called for the immediate spreading of his ideas in American newspapers in order to contribute to the governments’ awareness of the perverse effects of their defence policies and to prevent a second world conflict (Richardson 1960: ix). However, this call had no echo. Richardson’s ideas only became more popular at the end of the 1950s, notably owing to Anatole Rapoport’s work (1957). However, the model became widely discussed and followed, mainly throughout the 1970s. Richardson aimed to show that the process of arms accumulation had no pacifying effect, although it implies a search for a strategic equilibrium. He does not try to foresee the moment of war’s outbreak; he mainly aims at warning people about the ‘antisocial’ character of the acts which their instincts or their determinist strategies (of Pavlovian type) would lead them to express (1960: 12). © 2004 Fanny Coulomb

With two simple equations, he describes an arms race process between two nations, which, according to the values of the parameters, may or may not degenerate into an open conflict. The explanatory capacity of the model is important, because it expresses at the same time the political, strategic and economic constraints to which States are subjected when determining their defence budget. Richardson’s model (1960) is based on the representation of an international system composed of two States (or homogeneous and allied groups of States) with divergent interests. It expresses three ideas. • •

•

First, a country’s defence depends on the threats it is faced with. The arms level of the opponent country has an influence on the domestic arms level. Second, the cost of armaments is taken into account: it exerts a stabilizing effect over the international system. Nowadays, one refers to the ‘economic burden’ of armament. However, Richardson’s ‘fatigue coefficient’ doesn’t only reflect the cost, but also the ‘social viscosity’: for its estimation, one must consider the necessary delay between the changes in the relations with the opponent and the perception of these changes by public opinion; the opposition of people working in defence industries must also be taken into account. However, the main limit of Richardson’s model lies in the fact that it implies perfect information (notably on the military expenditures of the opponent) which may seem unrealistic. Finally, Richardson completes his model with a ‘grievance coefficient’, which includes specific political factors: as an example, he states that the arms race during the First World War had been generated by nationalist ambitions of annexation or territorial conquest, and not only by an action–reaction process on arms spending.

The standard representation for this model is: dx/dt ky x g dy/dt lx y h with: t: the time; x: the cost of national defence for the country x; y: the threats faced by the country x. To simplify, y is considered as the threat of a single nation y; k and l are positive defence coefficients, often inequal. and are positive constants, representing respectively ‘economic fatigue’ and defence expenditures; g and h are constants representing the grievances and ambitions of the two States (aggressive intentions). © 2004 Fanny Coulomb

The three terms of Richardson’s model therefore represent, respectively, the strategic factor (national security), the economic factor (the problem of fatigue or the cost of armament) and the political factor (grievances). According to the value of the parameters, these equations will characterize different patterns of international situations. Indeed, the arms race can be stable (no war in the long term) or unstable (likely to lead to a conflict). The main results of Richardson’s model may be summarized in Table 6.1. Richardson pursued his study by modelling the relation between international peace and the development of ‘co-operations’ between States, notably through trade. The interactions between the defence policies of two countries could therefore just as well lead to co-operation or to rivalry. Coefficients of defence equal to zero correspond to a peace situation; a negative value means that both countries co-operate, the development of international trade being in his view the most significant type of co-operation (1960: 19). This part of his research isn’t very well known, although it represents an important part of his work. The lack of relations statistically demonstrated between peace and foreign trade can partially explain this. Richardson’s econometric results, based on regression analyses of least ordinary squares and their related tests, are generally considered as little significant as well as weakly appropriate (Rashevsky and Trucco 1960; Schrodt 1978).1 Several other criticisms of Richardson’s model were developed. Some economists (Sandler and Hartley 1995: 186; Luterbacher 1977: 204) notably underlined the fact that it in no way explained the process of conflict outbreak. In theory, an unstable arms race can lead to an infinite arms increase for each party, without degenerating into a war. Other criticisms were developed on the linearity of behaviours, which did not necessarily square with the strategic reality. For example, a stable situation can degenerate into an explosive situation; an unstable cyclical interaction between two nations can also stabilize in the long run. Besides, Richardson’s model presupposes perfect information on the opponent’s level of military expenditures, which doesn’t seem very realistic.2 Table 6.1 The main results of Richardson’s model Results

Signification

ky x g lx y h lk lk g 0, h 0, x 0 and y 0 g 0, h 0, x 0 and y 0

Arms race

x 0 and h 0 x 0 and h 0


Stable arms race equilibrium Unstable arms race equilibrium Disarmament and ‘permanent peace’ Unstable mutual disarmament: dx/dt g dy/dt h Stable unilateral disarmament Unstable unilateral disarmament (and reciprocally for a unilateral disarmament of y)

Two other criticisms have been the subject of important developments, which have contributed to enrich the economic analysis of the arms race. First, some studies considered that the way Richardson treated the cost constraint, represented by the importance of the GDP, was insufficient. Indeed, the model does not contain any other constraint of cost than the size of national revenue. However, military expenditure has obviously never reached the level of total national income. In 1967, Caspary (1967) introduced into the arms race model the idea of a maximum level of resources devoted to increase the military potential, which a country cannot exceed. In the 1980s, Luterbacher (1977) also sought to go deeper into the analysis of the cost constraint, which led him to build a model much more complex than Richardson’s. However, the analysis of the economic limit to the arms race has generally remained undeveloped in defence economics, which can seem regrettable. Second, other studies criticized the overly superficial way Richardson treated the national policy, i.e. of the internal determinants of military expenditures. Thus, since the 1970s, models explaining military expenditures through an action–reaction process have often been opposed to those insisting on the internal determinants of arms increases, thus following the incremental analysis. Similarly, the ‘bureaucratic’ models insist on the importance of the past levels of military expenditure as explanatory variables of the current level; this is called ‘bureaucratic inertia’ (Sandler and Hartley 1995: 193). Models of ‘stock adjustment’ have also been developed (Intriligator 1964; McGuire 1977): they underline the difference between wished and actual levels of defence budgets, therefore considering the socio-economic constraints. These models were derived from Boulding (1962), which presented the arms race differently from Richardson, notably by using a graphic resolution method. Besides, numerous empirical studies have been led to compare the internalexternal causes of the level of national military expenditures. They generally considered that both explanations of the levels of military expenditures equally applied: the ‘bureaucratic inertia’ and the interaction with the levels of military expenditures of opponent countries. Indeed the internal groups in favour of or opposed to an increase in military expenditures would have more or less influence depending on the action of the opponent country. (Lambelet et al. 1979; Williams and McGinnis 1992). The theory of public choice was also used at the beginning of the 1980s to underline the internal determinant of defence expenditures. According to this theory, the State mustn’t be perceived as a simple entity. It is the sum of the particular interests of the groups or individuals which compose it. State intervention can thus be criticized, as far as it doesn’t answer the general interest; it results from the pressure of special interest groups, each trying to maximize its utility. Therefore, public choice models aimed at showing how the action of the various pressure groups (voters, political parties, State bureaucracies, interest groups of producers and consumers, the international community, international agencies) influences the national defence policy (Hartley 1987). Moreover, some studies showed the relation between the political cycles and the signature © 2004 Fanny Coulomb

III Supply quadrant

C Production of civil goods

II Demand quadrant Indifference curve Social utility function Preference of society between civilian goods and security

C* Production possibilities frontier (guns–butter dilemma)

Security– consumption frontier

M*JP

SC* Se Perceived level of national security

MJ Production of military goods

M* J

Line of military goods stocks-flows Security function S

IV Supply quadrant

I Strategic quadrant

M Arms stocks

Figure 6.1 Resources allocation in the Nation J (source: Charles H. Anderton, ‘Teaching arms-race concepts in intermediate microeconomics’, Journal of Economic Education, Spring 1990, pp. 148–166).

of contracts with arms industries. Other studies denounced the ‘bureaucratic’ growth, leading to problems such as an underestimation of project costs. However, the empirical tests of this type of explanation of military expenditure determiners weren’t numerous or conclusive. FURTHER DEVELOPMENTS OF ARMS RACE MODELS

Since the 1970s, the hypothesis of maximization under the constraint of the social utility has been introduced in almost all arms race models. This continuation of the basic model led to a systematic presentation of the allocation process of economic resources to the military sector. Richardson’s model describes the change in a country’s arms stocks in answer © 2004 Fanny Coulomb

Table 6.2 Some studies based on Richardson’s model Study

Method

Link with economy

Main conclusions

L.F. Richardson (1960) Arms race model between two countries. System of two equations representing military expenditure variations of each country.

Military expenditure of each country is represented by a differential equation. Three coefficients: • ‘fatigue’ term (economic) • ‘defence’ term (strategic) • ‘grievance’ term (politic)

‘Fatigue’ represents the economic burden and expenditure for the maintenance of the same level of defence. It is an element restricting arms-race development. Moreover, trade exchange development between the two countries (co-operation) exerts a restrictive influence on an arms race.

This model allows the specification of several international situations. According to the value of parameters, the reached equilibrium will be stable or unstable. The aim of the model is to show governments the perverse effects of an arms race, and to incite them to co-operate. Empirical tests are rather satisfactory.

K. Boulding (1962) Graphical presentation of an arms race model of Richardson’s type. It is then formulated as an equation.

The hostility level, and not the armament level, is taken into account. An initial level of hostility and a reaction term are introduced in this model.

The economic element disappears in this presentation. It may, however, appear in the reaction coefficients (more or less flexible economy).

This model is less mathematical than Richardson’s. It defines the hostility level rather than the armament level. The idea of proportionality is introduced: each term of the equation is multiplied by a constant.

Intriligator (1964) and McGuire (1977) Stock adjustment models. An arms race is represented by variations of armament budgets level of the two countries.

A system of two equations representing the variation of the armament budget level of each country. The desired level depends on the initial armament level and of the reaction coefficient.

The relation with the economy is not explicit, but economic constraints may partially explain the gap between actual and desired levels of armament budget.

This model is close to Richardson’s, but it underlines a specific problem: the defence budget adjustment proportionally to the gap between expected and real level. continued


Table 6.2 continued Study

Method

Link with economy

Main conclusions

P. Schrodt (1978) A study of statistical problems associated with Richardson’s model and of its empirical test’s significance.

Richardson’s model is used under a ‘finite’ rather than ‘differential’ formulation. The statistical models used for an empirical application are discussed.

The validity of econometric estimates based on Richardson’s model is questioned.

• R2 cannot be a reliable indicator of • error variance. • Almost all parameter estimates of • the model are biased, which • invalidates the determination of an • equilibrium point of an arms race.

M.D. McGinnis (1991) The superficial treatment of national policy by Richardson limits the pertinence of his work. A model of rational expectations is used.

The rational expectations hypothesis is tested for the behaviour of deciders on armament. Information access problems on adversary strategy and the internal political consequences of an arms race are discussed. Decider’s anticipations of future external threat and of domestic opportunity costs depend on the rival strategy and of the economic system performances.

The level of national economic performance is taken into account, as well as the ‘fatigue’ term of Richardson’s model. The ‘opportunity costs’ of each policy are evaluated. Individuals are able to modify their behaviour, even if they make errors of perception. Owing to information insufficiency about the adversary’s military expenditure, rational expectations models are more ‘incrementalist’ than the ‘action–reaction’ type.

The single study of military expenditure may lead us to wrongly conclude to the non-reaction to an adversary’s military expenditure. But the rational expectations model shows that military the expenditure of a rival State is not affected by past values of an adversary’s military expenditure. The rational expectations hypothesis is then verified.

J.C. Lambelet, U. Luterbacher and P. Allan (1979) Reconciliation of actionreaction models and incrementalist models.

Analysis based on Richardson’s type model of arms race. The impossibility of constructing military expenditure adversary’s models without considering military expenditure, or, on the contrary, the internal economic and political determinants, is underlined.

Mutual stimulation models must The dichotomy between models of introduce the limit raised by the action–reaction type (Richardson) economic resources. and incrementalist models is artificial. Socio-economic internal Internal and external determinants constraints are not sufficient to are simultaneously taken into account explain the choice on military in military expenditure expenditure: the opponent action determination models. always has an influence.


J.T. Williams and M. McGinnis (1992) Dynamic analysis of the interaction of two superpowers military expenditures. Richardson’s model is widened, so as to integrate the whole ‘rivality system’ between the two countries.

Rather than study arms races, it would be more pertinent to study the whole ‘rivalry system’ between two superpowers. A general model of two rival States’ foreign policy is set up. A one-factor, simplified model is presented. Empirical tests try to demonstrate what proportion of foreign policy is determined by the rivality system. The model is written under a dynamic form.

Even if empirical tests seem to demonstrate that internal determinants are more explicative than external ones, this does not invalidate the hypothesis of reaction to an increase of an adversary’s military expenditure. But one must consider the fact that this reaction may have several forms, such as commercial sanctions, alliance membership, etc.

States may use many foreign policy instruments to ensure national security, besides an increase in armament levels. Empirical tests aim to show that foreign policy measures of States are almost always determined by the rivality system. But information insufficiency limits the validity of results.

K. Hartley (1987) Analysis of military expenditure with public choice theory.

The contribution of public choice theory to United Kingdom foreign policy is presented. The relation between annual defence programmes and employment levels is tested.

Some groups within the nation influence State action, which results from an arbitration between those groups. The specificity of public decision affects: • the conclusion of defence • contacts in the defence industry. • the underestimation of project • costs.

Vote mechanisms are limited for the setting up of a defence policy which corresponds to society’s preferences. Defence programmes are related to political cycles. State action does not correspond to the general interest. Econometric tests do not show the relation between defence programmes and civil employment levels, contrary to government assertions.

This model takes into account ‘natural’ economic limitations opposed to the continuation of an arms race, with the integration of a new cost constraint in the economic growth rate equation.

This model is composed of two differential equations, allowing a better integration of internal economic and political limitations. Tests on the relation between the United States and the Soviet Union during the 1947/1965 period are satisfactory.

U. Luterbacher (1977) • A resources threshold limits An arms-race model, with a new • military expenditure increases. formulation of the cost constraint. • Fatigue makes the limit of • social groups opposition to • armaments increase. • Military expenditure increases • are based on differences of • perception on their respective • levels. © 2004 Fanny Coulomb

to the evolution of the opponent’s stocks. However, it does not explain how this country is led to adopt such a strategy, i.e. how it elaborates its reaction curve. The hypothesis of the maximization under constraints of the national utility function provides an answer to this question, by introducing the population’s preferences into the model. This function is indeed constituted by the aggregation of the individual indifference curves for two goods, namely security and non-military goods. Security is considered as depending on both the national and the opponents arms levels (even if this hypothesis is not always demonstrated). Therefore, the model represents an arms race differential game between both opponents (Chatterji 1992: 97). Owing to this addition, ‘normative’ analyses can be followed, based on the postulates of rationality and of maximizing behaviour, which go beyond the ‘mechanical’ character of Richardson’s equations (Brito and Intriligator 1995: 133). In 1965, McGuire was the first economist to consider the hypothesis of utility maximization in an arms race model. His method enabled him to introduce strategic considerations, notably with the choice between weapons of attack or weapons of deterrence (McGuire 1965). However, the static character of this model is one of its limits. In 1972, Brito defined security as being a function of both countries’ arms stocks. This model (Brito 1972) became the base of the strategic dynamics analyses of the nuclear arms race developed by Brito and Intriligator during the 1970s and the 1980s (Sandler and Hartley 1995: 214). In Brito’s model, the chosen allocation between civil and miltary goods is the one which maximizes the following function (at any point in time ):

e

Ji( )

ri(t )

U(ci, D(wi, wj))dt

With: wi: the arms stock of country i; wj: the arms stock of country j; Di: the level of security of the country i, depending on the arms stocks of the two countries; Ui: the utility function of the country i, which represents the social welfare of the country i; ci: the level of civilian consumption; Yi(t): the net national product of country i; zi(t): arms expenditures at time t; i: the depreciation rate of the arms stock; ri: the updating rate; t: the time. And with two resources constraints: Yi(t) ci(t) (t) zi(t) wi zi(t) iwi © 2004 Fanny Coulomb

However, the problem of the indetermination of Richardson’s coefficients remains. In other words, the analysis gives no information about the importance, the virulence or the inertia of each protagonist’s reactions. The equations of arms race models can be graphically presented, in a ‘diagram with quadrants’. With this presentation, introduced by Intriligator and also used by Anderton (1990), one can visualize, at the same time, the strategic and economic problems with which a nation is faced when involved in an arms race. In Anderton’s model, a nation, J, is involved in an arms race with a nation, L. It is presented as a unique and rational actor, maximizing its social utility function, under constraints of resources and of stock adjustment with the rival nation. National prosperity is presented as a function of civil consumption and of national security. Se f(Mj, ML, ) The shape of the ‘production possibility frontier’ (guns–butter curve) is: T(C, MPJ, K , L ) 0 The following variables, for a nation J, are: C: the production of civil goods; K: the capital stock; L: the labour stock; MJ: the military goods stock of the current year; MPJ: the production of armaments of the current year (the author makes the distinction between stocks and flows); MJt–1: the production of armaments of the previous year; ML: the quantity of military goods in the nation L; d: a coefficient of depreciation; Se: the level of national security perceived by the nation

: a parameter reflecting the quality of military goods in J and L, and the state of the international environment. This parameter is not very homogeneous. It represents all the other exogenous factors modifying the security of J. Anderton then sets out the following equations. The security function has the form of a production function, as national security can be analysed as a non-traditional economic good for which nations have specific preferences: Se f(Mj, ML, ) The ‘frontier of production possibilities’ (guns–butter curves) is of the shape: T(C, MPJ, K , L ) 0 (Quadrant III) © 2004 Fanny Coulomb

The society’s preferences between civil goods and security are represented by the social utility function: U = UJ(C, Se) (quadrant II) The indifference curves of the society are used to represent these preferences. Anderton shows all the determinants of the arms race in the same graph with quadrants. He first presents it statically, then dynamically. The static representation (see graph no2) shows the process of allocation of resources between civil goods and military goods in the nation J. From the choice by the nation of a level C* of civil goods and of level MPJ* of military goods, the current stock MJ* and thus the level of security Se* can be deduced. Anderton then shows the reaction of nation J to an increase in nation L’s armaments. Ceteris paribus, any increase in L’s military expenditure leads to an increase in J’s military expenditure and stocks of armament, to a decrease in civil consumption and in the perceived level of national security for L. Any process of an arms race thus reduces the welfare function. When the equilibrium point of the arms race is reached, then the action-reaction process should stop. But Anderton quotes several factors which can revive the arms race. One of the nations can boost its economic growth by allocating a sufficiently important part of civil production to capital. The same result may be obtained through the reception of foreign aid, military or civil. Also, if one of the nations improves the quality of its armaments (at equivalent prices), then its security curve may move. Moreover, a stronger tension and hostility between both nations implies a reduction in the perceived level of security by both countries, thus provoking an acceleration of the arms race. Moreover, if a leader who favours military production comes to power in one of the countries, this would modify the strategic equilibrium between both nations. This simplified presentation of the arms race is then completed by an analysis of the behaviour of nations and notably whether they take into account the strategic reactions of the opponents or not when taking a decision. In summary, in an arms race process, the economic variables can be considered to have both upward and downward ‘stabilizing effects’. When the arms race develops, its increasing cost leads States to devote important resources to military ends. As a result, on one hand the financing of investments decreases in the civil sector (and thus limits the economic development potential) and on the other hand consumers and citizens express their dissatisfaction more and more (which can only be overcome, in a democratic society, by the collective acceptance of the necessary financial commitments to face the international threats). The more the arms race accelerates, the more the costs grow, until they go beyond the bearable economic limits; this (situation) should lead to recession or to war. When the arms race relaxes, and even more when a disarmament process becomes effective, the inertia effects of capital, people or research-development © 2004 Fanny Coulomb

in the military sector limit the potential reductions of the national military expenditures. But most of the studies on arms races developed since the 1960s have in fact rather neglected its economic aspects; strategic considerations have become predominant, all the more since progress in modelling techniques have greatly improved their formalization. The ‘strategic’ analysis and the point of conflict outbreak The use of optimization techniques led to a consideration of the arms race as a result of the States’ rational behaviour. But why and under which conditions is the conflictual option chosen among other possible strategies, even if the same result might have been reached through ‘less expensive’ strategies? The answer to this question implies a consideration of the strategic aspect of the actors’ behaviour, by using mathematical techniques, which refer to duopoly theory and game theory. The economic aspect isn’t put forward as a determining explanatory variable of a conflict. It only appears at the level of the economic constraint, or as the expression of a population’s preferences for civil consumption rather than for security. Besides, arms race analyses can be used to reveal the profits arising from disarmament processes or arms control. However, even if they are developed by economists, these analyses tend to neglect economic considerations, for the benefit of strategic ones. Economy only represents a secondary factor in most of the ‘strategic’ arms race models. Brito and Intriligator (1995) analysed the conditions under which an arms race could lead to war. Their analysis is above all strategic, and it is especially the methodology which is taken from economics. Using some aspects of duopoly theory, they considerably improved the strategic analysis of arms races. The first model was presented by Intriligator (1975). It was based on Brito’s (1972) work on the optimal allocation of resources between civil and military expenditures. Intriligator (1975) models an arms race between two superpowers (or two alliances), the respective armaments of which are given by the stocks of nuclear missiles, which are the determining factors of the States’ strategies. Later, Brito and Intriligator brought numerous refinements to this first analysis. In 1995, they integrate into their model some elements of the analyses on asymmetric information and the reasoning on discreet time, to study the very topical problem of nuclear proliferation. These two authors aimed at creating models which could determine under which conditions a nuclear arms race between two countries leads to war, or on the contrary to peace through deterrence. Their main concern was thus to determine under which conditions a stable strategic equilibrium could exist between two nuclear powers involved in an arms race. In his maximization model, Brito (1972) shows that, on the hypothesis of a ‘myopic’ behaviour of the States, an arms race leads to an equilibrium. Intriligator later used this development to elaborate an arms race model between two nuclear powers. © 2004 Fanny Coulomb

His model (1975) is based on the hypothesis that each nation follows a ‘Cournot–Nash’ behaviour. Moreover, a nation’s arms stocks are supposed to be stocks of nuclear missiles (which amounts to considering that only these weapons are decisive for defence strategies and excluding non-nuclear States). Besides, nations have two strategic objectives: • •

guarantee their deterrence potential, this being effective if the estimated damages for the opponent of a reprisal attack are regarded as unacceptable. have a sufficient level of armament to make a successful attack with complete impunity, i.e. without the reprisals of the target country being unacceptable.

Countries A and B can attack if their stocks of missiles respectively correspond to the following equations: (. . .)

ce

Cone of mutual deterrence A and B have enough missiles to deter the adversary

en

B can deter or attack A. A can neither attack nor deter B

err

Mb

Att ack Bh by as B to enou de gh t e en ou r A, b missi gh l to ut no es att A’s ack t de t

Graphically, the model is represented by a ‘cone of mutual deterrence’ (see Figure 6.2).

ce

rren

ete ’s d

les issi gh m t not u o n , bu as e k A h deter B attac to to h g u eno yA ck b Atta

B

Zone of war initiation B can attack, but not deter A (incentive to a ‘preventative attack’ against A)

E

Neither A or B can deter or attack the adversary

A and B can attack but not deter (Risk of a ‘preventative attack’)

Zone of war initiation A can attack but not deter B (incentive to a ‘preventative attack’ against B)

A can deter or attack B. B can neither attack nor deter A

Ma

Figure 6.2 Cone of mutual deterrence (source: D. Brito and M. Intriligator 1995). © 2004 Fanny Coulomb

Intriligator’s model formalizes the strategic interactions between two nuclear powers, whether these have objectives of deterrence or attack. However, one may have reservations about the following points. The hypotheses on the State’s ‘myopia’ and the fact that the opponent’s past levels of military expenditures are not considered, are unrealistic. This criticism may however be qualified, if the reasoning in terms of stocks is taken into account. This model insists on the strategic factors of a conflict, but not on its economic factors. The only link with the economic field regards the hypothesis of social utility maximization, i.e. the arbitration between military and civil sectors in the process of allocation of national resources. In fact, Brito and Intriligator use analytical methods that have been developed by economists, but they do not develop an economic approach of conflict determinants. Indeed, in this short-term analysis, economic variables do not have much interest. But, in fact, rather than explaining the whole mechanism of an arms race, this model presents the various possible strategies in view of the available stocks of missiles. Brito and Intriligator carried out numerous improvements to the 1975 model during the 1980s (see Table 6.3). Economic considerations were further developed, notably with the idea that a country may prefer to defuse a conflict that would be at its disadvantage, and agree on a transfer of resources in favour of the opponent. Their model of 1995 synthesizes all of these developments; it is also improved by an analysis in discrete time including the notion of information asymmetries. Richardson’s model is implicitly based on the hypothesis that the State will base its decision about military expenditure on a ‘static’ conception of the opponent’s military expenditure: he considers its current level, without taking into account the fact that the opponent will readjust its stocks of armament according to its own reaction. It is Cournot’s hypothesis of the State’s myopic behaviour. Brito and Intriligator introduced the concept of information asymmetries (only one of the countries knows the opponent’s utility function). Referring to duopoly theory, and directly linked with game theory, the leader–follower principle is then used. This principle takes into account practices of ‘disinformation’, so frequent in the economic and military strategies. Therefore, Brito and Intriligator’s model (1995), which reaches a high degree of complexity, almost exclusively explains war through imperfection of information. Thus, because both countries do not have all the information, war may occur, even when a transfer of resources would have been preferable. However, the importance given to the insufficiency of information as an explanation of wars may seem exaggerated. Economic aspects are not much expounded, although they remain present, with the fatigability factor and the optimization method of social utility under constraints. In fact, Brito and Intriligator’s model is especially intended to reveal the strategic implications of an arms race between two nuclear superpowers. Because of the specificity of these weapons, the fact that the analysis of strategic aspects prevails over (the © 2004 Fanny Coulomb

Table 6.3 Brito and Intriligator’s ‘strategic’ analyses and the point of conflict outbreak Study

Method

Link with economy

Main conclusions

Intriligator (1975) Nuclear arms-race model

• Each nation adopts a Cournot– • Nash behaviour. • The deterrence potential and • the reprisal potential are • introduced in the model.

Equations specifying the different possible strategic situations in an arms race are formalized. Graphically, these results appear in the cone of mutual deterrence.

The notion of ‘acceptable damages’ threshold is introduced. The ‘fatigue’ term does not appear in the four equations of the model.

Brito and Intriligator (1980) A deepening of the former model, with the introduction of the hypothesis of social utility maximization under constraints, and of the possibility of a resources transfer between the two countries.

Model of a game of two periods: 1 each country chooses between consumption and investment; 2 each country chooses between the use of force or of the threat of force. The possibility of a redivision of resources constitutes a stabilizing factor.

The method of social utility maximization under constraints is used. A country resources level is essential for the decision of whether to enter into conflict. War is explained mainly by information insufficiency. This situation prevents countries from choosing the transfer of resources, which would have been preferable. Wars initiated for economic ambitions do not appear in the model.

The model allows s presentation of different possible international situations. Several cases are studied, especially that of imperfect information (Cournot–Nash solution) or the one of asymetric information (Stackelberg solution). The different types of equilibrium are then explained.

Brito and Intriligator (1995) Analysis of the stability of the post-Cold War world, with the phenomenon of nuclear proliferation. The probability of a nuclear war is studied.

The consequences of the new strategic context after 1991 are studied. Probabilities are used, to determine the possibilities of a nuclear war outbreak.

Deterrence weapons are relatively more costly than destruction arms. Economic cost of nuclear armaments is a factor of the contemporaneous world. But the credibility of nuclear deterrence is reduced by the risk factor associated with its use. From now on, competition will be on conventional arms with advanced technologies.

In a disarmament, it is better to diminish the level of first-attack arms rather than of deterrence arms. But this choice is risky (quick obsolesence, risk of agreements non respect) and costly (relatively to destruction arms). The relative importance of nuclear armaments in comparison to conventional armaments is reduced. There is a return to the ‘policy of power’, led with conventional armaments.


analysis of) economic aspects makes sense. One advantage of these arms race models lies in the fact that they are not ‘historically dated’, although their development was favoured in the context of the Cold War between the United States and the Soviet Union. Most of the models built in the 1980s could apply to any confrontation between two nations, whatever their economic or political characteristics. These studies are thus still relevant today. However, the analysis of a particular example of an arms race implies the construction of a specific model, reflecting the specific economic and political characteristics of each of the countries in conflict. Such models are more empirical than those previously studied. For example, Manas Chatterji (1992) developed an arms race model between India and Pakistan, based on Richardson’s differential equations. Since the end of the Cold War, only a few studies have used action–reaction models to analyse the disarmament process. The interaction process would then exert towards a decline of military expenditures. Such analyses had already been conducted before 1991 to analyse the effects of a possible disarmament process between the United States and the Soviet Union. Our purpose here is not to make an exhaustive presentation of these analyses. For example, we can quote Pastijin and Struys’ study (1986), on the dynamic interaction between the military expenditure of NATO and of the Warsaw Pact. Their statistical tests showed (with suitable reservations as to the available information on the Warsaw Pact’s military expenditure) that the Warsaw Pact’s behaviour did not correspond to an action–reaction process, whereas NATO’s did. The military sector was considered to be playing a too-important part in Soviet foreign policy for military expenditure to be sensitive to economic fluctuations. The authors reveal the instability of a disarmament process: a reduction of NATO’s military expenditures could increase international tension. The authors conclude that it would be dangerous for NATO to decrease its defence expenditures, thus accelerating those of the Warsaw Pact. This conclusion was very close to Lambelet et al.’s (1979), who showed that international agreements on disarmament would only be effective if the arms race was ruled by the ‘mutual stimulation’ principle and not by ‘self-stimulation’. This problem has been more recently studied with agency theory, applied to the study of the technological arms race between the United States and USSR. Hirao (1994) analyses how the arbitration between the quality and the quantity of armaments is determined by the international arms race as well as by the national characteristics of the organizational structure of the government and of the military sector. Thus, Richardson’s model can’t easily be used to analyse disarmament. Besides, this model is linear, and does not take into account discontinuities, such as breaks in political order at the level of a single nation. Yet a disarmament process can modify in an irreversible way the balance of power between the various national groups, and engender political breaks which deeply modify the conditions of the interaction between the military expenditure of the ‘former opponents’. As well as disarmament, other strategic concerns of the post-Cold War © 2004 Fanny Coulomb

environment have been studied, including the risk of nuclear proliferation and the new instability of international relations. Richardson’s basic model has been improved, notably by taking into account the fact that armaments are not homogenous (conventional, nuclear, offensive, defensive or dissuasive weapons), thus refining the reflections on international security, especially in the new context of disarmament and nuclear proliferation. Brito and Intriligator’s analysis proved once again to be particularly interesting. From an extension of their model (1995), they warn against negotiations on arms control which would aim at decreasing the arms of deterrence. Only the arms of first attack should be limited by an international agreement, otherwise the system would become even more unstable. The reduction of deterrent weapons is possible, however, if it stays within the limits of the cone of mutual deterrence. However, to favour the weapons of deterrence rather than those of destruction entails a risk and a cost. Brito and Intriligator also consider that the nuclear proliferation of the post-Cold War years, as well as the greater world economic interdependence, tend to decrease the credibility of nuclear deterrence; the competition on conventional weapons becomes more and more determining. Non-linear analyses have been developed in the 1990s to describe the new instability of international relations and the uncertainties ensuing from the end of the bipolar system. New mathematical theories seem particularly appropriate to translate this uncertainty, notably the catastrophe theory. For example, Wolfson et al. (1992) presented a non-linear dynamic model of international conflict. The formalization of the arms race here reaches a high degree of complexity. Their model takes into account the ‘chaotic’ pattern of the arms race. The authors predict that this (kind of) application of the non-linear dynamic techniques to the study of international relations should have a bright future. Other analysts are more sceptical, and believe that the high level of complexity of these models considerably limits their interest.3 Many other studies based on arms race models have been developed since the beginning of the 1990s, too numerous to be evoked here. In their abundance and variety, they deal with several issues of international relations. However, these analyses do not take into account some realities of interstate relations, such as the possibility of co-operative strategies or the existence of alliances and international institutions. The integration of these specific issues has become possible owing to the development of a particular method of analysis, game theory. Game theory: a key instrument of the analysis of conflicts and security The fact that conflict issues weren’t taken into account contributed to fuel the criticism about the unrealistic character of neo-classical theory (Varoufakis 1990). But the development of game theory provided an answer to this objection. The solution of a game is obtained by the study of the actors’ behaviour, specified by a few hypotheses. Numerous concepts used in the analysis of duopoly or oligopoly directly apply to the study of interstate strategic relations. The applications of game theory to defence economics are not limited to the study of arms © 2004 Fanny Coulomb

races, nor international conflicts. They also extend to the issues of disarmament, interstate co-operation and the role of the international institutions. 1

2

Some studies develop a matrix presentation (or normal). The possible strategies of the various actors are represented in a matrix, each being estimated by a specific value. The analysis is particularly well suited to ‘political’ analyses and systematized presentations of various international situations. Other studies develop mathematical models. The ‘games’ are expressed in the form of differential equations. Very complex studies of interstate strategic interactions can then be developed.

Our aim is not to make an exhaustive presentation of the various contributions of game theory to conflict analysis; this has already been the purpose of other studies (Leitzel 1993; O’Neil 1997). We shall try here to show to what extent these contributions represent progress in the understanding of the relations between security and the economy. ECONOMIC COSTS AND BENEFITS OF STATE STRATEGIES ON THE INTERNATIONAL SCENE: THE PRISONER’S DILEMMA

Richardson’s model shows that two countries involved in an arms race could reach an equilibrium which was not a Pareto optimum, in so far as the same level of security could have been obtained at a lower level of military expenditure for each country. This seems to justify common initiatives of disarmament or arms control. This paradox of sub-optimality is well explained by the prisoner’s dilemma model, one of game theory’s basic models. Plous (1993), for example, analysed Israelo-Palestinian relations. He established the following matrix, from the results of a questionnaire sent to the various members of the Knesset.

Country A

Disarm Arm

Country B Disarm Arm 3,3 1,4 4,1 2,2

The retained principle is that the strongest values are those that are preferred. Thus, this model shows that the solution of mutual disarmament would have been more profitable for both countries; in other words, international security would have been better ensured in that case. However, in a situation where there is no information about the other party’s behaviour, both countries choose to arm themselves rather than to disarm. They thus adopt the nonco-operative solution. The paradox that is inherent to the prisoner’s dilemma game is that it results in a solution which is optimal for neither countries. Other matrix analyses have been developed, for example that of Jervis (1978). © 2004 Fanny Coulomb

A priori, such a matrix presentation is directly linked with the economy only if the actors’ preferences are considered as depending on the expected costs or profits of the different strategies. However, a matrix is more an instrument which helps to understand international strategic interactions, than a real instrument of economic analysis. Unlike the arms race models previously studied, this presentation is too abstract to include all the different aspects of specific international situations. For Luterbacher and Allan (1985), the problem is that game theory considers that decisions are taken by equal and not differentiated actors, with fixed preferences. Such models are thus unable to represent the dynamic interactions between ‘uneven’ States, which do not have all the same priorities or objectives. It would notably be necessary that game theory models take into account the improvement or the decrease in the military or economic potential of countries, because these changes affect their structure of preferences. Some mathematical game theory models, which will be presented later, dismiss, at least partially, this limit of the matrix analysis. The prisoner’s dilemma model may also be used to underline the hindrances to a disarmament process. Indeed, a nation can take advantage of another nation’s disarmament to increase its own level of armaments, so as to get a future advantage. Yet, the fear of a non-co-operative attitude of the opponent can prevent a nation from adopting a co-operative attitude. An agreement on arms limitation can fail, if the fear that the opposite nation will ‘cheat’ prevails. Moreover, the longest negotiations always concern procedures of verification. In the same way, the participation to an international peacekeeping institution can lead to ‘free-rider’ behaviours, even if all countries would gain in strengthening the deterrent power of this institution. Besides disarmament issues, the prisoner’s dilemma model can be applied to all situations in which two States are in strategic interaction, and notably an arms race (with the concept of ‘security dilemma’) or strategic alliances (Snyder 1971). INFORMATION: A CENTRAL ISSUE FOR INTERSTATE CONFLICTS

A State decides to co-operate or not at the international level from a subjective evaluation of the relative costs/benefits of co-operation and defection. Its information on the behaviour of other countries is thus a determining element of its choice. Imperfect information sometimes explains that a conflict occurs, even if in most cases States would have gained more by co-operating. Game theory shows that conflicts can arise from the rational behaviour of agents (a fact which neo-classical theory did not consider), in a situation of imperfect information, and in the absence of ‘convention’. The concept of the Nash equilibrium is used to characterize the various outcomes of a game. It defines a combination of strategies such as, given the decisions of the other players, no party would have been able to increase its gain by implementing another strategy. During an arms race between two countries, the equilibrium point at the intersection of both reaction curves is a Nash equilibrium: indeed, this situation represents the best possible choice for each country, given © 2004 Fanny Coulomb

the choices of its opponent. However, this implies that both countries simultaneously make up their mind in an irreversible way, which is only possible in the case of a lack of information about the opponent’s behaviour. Such a hypothesis doesn’t apply to the analysis of international relations (Nicholson 1989). Game theorists show that, if the interactions between players continue in the long term, then the prisoner’s dilemma model no longer applies. The notion of ‘repeated games’ is introduced, and the game is presented under an ‘extensive’ or ‘iterative’ shape (graphically, under the shape of a ‘game tree’). There is a repeated game (or super-game) when a game, J, always the same, is played either several times or indefinitely. The interest of a repeated game is to show how non-co-operative behaviours can result in a co-operative solution (provided that the game outcome remains unknown), which is generally the most profitable outcome. The solution of the game will thus be different from the one of the prisoner’s dilemma, which is not optimal. In a repeated game, the strategies are conditional: the threat of the future defection of the other party encourages a State to co-operate. With perfect information, an iterative game can result in several Nash equilibriums. The limitation of the information (because of its imperfection, of its asymmetry or of its cost) leads to a unique equilibrium. The multiplicity of Nash equilibriums under perfect information is demonstrated by Brams and Kilgour’s (1988) iterative conflictual game applied to deterrence. It is a classic example of the use of ‘game trees’ (iterative game) for strategic analysis. To determine a unique equilibrium, it is necessary to ‘refine’ the hypotheses of Nash equilibrium, by considering situations of incomplete or asymmetric information. ‘Sub-games with perfect equilibrium’ are then used: they describe the various possible outcomes of an iterative game. At the end of the 1960s, Harsanyi developed the study of games with incomplete information. For the economics of security, it represents considerable progress: indeed, the hypothesis of complete information about the behaviour of an adversary State is not very realistic. Conflicts can result from insufficient or asymmetrical information. Hargreaves-Heap and Varoufakis (1995) have shown the interest of the sub-games concept applied to the theory of arms races, with an analysis of NATO’s and the Warsaw Pact’s strategies during the Cold War. NATO’s strategy towards the Warsaw Pact was based on the MAD (‘mutual assured destruction’) system. In a ‘normal’ game, the strategic interaction between the two sides leads to two possible equilibriums. With the extensive form (sub-games), a single equilibrium is retained, which does not imply the application of the MAD strategy. This choice results from the fact that NATO’s threat to initiate a process of mutual assured destruction is not credible enough. By reasoning in terms of subgames with perfect equilibriums, one can exclude strategies implying excessive threats. Therefore, NATO was led to change its MAD strategy in favour of a ‘gradual reprisal’ strategy. Thus, the credibility of a threat is essential for the game outcome, because in a situation of imperfect information, i.e. uncertainty, States will determine their strategy by allocating a probability to each strategy. Nicholson (1989) applied this method to a situation of nuclear deterrence under a normal form. In addition, the ‘reputation’ of a player will be determining for the game outcome. © 2004 Fanny Coulomb

In a situation of asymmetric information (one of the players has the information but not the other one), the non-informed party can deduce its information from the action of the informed party at the previous stage. Learning games are then used. In addition, signalling games raise the problem of information revealing. They are used to study war situations: the parties in conflict can try to signal or mask their information. The question of information revealing is also central for the theory of contracts, in particular contracts concerning defence and security (Leitzel 1993). Contracts can be renegotiated as the information is revealed. Besides, political representatives can benefit from their private information, even at the expense of voters. Game theory can bring about other refinements to the analysis of international relations. Notably, Dixit and Nalebuff (1991) have shown that, in some games, misperceptions must be taken into account. A party can believe that the other one does not co-operate, while it cooperates, or vice versa. Moreover, uncertainty decreases as the game develops, because of the establishment of conventions, or even of democratic institutions (Kuenne’s theory of ‘mature–rivalry conflict’ 1989). Moreover, some developments of the game theory have shown that only the stronger power of international institutions can lead to a lasting international peace (Wagner 1983). Indeed, it decreases the risk of not detecting the opponent’s armament. In addition if an arms race results in several equilibriums, preliminary negotiations can make individual strategies coherent. However, the equilibrium will only be stable if there is a threat of the international community against all non-co-operative individual behaviour (‘opportunism effect’). In the arms race, a higher level of security could be reached with a co-operative strategy; however, this solution is not a Nash equilibrium, because the agents’ interest would be to deviate from this point, i.e. to defect. International institutions must enforce the agreements, notably by developing co-operation by means of a delegation, which already exists at the national level (with the State supplying security) and which can notably avoid free-rider behaviours. Such international institutions can also favour information sharing, which often favours co-operation and the coordination of the various parties’ actions. Indeed, the United Nations now supplies information on military expenditure, voluntarily given by States, and on weapons sales. Game theory helps to explain how co-operative actions can be followed in a non-co-operative environment, notably with the notion of a repeated game, and thus to clarify the mechanism of an alliance (a game with n countries). The ‘free rider’ concept is used to analyse the sharing of defence burdens within a military alliance. These studies, though carried out by economists, place a great deal of importance on economic aspects of conflicts. The theory of alliances Richardson’s model represented the strategic interactions between two nations. Other models have studied the interactions between two alliances, such as NATO © 2004 Fanny Coulomb

and the Warsaw Pact. However, the issue of a strategic alliance was the object of particular theoretical developments. The co-operation in defence notably implies a sharing of costs: economic aspects are thus important in these models. The alliance can be formalized by game theory. However, a major part of the vast economic literature on strategic alliances resorted to a standard neo-classic model, so as to study its economic consequences, or the issue of cost sharing. The founding model was developed by Olson and Zeckhauser (1966) . Using the instruments of public economy, it shows that the financial contribution of a country to an alliance is more or less important according to the relative size of its GNP. Therefore, the wealthiest countries are induced to support a greater part of the alliance expenditure than the average, and the relation is reversed for the poorest countries. ‘The hypothesis of the exploitation’ of the rich by the poor is thus revealed. This disparity in the sharing of the defence burden within an alliance is explained by the fact that the demand for national defence tends to increase with GNP. Olson and Zeckhauser tested the hypothesis of a positive correlation between the countries’ participation in the alliance and the level of their national income, measured by the ratio military expenditures/GNP. However, the empirical results with regard to the members of NATO weren’t conclusive (with a positive but declining relation). The alliance can be analysed as a collective good, of which it possesses all the characteristics. Notably, the construction of an alliance model requires the consideration of the allocation of costs between the alliance members, and thus the ‘free rider’s’ allocation. Game theory seems particularly appropriate to this study, as it determines the conditions of the allies’ co-operative or nonco-operative (‘Nash’) behaviour. The members’ decisions on defence are analysed in relation to the policies led by their allies. More than arms race models, the theory of alliance explicitly links the fields of strategic and economic analysis. Some analyses notably focused on the issue of trade relations between countries belonging to the same alliance, or the development of new armament technologies through common programmes. The theory of alliance thus opens a vast field of research with regard to the analysis of defence and peace, notably in the current context of the discussions about NATO’s future. The ‘standard’ model of alliance is generally a ‘pure public good model’. Its purpose is to determine the conditions under which a country, i, takes part in an alliance of n countries. The variables of the model are the following (Sandler, T. and Hartley, K. 1995: 21–24): U i: utility of the ally i I i: national income of the ally i, shared between: qi: military activity of ally i, that is the defence supplied by i, at the unitary price p y i: non-defence private good of i T: threat measure that may be represented by the enemy’s collective military expenditures ~ Qi*: resources allocation to defense of i’s allies. © 2004 Fanny Coulomb

It is then necessary to solve the following Nash problem: ~ max{U i (y i,q i Qi*,T)/I i yi pq i} y i,q i

The economic aspect appear mainly at the level of choice of resource allocation to defence, aiming at maximizing the welfare function. The fact that the analysis of alliance doesn’t take into account the strategic interactions between the allies and their opponents is one of its weaknesses. The ‘threat’ is indeed considered in an exogenous way, because of the static character of this model. Several attempts were made to reinsert the threat into the model (Bruce 1990; Hilton and Vu 1990). Another criticism of the standard model of alliance (as well as of the classical arms race model) is that it is based on the hypothesis of a Cournot–Nash behaviour. Yet, the existence of strategic interactions enables the allies to anticipate their mutual reactions. An improvement was carried out to the model with the hypothesis that allies had a ‘Lindhal’ co-operative behaviour (conflicting with the ‘Nash’ non-co-operative behaviour) (McGuire and Groth 1985). Numerous studies aimed at determining whether the behaviour within the alliances was co-operative or not. But the interpretation of the empirical tests carried out on this subject has raised several theoretical difficulties. Other improvements have been carried out to this standard model of alliance, directly connected with economic considerations. They notably concerned the issue of the various comparative advantages for alliance member countries in military production (Boyer 1989) or changes in the terms of trade between these countries, because of the increase in defence production by certain members (Wong 1991). Other models of alliance insisted on the distinction between nuclear and conventional weapons, at the level of the demand for defence (Hansen et al. 1990). Public choice theory can also be used to focus on the internal determination of each ally’s level of defence (Jones 1992). A second model, called the ‘model of joint production’, has also been used to describe the fact that the defence supplied by an alliance can, in the case of conventional armaments, be considered as an impure public good (Sandler and Murdoch 1990). Indeed, the rejection of the non-rivalry hypothesis of this collective good is justified when the number of users (or the level of use) of the alliance causes a decrease in available profits for the other users. Thus, the deployment of conventional forces can favour the protection of an ally at the expense of the others. Defence can also be considered as exclusive, if some decisions in the alliance are made in the absence of one or several allies. Some benefits of defence can also be privatized by allies, notably the protection of coastal resources, the maintenance of domestic order, the fight against terrorism or the preservation of a control over other territories. The sharing of costs within an alliance is therefore directly connected with the issue of internal economic choices within each nation. Game theory, in the theory of alliance, refocuses strategic analyses on economic issues. © 2004 Fanny Coulomb

The reintegration of economic considerations in models of defence economics A new analysis of the economic bases of arms-race models Economic issues don’t play an important part in the models analysing the nuclear arms race. However, during the 1990s, several studies refocused on the process of resource allocation to the military sector. Other economic aspects of ‘strategic models’ have also been widely discussed. The arms race begins, like all economic problems, with a particular choice of allocation of rare resources under economic (and technological) constraints. In arms race models, the choice of resource allocation between the civil and military sectors is called the ‘choice between the butter and the guns’. Once the ‘strategic’ choices of military planners and specialists of international relations are made, the defence budget is determined by taking into account the economic constraint. The final decision is on the curve of the frontiers of production possibilities between civil goods and military goods, i.e. the ‘guns versus butter’ curve. A higher level of investment in armaments can increase the feeling of security and thus welfare, but it also means that there are fewer available resources for consumption in the private sector; another constituent of welfare therefore decreases. Game theory better explains the government’s choice between civil or military goods, in the process of social utility maximization. For example, Van der Ploeg and de Zeeuw (1990) criticized the lack of economic foundations in arms race models. They therefore underlined the importance to the ‘guns–butter’ dilemma. The process of resource allocation between the military civil sectors depends on the way the opponent’s behaviour is perceived. In fact, these authors used game theory to show that, according to the hypotheses formulated on the States’ behaviour, the conclusions with regard to the benefits which can be gained from an interstate co-operation policy in armaments were very different. Their model represents two different economies, a decentralized one (West) and a centrally planned one (East), under the hypothesis of different utility functions. There is a ‘guns–butter’ dilemma because supplementary taxes are necessary to increase armaments, at the expense of consumption and leisure activities. The model concludes on the advantages of co-operation and disarmament. It is interesting because it stresses the importance of the economic elements of the arms race model, and notably Richardson’s coefficient of ‘economic fatigue’. For their part, Deger and Sen (1984) presented a model of military expenditure in less-developed countries, based on a non-co-operative differential game between two countries. They take into account the different size of each LDC involved in the arms race, and thus consider the asymmetries in the way threat, security awareness, military reaction curves and economic costs are perceived by both agents. Other game theory models which emphasize the economic aspects of an arms race have been developed (notably Garfinkel 1990). Other © 2004 Fanny Coulomb

Table 6.4 Some studies on the theory of alliances Study

Method

Link with economy

Main conclusions

M. Olson and R. Zeckhauser (1966) Economic Study of an Alliance. Problem of the Alliance’s Cost Sharing.

Hypothesis of a positive correlation between the participation of each country to the alliance and the level of their national income.

Central point of the model: the problem of costs allocation within the alliance. The financial contribution of a country is more or less important depending on the relative size of its GDP. It is ‘the exploitation of the rich by the poor’ hypothesis and the underlining of the ‘free rider’ problem.

For NATO, the correlation between the level of GDP and the financial contribution to alliance (ratio of military expenditure/PNB) is tested: results are conclusive for 1964, but, later, other studies have shown a positive but declining relation.

Standard study of the alliance. Discussion of the conditions of participation of one country to an alliance.

Defence is considered as a pure public good. Two constraints: resources constraint and first order constraint. The global level of deterrence is a function of the military activity of each ally and of defence spillovers. Problem of each ally’s utility maximization (hypothesis of a Cournot–Nash behaviour).

The economic dimension appears at the level of resource allocation to each ally’s defence, under resource constraints. Maximization of the utility function, that is resources allocation between civil and military goods such that each ally maximizes its welfare (under resources constraint).

The model is a Nash problem. The utility function depends on civil private goods and of national military activity, and of the enemy’s global military expenditure.


N. Bruce (1990) The model aims at studying relations between national security and military expenditure of the allies or adversaries. The question’s aim is to introduce the enemy threat in the alliance model.

The basic model is the pure public good model of alliance of Olson and Zeckhauser. It is built for three countries, with an initial country, an ally country and an adversary country.

The model lies on the choice, at each country’s level, between civil and military goods. The cost of an arms race is introduced in the alliance model. Increase of military expenditure within an alliance can deteriorate its strategic situation, or weaken the strategic equilibrium at the international level, and then decrease alliance members’ security.

In opposition with the conclusions of Olson and Zeckhauser, a treaty of co-operation to increase defence expenditure within an alliance may decrease its efficiency. Even if the alliance situation is improved by this treaty, it may lead, at the international level, to a prisoner dilemma, and to a worse situation than if they had co-operated.

B. Hilton and A. Vu (1990) The question is to test the relation between the defence expenditure of one country and those of its allies and adversaries. The standard model of alliance as a pure public good is not applicable to NATO, as shown by this analysis following the MacGuire model (1982/1987). The threat constituted by the Warsaw Pact is introduced in the model.

The reference model used is McGuire (1982/1987). The military expenditure of each NATO member is represented by a Stone–Geary function. Non-defence public expenditure and private expenditure are also estimated by this kind of function. Warsaw Pact military expenditure is integrated into the model.

Social utility maximization is made from a middle function, representing each citizen’s utility. For each NATO ally, the resource allocation between civil and military goods depends on income per capita, investment level (which indicates the confidence level of the private sector in the future), of the population, of the defence expenditure of the Warsaw Pact, and total NATO defence expenditure.

The model allows the demonstration that one country’s ‘defence is not negatively related to allies’ expenditure and positively to enemy’s expenditure. The public model of alliance is naive and inappropriate to represent NATO. Allies adopt a competitive behaviour towards each other.

continued


Table 6.4 continued Study

Method

Link with economy

Main conclusions

J. Fontanel and R. Smith (1998) To understand the difficulties in the settlement of a common European defence, the study of hypotheses of the allies’ behaviour is fundamental. This is a study of a Lindhaltype behaviour.

Definition of a national welfare function, depending on the level of security, civil expenditure and population. To define security, threat must be taken into account, as well as two kinds of defence provided by the national armed forces: common protection for the whole alliance or specific national protection.

Introduction of the cost of production of two types of defence, which can differ from one country to another. Distinction of two types of behaviour: non-co-operative of Cournot–Nash type and co-operative of Lindhal type. The internalization of externalities of the alliance will be made only if allies adopt a co-operative behaviour. Co-operation allows a decrease of national military expenditure.

Threats are supposed to be exogeneous, but military expenditure within alliance determine the reaction of the adversary. An excess of military expenditure decreases the alliance’s security.

K.Y. Wong (1991) Analysis of the influence of alliance existence on the orientation of international trade. The questions of the burden division between two allied countries, and of its consequences on exchanges, are studied.

A model is built to analyse the evolution of trade and military relations between two countries which have a common enemy. There are three countries, three sectors, three factors. The question is to determine how defence production can affect consumption, production and trade in the private sector. A defence function to optimize is derived for one country, and the impact of a defence increase of the allied country is analysed.

The increase of defence production generally leads to a deterioration of the terms of trade for the other ally which does not produce defence goods. However, numerous particular cases exist. Depending on the hypotheses on the trade orientation between the two allies, the alliance’s impact on the terms of trade would be different.

If there is a threat leading to an increase of defence expenditures for the allies, then the terms of trade between these allies would be modified.


Hansen, Murdoch and Sandler (1990) Analysis of defence goods coproduction within NATO in 1972/1985. A distinction is made between nuclear and nonnuclear allies.

The model is of joint production. ‘Strategic’ and ‘non-strategic’ expenditures are distinguished within the alliance, from 1970 to 1985.

Military expenditure estimates are made from GNP, but also from strategic and conventional spillovers.

Different behaviours are distinguished inside the alliance, depending on the nature of the good produced by the alliance. The free-rider behaviour is appropriate only for purely public strategic spillovers, but not for conventional spillovers, with private benefits.

P. Jones 1992 Test of the hypothesis according to which alliance membership allows a reduction of bureaucratic inefficiency at each State’s level.

NATO is used as a reference. Bureaucratic inefficiency effects are represented in a quadrants diagram, representing the military expenditure of two countries and their relative defence price. This presentation allows an evaluation of the respective benefits of mutual assistance.

This analysis refers directly to public choice analysis. The failure of government may provoke a demand of supranational structures. These permit a reduction of government failures, while they are not efficient to the palliation of market failures.

Alliance membership allows a reduction of bureaucratic inefficiency at the national level. Alliances such as NATO are more efficient when defence institutions suffer from great bureaucratic inefficiencies.

T. Sandler (1977) Study of joint production. Defence is an imperfectly pure good.

Some benefits of alliance defence may be privatized by some allies. An ally military activity produces a defence public good but also a defence private good.

The problem of cost allocation Defence does not have the within an alliance is reconsidered. characteristics of a pure public good.


interesting models using different economic concepts have also been developed, such as Seiglie’s (1988; 1996b): in the context of an arms race, the opponent’s armament should be considered as exerting ‘negative externalities’ over the domestic economic situation. All of these examples, which of course are not exhaustive, show that the models derived from neo-classical theory can be indefinitely improved to better understand interstate strategic interactions and the part played by economic considerations in decisions of foreign policy. Other interesting models were developed, such as Seiglie’s: in the context of an arms race, the opponent’s armament exerts ‘negative externalities’ on the domestic economic situation. Besides, the process of resource allocation to the military sector is once again reviewed from a more economic perspective than in the initial arms race models. The economic foundations of conflicts During the second half of the 1980s, Wolfson, in association with Farrell (1987) and then Shabahang (1991), used Brito and Intriligator’s arms race model to study the ‘economic war’, this one referring to the economic dimension of the arms race (as an attempt towards economic exhaustion of the opponent), as well as to the fact that international conflicts can have economic causes. Wolfson and Shabahang (1991) base their model on the idea that economic causes can lead to a disruption in the military balance. Their model applies to conventional armaments. They underline the direct relationship between the concepts of ‘economic war’ and of ‘arms race’, for two reasons: 1

2

the term ‘economic war’ can be used when the armament of a nation compels a rival nation to increase its armaments so much that it erodes its capital, to maintain its deterrent capacity. The consequences of economic war are a reduction in the enemy’s production capacity (and thus of its capacity to arm itself), of its consumption, welfare and economic growth. military conflicts often have an economic source. Most of the time, they are the result of a change in the global balance of international relations, because of uneven rhythms of national economic development.

In a previous article, Wolfson and Farrell (1987) applied their model of economic war to the confrontation between the United States and USSR; they anticipated the collapse of the Soviet Union if the ‘economic war’ continued at this rate. The authors’ demonstration was based on the representation of a diagram with quadrants. To test the possible outcomes of the American–Soviet arms race, they distinguished high-technology military equipment (capitalintensive) from low technology equipment (labour-intensive). They thus studied the characteristics of the arms race according to the factor endowment of both countries. The fact that the conflict requires weapons that are more sophisticated or, conversely, more ‘labour-intensive’, has completely different © 2004 Fanny Coulomb

implications for each country, because of their particular factor endowments. Wolfson and Shabahang (1991) have applied their model (by adding a function of social utility to the one of 1987, on Walter Isard’s proposal) to the arms race between Germany and the United Kingdom on the eve of the First World War. Their model aimed at testing the hypothesis that the escalation of this arms race, until the war’s outbreak, would be explained by the differences in their respective structures of economic development. The importance of economic factors for explaining military budgets The instruments of the theory of collective goods can be applied to the analysis of defence. The defence budget is decided outside the market, through a collective choice procedure. The creation of models allows a systematic presentation of the economic factors of military expenditure. DEFENCE AS A PUBLIC GOOD

Defence, like all public goods, raises the problem of cost allocation. It is difficult to estimate the ‘production of security’. Indeed, the notion of ‘security’ implies (at least partially) the consideration of non-market values, the quantification of which gives rise to important definition and approximation problems. It requires assessing the ‘confidence’ in the national defence or diplomacy, to precisely estimate the relative military forces, to envisage different strategies. It is therefore very difficult to determine the level of military expenditures necessary for a sufficient level of security. Defence is an indivisible collective good, as far as no citizen can be excluded from its consumption, notably by the price system. In this context, it is better to speak in terms of collective good/individual good rather than public good/private good, this latter typology exclusively referring to the institutional context. Thus, with the characteristics of non-rivalry and non-exclusion, defence has the characteristics of a pure public good and it had indeed been presented as such. Certainly, some kinds of defence could include trade relations, with personalized payments. But the modern forms of national defence policies, notably for States possessing the nuclear weapon, imply a concentration of the strategic power which eliminates the intervention of markets. The determination by the State of a desirable level of military expenditure, through a collective choice procedure, then turns out to be particularly delicate, considering the difficulties in defining the optimal level of national security. In the field of defence, the economist faces the difficulty of estimating the ‘product of defence’. In this respect, French nuclear deterrence has probably been efficient with regard to its purpose of avoiding conflicts, notably nuclear ones. However, it does not answer the question as to whether a similar result would have been obtained with lower military expenditures. The majority of the contemporary studies of defence economics is based on the theoretical concept of efficiency in resource allocation; decisions can be © 2004 Fanny Coulomb

Table 6.5 Some studies on the economic foundations of arms-race models Study

Method

Link with economy

Main conclusions

Van der Ploeg and de Zeeuw (1991) Differential game theory study. The objective is to improve the theoretical study of strategic bases of Richardson’s model and to show the opportunity of an arms control.

Game theory is applied to an arms race between East and West. Several games are successively studied: perfect equilibrium subgames or Nash equilibrium. The hypothesis of a behaviour as Stackleberg leadership is also studied.

The problem of the allocation of resources between civil and military sectors is studied. A distinction is made between the economic systems of the two actors.

Demonstration of the benefit of arms control.

Deger and Sen (1984) Differential game theory study. Analysis of strategic interactions between two developing countries.

The optimization method and the dfferential game method (Nash solution) are successively used.

The question of resource allocation between civil and military sectors is studied.

The choice of one of the two methods is made according to the more or less important interaction between defence the expenditure of the two adversaries (game theory is well adapted in the case when there exists a tradition of antagonism between the two countries).

M. Garfinkel (1990) Insisting on the role of strategic considerations in an international conflict economic model.

Two models are successively used: a one period nonco-operative game; repeated nonco-operative games.

The question of resources allocation between civil and military sectors is studied. The economic cost of the participation in an international conflict is also taken into account. Investment in armaments allows a promotion of economic interests.

There are numerous relations between armaments levels and the strategies followed by the actors. But, also, there is a link between the strategies followed, economic activity variations and military expenditure level.


C. Seiglie (1996) Improve the analysis of the allocation resources process between civil and military goods, insisting on the economic dimension.

A minimum armament level is maintained, even if there is no threat. The part of the adversary armament stock which decreases the national security is considered. A production function is defined.

A production function is introduced into the arms-race model; it depends on the level of consumption, of investment and armaments stocks.

The author tests his model on pairs of countries, and he shows the existence or not of Granger causality relations between their military expenditures. All results are not satisfactory.

M. Wolfson et al. (1987; 1991) The economic war is introduced inside Brito and Intriligator’s model (presentation of the arms race in a diagram of four quadrants). The problem is to demonstrate that economic causes may cause the rupture of military equilibrium.

The presentation is made in a four quadrants diagram: civil goods, military goods, adversary’s military goods, investment. The diagram represents the choice between civil and military goods, the relation between saving and investment, the mutual deterence cone and the economic war.

The allocation process between civil and military sectors is analysed (production possibilities frontiers and social utility curve). The relation between saving and investment depends on this resources allocation. Economic war stems from the relation between investment of one country and military acquisitions of adversary.

The rupture of military equilibrium may come from several economic factors: • a rise of military expenditure • induces a too-important decrease • of civil consumption; • some divergences in arms demand • elasticities. Economic growth may then generate military equilibrium ruptures. • asymmetries in economic growth • rhythms. • a consideration of population • knowledge, physical resources • stock, etc.


subject to the same efficiency criteria as private goods. We can, however, consider that the determination of the necessary defence capacity is subjective, because it can only be tried out in wartime for the strategies of conflict (or, in the permanence of a ‘non-war’ situation, for strategies of mutual deterrence). Often, political concerns overshadow, at least in the short term, economic concerns. The economic analysis of defence implies a measurement of the costs of various solutions of national defence, with regard to their opportunity costs. The main difference between the supply of private goods and that of public goods is at the level of cost allocation, several Pareto optimums being possible. No choice is more justified than another along the curve of contracts. The indecision is ended when a price is fixed outside the market, through a collective choice procedure, because it corresponds to a unique point on the curve of contract. It is thus necessary to avoid ‘free-rider’ behaviours. If both parties react according to the prisoner’s dilemma principle, then they are likely to reach an equilibrium which is not optimal. Even for the supply of a collective good which seems as consensual as defence, conflicts of interests appear (Wagner 1975). Under these conditions, the modalities of optimal security State intervention are difficult to define. The individuals concerned have very different feelings about their national membership, as well as about the advantages and disadvantages of conflicts with other States. Moreover, some groups within society can find their own advantage in manipulating the information or in propagandizing to try to influence individual demands for defence in favour of their increase. Another difficulty in the analysis of the demand for defence is that national defence mustn’t be considered as equivalent to military expenditures. The latter can indeed be devoted to the purchase of goods which don’t exclusively serve defence purposes; besides, some forms of civilian defence have no military character. Moreover, there is no simple relationship between the increase in military expenditure and the reinforcement of security, given that the ‘probability of national survival’ is only assessed in a subjective way, because the plans of the opponent cannot be objectively defined. The fact that the political leaders’ decisions with regard to the defence policy are themselves not only taken in relation to foreign policy, but also to the domestic policy as well, must also be taken into account (this question has already been mentioned about arms race models). THE MODELS OF MILITARY EXPENDITURES

The economic explanation of the level of military expenditure gave rise to numerous hypotheses, generally tested by models. Several variables are thus taken into account, notably: •

the commitment of the country in an arms race, or its participation in a military alliance, by the integration into the model of the opponent’s and the allies’ military expenditure. At first sight, national military expenditure


•

• •

can be considered as varying positively with those of the opponent and negatively with those of the allies; however, agreements between allies can contradict such an evolution. For example, NATO decided at the beginning of the 1980s to ask its members to increase their contribution up to at least 3 per cent per year. This type of agreement leads to a questioning of the economic reasons for the constitution of alliances partially based on cost reduction. the national economic situation, as well as the impact of military expenditure on the great macroeconomic variables, as investment, inflation or exports. the evolution of technical progress, which can increase the costs of equipment and modify the strategic context, through the effects of obsolescence. finally, governmental changes can modify the level of military expenditure, every political party sharing its own conception of desirable defence policy. However, a particularly unfavourable economic situation can lead to a decrease in military expenditure, and thus limit the choice of defence policy for the government. It is also necessary to take into account the fact that the vote process can be influenced by the perception the citizens have of the foreign threat.

Nevertheless, the economists who wish to create a model of military expenditure limit their model to a few variables which they consider particularly representative. They create their model according to a pre-established conception, which determines the choice of the variables and hypotheses. Such a method could be criticized for its subjectivity; however, some models are based on a rigorous preliminary reflection on the best way of estimating the various variables. Thus, Fontanel and Smith’s model (1989) shows that, according to the way the variables are integrated into the model, and the way the available information is used, the results will differ. Besides, the results of the econometric tests of such models are rarely clear. Neo-classical theory supplies many instruments to formalize a more ‘general’ model of the economic factors of military expenditure. In this respect, Smith (1989) constructed a ‘standard’ model of the demand for military expenditure. It is based on the method which consists in maximizing the social welfare function under budgetary constraints. Other theoretical considerations would lead to an underlining of other key factors of military expenditure. Indeed, from a Marxist point of view, military expenditure represent above all an element which ensures the stability and permanence of the capitalist system. Besides, the conception of a society divided into social classes, each trying to hold power, implies a particular conception of the way military expenditure is determined. Nevertheless, neo-classical theory is the one which inspired the considerable development of the literature on defence economics since the 1960s, thus benefiting from its hegemony on economics. Several other models have been created; it would in fact be impossible to make an exhaustive presentation of the various types of models of military © 2004 Fanny Coulomb

expenditure. A good review of the literature on this subject was presented in 1989 by Smith. A new perspective of conflicts analysis In conclusion to all these studies, it is necessary to mention the most original perspectives which have been developed in recent years on the issue of integrating the study of conflict into economic analysis. In this way, Hirshleifer (1995) considers that the economic analyses of conflicts and trade must be treated on an equal footing. In this respect, he follows Boulding (1962) who had previously underlined the importance of the concept of conflict for economic analysis. In his work published in 1962, Conflict and Defense, Boulding had adapted the models of price war and spatial competition to explain the balance in the configuration of interstate borders or the absorption of one nation by another. He notably formalizes Richardson’s arms race model with game theory. In this analysis, international conflict is considered an economic process. Moreover, different categories of conflict are distinguished, evolving according to the characteristics of the society. But one of Boulding’s main contributions to the theory of conflict was the idea that a country’s capacity to control others declines with the distance from its centre of power. He thus stresses the effects of the geographic distance on the emergence of conflicts. However, such a socio-historical analysis is not directly linked to economic issues; besides, it hardly explains systemic or nuclear conflicts. Like Hirshleifer, McGuire (1995) considers that the analysis of the choices of ‘production versus aggression’ and ‘offence versus defence’ presents a methodological potential that is still poorly exploited by economic analysis. Besides, according to McGuire, game theory must be used to pacify international relations, notably by applying it to international institution mechanisms and international trade relations, which can help to contain a nation’s aggressiveness. These various calls to deepen the economic research around the theme of conflict show the involvement of numerous contemporary economists in peace economics. Several economists, in particular Boulding, Schwartz and Tinbergen, stressed the particular part the non-economic international institutions must play to maintain peace among nations. Conclusion Arms race models were of great interest during the systemic struggle between the United States and USSR, or NATO and the Warsaw Pact. Today, their interest seems reduced for at least three reasons: 1

none of these models has given indications anticipating the events that led to the destruction of the Warsaw Pact. Even when economists underlined the ‘internal’ factors of the arms race, they limited this idea to the study of


2

3

industrialized market economies. The lack of reliable information on the military expenditures of the Warsaw Pact countries can explain the absence of studies on the long-term effects of these expenditures on the Soviet economy. the disarmament process doesn’t lend itself to a symmetrical analysis of a ‘disarmament race’, since downward inertia effects are powerful and the ‘exogenous’ (political) character of military expenditure seems to prevail, at least for some time. for an arms race to take place, there must be at least two avowed enemies. Yet, in the current geopolitical context, it is difficult to explain decisions to increase military expenditure with the concept of an arms race, except in a few cases (India–Pakistan for example). The issue of international terrorism raises specific problems, that have notably been studied by Sandler in some recent studies (Sandler 2002).

Nevertheless, these models still have a great explanatory power, even if new variables should now be considered. It is very likely that they will inspire future theoretical constructions, which might deal more clearly with the economic foundations of conflicts.

Econometric and formalized analyses of military expenditure and disarmament Econometric analyses of military expenditure The development of studies on the economic consequences of armament and disarmament contributed to the thought on economic policy after the Second World War. The defence budget represents an important part of public spending, and a whole area of the national economic activity depends on the military sector. Defence economics has been mainly developed as an autonomous field of work since the 1960s, because of the new international strategic order. With the increase of Western military budgets during the Cold War, the argument of the unproductiveness of military expenditure has been renewed. New mathematical and quantitative methods have then been used to conduct empirical analyses on the economic impact of the military sector. However, despite these scientific methods, the theoretical or ‘ideological’ debate didn’t disappear. Indeed, in economics like in all social sciences, no conceptualization or instrument of analysis is totally neutral. The analysis of the economic effects of armament, and thus, symmetrically, of disarmament, represented a new economic field of work. Specific studies have dealt with several questions, such as: • • •

should the military budget be used as an instrument of a reflationary policy? what part does the military sector play in an industrialization process? in the long run, can excessive military expenditure check economic growth, and thus, paradoxically, contribute to weaken national security?


Topics, statistics and methods regarding military expenditure The study of the concepts, hypotheses and methods underlying the analyses of military expenditure based on econometric tests or on modelling requires, first, a discussion on the pertinence of the information, and then of the methods and hypotheses. THE STATISTICAL INFORMATION

The selection of the information used in empirical studies of military expenditure raises several questions. First, the collection of information on military expenditure raises a problem of definition. The main international sources, such as SIPRI (Stockholm International Peace Research Institute), USACDA (United States Arms Control and Disarmament Agency) or IISS (International Institute for Strategic Studies) don’t consider the same elements in their statistics. In addition, the military budget is almost never equivalent to military expenditure, because some defence costs are borne by other ministries. The economic evaluation of the conscription is tricky, as is evaluation of some halfcivil, half-military expenditures, or the distinction between police forces and military forces, etc. In addition, the secretive nature of the military makes the quality of information debatable. Moreover, intertemporal comparisons come up against the difficulty of estimating military inflation. International comparisons of military expenditure are also problematic, as the exchange rate does not represent, at least in the short run, the purchasing power of currencies. Finally, the use of statistical information requires a conversion in constant currencies; yet, the construction of indexes for adjusting the data is delicate. Another difficulty for statistical studies on military expenditure lies in the choice of the type of information used. Regression equations such as those developed by Benoit (1978) or Frederiksen and Looney (1986) are based on cross-information, i.e. information for one specific year and for a representative sample of countries. Time series, or longitudinal information, concerning a single country, over several years, could also have been used. The question of the most relevant choice between both kinds of information for models on military expenditure gave rise to an important debate (Chan 1985; Martin et al. 1987; Mintz and Stevenson 1992; Chatterji 1996). The choice depends on the theoretical orientation of the study. Various methods are used to study the macroeconomic impact of military expenditure: • • •

statistical estimates of the relations between military expenditure and other macroeconomic variables; modelling and econometric tests; the use of big macroeconomic simulation models.

Synthesized presentations have already been made on the quantitative methods applied to defence economics (notably Chatterji 1993; Fontanel 1995b). © 2004 Fanny Coulomb

SIMPLE STATISTICAL ESTIMATIONS OF THE RELATIONS BETWEEN MILITARY EXPENDITURE AND MACROECONOMIC VARIABLES

Owing to econometrics, one can confirm the appropriateness between a theoretical hypothesis on the economic impact of military expenditure, and the available information. It is also an instrument of empirical validation of a theoretical model. Several instruments have been employed to estimate the economic impact of military expenditure, in particular the relation between military effort and the main economic variables: simple linear regressions, analyses of direct causality and VAR models.4 A first simple statistical technique consists of testing the correlation between two variables, military expenditure (as an exogenous variable) and economic growth, represented, for example, by GNP (as an endogenous variable). The point is to make a linear adjustment, i.e. to estimate a linear regression by Ordinary Least Squares. The correlation tests can also include several variables, as well as ‘dummy’ variables to account for the impact of a precise event during the studied period. The linear regression method was used in a famous study by Benoit (1978): its conclusion was that the relation between military expenditure and economic development for forty-four developing countries was rather positive or neutral. However, this study has been strongly criticized, notably because of the too-empirical choice (without any preliminary theoretical model) of the explanatory variables and because of the lack of adequate statistical tests (Deger and Smith 1983). The Granger causality test determines the direction of a causal relation between two variables, expressed as a time series. It has often been used to study the links between military expenditure and other economic factors. But several analyses have shown the limits of this method. (Chowdury 1991; Majeski 1992). One of the problems cited is the use of the same number of lags for all variables, with the risk of rejecting or omitting significant variables. A more accurate analysis of causality implies the creation of a system of equations. The VAR (Vector AutoRegressive) models are one of the methods used (Kinsella 1990; Dunne 1993; Payne et al. 1993). VAR analyses of military spending take into account variables other than economic growth. However, the upholders of econometric models, such as Hartley and Sandler (1995), denounce the ‘arranged’ character of these empirical estimate techniques, if they are not at first underlain by a solid theoretical model. The econometric tests of model validation are numerous and more or less complex. Notably, some very recent developments in econometrics refine the analysis of non-stationary series, by distinguishing short-term from long-term characteristics. If both studied series are trending, they can be co-integrated if they fulfil certain requirements, i.e. if they have the same rate of increase. Cointegration tests are henceforth often used in defence economics.


ECONOMETRIC MODELLING: A THEORETICAL SUPPORT TO THE ESTIMATION OF THE ECONOMIC EFFECTS OF MILITARY EXPENDITURE

The economic analysis of military expenditure gave rise to three types of models, each focusing on specific economic effects (Sandler and Hartley 1995: 205–213). ‘Demand-side’ models analyse the crowding-out effect of military expenditures on investment. There are fewer Keynesian models on the relations between military expenditure and growth than neo-classical models. At a first level of analysis, the Keynesian mechanism of effective demand seems to back up the hypothesis that defence expenditure stimulates economic activity in times of crisis, like all public spending, notably because of the existence of a multiplier effect. This argument is characteristic of ‘military Keynesianism’ (Mosley 1985). But it is, above all, another Keynesian argument on the link between military expenditure and growth which was developed after the Second World War and which contradicts the previous one: defence expenditure could crowd out public or private investment. Military expenditure would thus represent an opportunity cost with regard to investment. Ron Smith (1980) was one of the first economists to formalize crowding-out effects of military expenditure on investment. It is the most classic economic argument in the analysis of military expenditure through the theory of growth. This model highlights the crowding-out effects of military expenditure on investment. It has been used in numerous studies. ‘Supply-side’ models study size effects and externalities generated by the military sector. Smith’s analysis is made from the ‘demand side’, in a rather Keynesian perspective. Another type of model has also been developed, in a more neo-classic perspective, from the ‘supply-side’. This analysis of the relation between the defence budget and economic growth is based on the formulation of an aggregated production function for each economic sector (generally the military sector and the civil sector, but also the public sector without defence), specifying externalities and size effects of military expenditure on the total output. After derivation, an equation of economic growth is obtained. This method was used by Feder (1983) and Ram (1986). These models are, in fact, used to highlight certain macroeconomic impacts of military spending, in particular the positive effects of the military sector on the entire economy (modernization and development of new technologies and new products which can benefit the civil sector). These are some of the conclusions drawn by Ram (1987; 1989). But Biswas and Ram (1986) concluded that military expenditure had a negative effect on economic growth. In fact, these models focus on the positive economic consequences of military expenditure; however, if the relative productivities of military and civil sectors are taken into account, this may lead to inverted conclusions if the relative productivity of the military sector is lower. Several economists used this approach. Criticisms have, however, been raised against these models, notably by Sandler and Hartley (1995): in their © 2004 Fanny Coulomb

point of view, one of the problems is that investment is considered as an exogenous variable, and thus that its interactions with military public spending cannot be taken into account. Furthermore, only the impact of military expenditure on economic growth is considered, but not the reverse relation; Granger’s causality tests could then prove to be useful. However, several economists used this type of model to analyse the economic impact of military expenditure, in particular Atetsoglu and Mueller (1993), Adams et al. (1992) and Ward et al. (1995). Deger, Smith and Sen contributed to the development of a more general model of the relation between military expenditures and economic growth, which considers both the ‘demand side’ and the ‘supply side’. Economists have often returned to Deger and Smith’s model; the 1995 version of Deger and Smith’s model explicitly mentions the previous contributions and distinguishes the supply-side from the demand-side. The authors refer to the works of Harrod and Solow. Deger and Sen (1995) consider that their model is more Keynesian than neo-classical, given that it takes into account a ratio of capital use. However they believe that it would be an illusion to try to determine the impact of military expenditure on the long-term steady state. The long-term growth will depend mainly on the qualitative and quantitative increase of the labour factor. On the other hand, in a shorter term, i.e. in a transitional stage towards a stabilized economy, military expenditure influences economic growth, either in a negative way, for example by decreasing the available resources for workers training, or in a positive way by accelerating technical progresses with important civil spin-offs. In conclusion, all the models presented above generally end up demonstrating one of the following hypotheses: •

•

defence expenditure exerts a negative effect on the economy, by monopolizing resources which would have been better used in other sectors; they thus hamper economic growth. the military sector exerts a positive effect on the economy. It generates externalities for other economic sectors, and therefore improves their results.

Each interpretation has been corroborated by various studies, which will be presented later. But it already appears necessary to distinguish short-term from long-term effects. The analyses of the relation between the military sector and growth or economic development have also been renewed owing to theoretical developments. As an example, Berthélemy et al. (1995) developed a model analysing the link between military expenditure and economic development based on the theory of endogenous growth, where military expenditure exerts externalities in the same way as other expenditures. Moreover, as well as ‘simple’ models, macroeconomic simulation models © 2004 Fanny Coulomb

have also been used to estimate the economic impact of military expenditure, or even the gains expected from a disarmament process (Kollias and Refenes 1996). The most famous models of economic growth rarely integrated military expenditure as an endogenous variable. Nevertheless, several regional, national or international macroeconomic models have been developed to test the economic impact of a change in military expenditure. The most common analytical method is to test various scenarios. However, numerous reserves have been expressed against such simulations using great pre-established models. According to Adams (1992: 13), econometric models often fail to represent the structural economic changes which should result from a disarmament process. Fontanel (1980) considers it is necessary to develop empirical tests on the conclusions drawn from the simulation model, which could lead to a surrender of some theoretical hypotheses. Besides, the analysis of the effects of military expenditures must be refined by taking into account the nature of the spending (staff, conscription, R&D, investment) and of the supplier (domestic, multinational, foreign company), as well as long-term effects, which are difficult to measure. These simulations study several issues, notably that of the economic impact of disarmament, at the international, national or regional level. Most of these analyses lie on input–output analyses (Chatterji 1992: 262; Braddon 1996: 495). General equilibrium models can also be used to simulate the effects of a reduction in military expenditure. These models provide information on the consequence of a decision (of armament or disarmament) on equilibrium prices and quantities. The general equilibrium models consider long-term perspectives, whereas macroeconomic simulation models consider short-term perspectives (Baum 1993). The general equilibrium models, however, have their limits, notably the fact that they are based on unrealistic hypotheses: technologies with constant scale economies in all industries, a perfect substitutability of inputs and the non-consideration of monetary and financial variables. These hypotheses are important when considering the issues of the conversion of the military industries, the characteristics of the competition within the military sector and the influence of monetary variables on domestic economies. THE THEORETICAL HYPOTHESES

No instrument of economic analysis is neutral. The choice of one model rather than another and the selection of the explanatory variables is based on a specific idea of the relations between military expenditures and these variables (Majeski 1992). Research on the relation between military spending and economic growth has often led to contradictory results; this can notably be explained by differences in theoretical approaches, in the definition of economic growth and by the variety of concrete economic situations. From a Keynesian point of view, one of the hypotheses can be that an increase in defence spending has an impact on the total aggregated demand. But other theoretical © 2004 Fanny Coulomb

methods could have been chosen as well. The macroeconomic model MULTIMOD of the IMF illustrates these theoretical difficulties. This model, which evaluates the consequence of a reduction in military expenditure, rests on precise theoretical hypotheses, based on the general equilibrium. Bayoumi et al. (1995) used it to estimate the impact of a 20 per cent reduction in military expenditure over five years. Their results were later criticized by Uno (1995) who denounces the lack of realism of the model’s hypotheses, which could only correspond to a perfect economy. Another criticism expressed against models of military expenditure is that they are used by economists who do not know the economies they are studying and are consequently unable to select the relevant variables and gather the appropriate information. Besides, the methodology of ‘ad hoc’ models has been questioned. It consists in expressing by equations the presuppositions regarding the direction and various characteristics of the links between economic growth and military spending, and then in validating them in an empirical way. Lebovic and Ishaq (1987) criticized the excessive simplifications and the lack of theoretical support of these studies. Nevertheless, econometric results remain particularly interesting, even if not enlightening. The main results of the analyses of the macroeconomic impact of military expenditure Many studies have dealt with the impact of military expenditure on great macroeconomic variables, in particular economic growth, other public expenditure, investment, employment, inflation, research and development. These studies have often led to divergent results, according to the period and economy considered. THE IMPACT OF MILITARY EXPENDITURE ON ECONOMIC GROWTH

The numerous models on the economic effects of military expenditure have often led to contradictory results; this can be explained by the diversity of the hypotheses and empirical techniques that have been used. The interpretation of a positive relation between the level of the defence budget and economic growth remains delicate. What part does the direct and indirect effects of military expenditure play in domestic economic performances? For example, the advantages gained from maintaining a high level of military expenditure, in terms of domination on the international economy, should be taken into account (trade agreements, markets opening, diplomatic influence, etc.). The issue of the long-term economic consequences of an excessive militarization should also be considered. Thus, the analysis of the link between military expenditure and economic growth is not simple. A work published by Benoit (1978) gave rise to a vast debate about the economic impact of defence spending. From a regression equation, he indeed showed that military expenditure had a rather positive effect on the economic © 2004 Fanny Coulomb

growth of developing countries, by playing an important part in economic modernization, notably with the construction of infrastructures, the introduction of new technologies and the development of human capital. Weede (1983) drew similar conclusions from his work. From this point of view, domestic military expenditure would benefit development. But this argumentation has been criticized. Deger and Smith (1983) notably underlined the fact that Benoit’s study was based on a simple regression with a single equation, thus distorting the results. Their own model of simultaneous equations, with a separate analysis of the impact on each macroeconomic variable, led to the opposite result. Other economists also criticized the statistical methods used by Benoit (see for example Adams et al. 1992). Besides, several studies have shown that the negative effects of military expenditure on the domestic economy were difficult to analyse in the short term. But, in the long term, militarization gradually weakens the domestic economy, by limiting its competitiveness. Thus, one of the paradoxical consequences of an arms race is that an increase in defence spending can lead to a decrease in national security. The analyses of Brandt (1988), Palme (1982) and Thorsson (1982) all concluded that military expenditure had a negative effect on economic growth, and therefore on tomorrow’s security. Nevertheless, several arguments have been used to show that military expenditure exerts a positive effect on economic growth. Thus, military expenditure has sometimes been analysed (in the perspective of the Keynesian multiplier) as a temporary remedy for under-consumption, i.e. demand insufficiency (CBO 1983). However, this under-use of productive capacities can result from other, more structural factors; it isn’t therefore necessarily resolved by an increase in military expenditure. Other, longer term factor, on the supply side, should also be analysed, and in particular the opportunity cost of military expenditure. (Ram 1983). Indeed, for the developing countries, where the demand for defence is mainly satisfied by imports, economic resources are allocated to the unproductive activity of defence at the expense of other uses. It notably exerts a crowding-out effect on investment or consumption, whether public (health, education) or private (research-development), even if military expenditure itself generates consumption and investment. The issue of positive externalities from the military sector to the civil one (notably, with technological spin-offs) has also often been studied (Payne and Sahu 1993). Ram (1993) identifies the various types of externalities, positive or negative, which can be generated by the military sector: technological spin-offs, training of human capital, infrastructures, militarization of the society, negative effects on the environment, arms race mentality, etc. In fact, a cost–advantage analysis is often necessary. The numerous global analyses of the impact of military expenditure on economic growth developed since the 1970s didn’t lead to consensual results. It seems that there are, in fact, as many different relations between these variables as there are economies, because of the differences in socioeconomic structures and political systems. Besides, the studies carried out in the 1980s on the economic impact of military expenditure were notably improved by reducing the © 2004 Fanny Coulomb

number of countries studied, or even by focusing on a single country (Chowdury 1991), over a given period. In the same way, Ward and Davis (1990) insisted on the dangers of hasty generalizations on the issue of the links between military expenditure and economic growth: according to the case studied, conclusions can totally differ. Neo-classical models seem to be better adapted to underline the existence of positive effects of defence spending on economic growth (Weede 1983; Alexander 1990; Atesoglu and Mueller 1990). However, these models also proved the opposite, notably in the work of Biswas and Ram (1986) or Ward (1991). With regard to demand-side models, Deger and Sen (1983a) created a model of three simultaneous equations, presenting the interactions between growth, investment and defence. Their tests for fifty developing countries show that the rise in the military burden resulted in a decrease in the rate of economic growth. A decade later, Mintz and Stevenson (1992) presented an analysis of 103 countries, based on Huang and Mintz’s model: only 10 per cent of the studied countries benefit from a positive relation between the level of the military budget and economic growth. As for the other countries, the impact of military expenditure on growth was not significant, unlike the other governmental expenditures. Biswas and Ram (1986) drew similar conclusions, as did several other studies (Fontanel 1980; Smith 1980; Faini et al. 1984). It therefore appears that the arguments of ‘military Keynesianism’ raise many objections, supported by numerous studies. The opportunity costs of military expenditure as regards other public expenditures or productive investment have notably been underlined. Paul Samuelson (1954) thus stated that civil public spending was more favourable to economic growth than defence expenditure, which exerts a neutral multiplier effect. The United Nations has also insisted on the idea that public outlays would be better used in health and education; the arms race represents a waste of resources and thus hinders economic growth (Thorsson Report 1982). Several econometric studies have, in fact, dealt with the relation between defence expenditure and other public ones, particularly health or education (Ames and Goff 1975; Hicks and Kubisch 1983, Mosley 1985; De Masi and Lorie 1988; Hewitt 1991). In this way, with a model representing the several positive or negative economic impacts of defence spending, Berthélemy et al. (1995) showed that the crowding-out effect between military expenditure and education has a negative impact on economic growth. Previously, Souls and Goff had obtained more qualified results. MILITARY EXPENDITURE AND INVESTMENT

Following Smith’s model (1980), numerous econometric studies have tended to show that military expenditure exerted a crowding-out effect on investment; however, other studies drew opposite conclusions. A key issue is to determine if an increase in military expenditure will rather lead to a decrease in consumption or in investment. Some studies have shown that, whenever the defence effort is accepted, then the population agree to © 2004 Fanny Coulomb

Table 6.6 Examples of studies of the effect of military expenditure on economic growth, concluding on an absence of relation between economic growth and military expenditure Author(s)

Country – Period

Method

Result

Joerding (1986)

Developing countries

Granger causality test. Two different measures of military expenditure.

No Granger causality for military expenditure on growth. Endogeneity of military expenditure.

Alexander (1990)

9 developed countries, 1974–1985

Model of Feder–Ram type. 4 sectors. Estimates of temporal transversal series. No consideration of aggregated growth but of real non-defence product growth.

No significant impact of military expenditure on growth. The underconsumption hypothesis is not validated. However, the defence sector is less productive than the rest of the economy.

Huang and Mintz (1990, 1991)

United States 1952–1988

Model of Feder–Ram type. A ridge regression equation is used to prevent multiple correlation errors. Three sectors. For the study of 1991, disaggregation of externalities effects and productivity effect.

No trade-off effect of defence on growth (even if indirect effects may exist). Military expenditure do not exert significant externality effects on growth, to the difference of other civil public expenditures (1991).

Adams, Pays en Modèle de type Feder–Ram Behrman and développement, Trois secteurs Boldin (1991) 1974–86 Estimations de séries temporelles transversales

Aucun effet de la défense sur la croissance. Les exportations ont des effets positifs.

Mintz and Stevenson (1993)

Feder–Ram type model. Longitudinal estimates for each country. Three sectors. Use of ridge regressions.

No strong short-term relation between military expenditure and growth. No externality effect of military expenditure.

Use of an input–output model to test different disarmament scenarios.

The contradictory results obtained lead to a conclusion that there is no structural specificity of military expenditure concerning their influence on economic growth.

103 countries, varied periods, around 1950–1985

Aben and France, Daurès (1993) prospective.


Table 6.6 continued Author(s)

Country – Period

Payne, Ross United States, and Olszewski 1960–1990 (1993)

Method

Result

VAR model. Comparison of macroeconomic effects of governmental defence and non-defence expenditure.

None of these variables has a significant impact on economic performances. The adverse relation is no more verified. However, the price level influences both defence and non-defence expenditure.

sacrifice its consumption, whereas investment doesn’t decrease, and is even stimulated. On the other hand, if the threat isn’t perceived as being imminent, an increase in military expenditure would cause a decrease in the general level of investment. Boulding (1973) thus shows that during the period 1929–1969, military expenditure was carried out at the expense of private consumption, whereas gross investment only underwent a slight decline. Weidenbaum (1990) confirmed this result. Some economists, however, have shown that during other times, military expenditure has exerted a negative effect on the investment of developed countries: the debt engendered by the rise in military expenditure exerts an upward pressure on interest rates, or even a tax rise, or a hoarding of production goods necessary in the short-term for civil investment or even a close substitutability between military and investment goods. These arguments have also been criticized. It seems in fact that the substitutability between military expenditure and investment is not the same for developed countries as for developing countries (Fontanel 1990: 86). Developed countries seem to confirm this relationship, when the private sector considers that the foreign threat is weak. On the contrary, the economies of developing countries often suffer from under-consumption and this relation of substitution is not always verified. The theory of under-consumption therefore considers that military expenditure uses resources which otherwise would have remained unused. However, many controversies still exist on this point. Finally, it is necessary to point out that certain forms of military expenditure can be considered as productive investments, for example with the installation of infrastructures, which benefit the civil economy. Besides, when the military sector plays an important role in the domestic economy, the comparison between the respective efficiency of civil or military investments turns out to be delicate.


Table 6.7 Some studies concluding on a negative relation between economic growth and military expenditure Author(s)

Country – Period

Method

Result

Lim (1983)

54 developing countries

Growth model of Harrod– Domar type.

Defence has a negative effect on growth.

Deger (1983; 1986)

50 developing countries

Demand-side and supplyside model (ad-hoc equations). Three equations, for defence, saving and growth. Cross-section estimates by ordinary triple squares.

The direct effect of defence on growth is positive but the indirect effect is negative. The net effect is negative.

Faini, Annez and Taylor (1984)

69 countries (mostly developing countries) 1952–1970

Demand-side model. Estimate of a single equation. Cross-section temporal series. Grouping by region and income.

The effect of defence on economic growth is negative (except for some developed countries).

Biswas and Ram (1986)

Developing countries, 1960–1970 and 1970–1977

Feder–Ram type model. Estimates of temporal cross-section series.

Most results are nonsignificative, or rather negative.

Lebovic and Ishaq (1987)

20 nations of Middle-Orient, 1973–1982

Production function. Keynesian demand. Three equations of the Deger–Smith type. Pooled temporal crosssection series.

The effects of military expenditure on economic growth are clearly negative.

Ward and Davis (1992)

United States, 1948–1990

Feder–Ram type model. Temporal series estimates. Separation of externality and productivity effects. Three sectors.

Net negative effect of military expenditure on economic growth, even if the externality effect is positive.

Fontanel (1980)

Morocco, France

Regression model. Double least squares. Distinction between military expenditure and military equipment expenditure.

If short-term effects of military expenditure are sometimes positive, in the long-run effect are rather negative, especially for current expenditure and for developed countries.


Table 6.8 Some studies concluding to a positive relation between economic growth and military expenditure Author

Country – Period

Benoit (1973/1978)

44 developing Ad hoc equation. countries, Estimation by correlations 1950–1965 and ordinary least squares.

Ram (1986)

115 countries

Landau (1986) 65 develping countries, 1960–80

Method

Result Positive and significative seffect on growth for many countries. For the others, no relation.

Feder–Ram type mode. The government sector Estimation of cross-section has a positive impact on time–series and for each economic growth. country. Defence is not distinguished from the whole government sector. Ad hoc function of production. Estimatation of time–series cross-section by ordinary least squares.

Feably positive or nul effect of defence (military expenditure/ GDP) on growth (income per capita growth).

Atesoglu and Mueller (1990)

United States, Feder–Ram type model. 1949–1989 Production function with two sectors. Estimation by the Cochran–Orcutt method.

Feably significant and positive effects on growth. Small elasticity with military expenditure (military expenditure/ GDP), which encourages a reduction of military expenditure.

Ward et al. (1991)

India, 1950–1987

Feder–Ram type model. Time–series estimates. Externality and productivity effects are separated. Three sectors.

Positive effect of military expenditure on India’s economic growth. In another study, the opposite result is obtained for Brazil.

Keynesian demand function. Use of simulations as estimates, equations are not under a reduced form.

Military expenditure generates economic growth, but to a smaller level than other governmental expenditure.

United States, Feder–Ram type model, 1948–1990 with the introduction of technological change. Single equation estimate. Two sectors. Non-linear regression method.

Positive and significant effect of defence on growth. But the externality effect of military expenditure on the civil sector is not significant.

Stewart (1991) Developing countries

Mueller and Atesoglu (1993)


Table 6.9 Some studies concluding to different impacts of military expenditure on economic growth on each country Author

Country – Period

Method

Result

Szymanski (1973)

18 countries

Correlation analysis.

Negative correlation between military expenditure and economic growth for the six greater economies. For the 12 smaller countries, the relation is feably positive between military expenditure and economic growth.

Chan (1984)

OECD countries


Countries with the highest military expenditure level per capital (mature industrialized countries) have a smaller growth; countries with a strong increase in military expenditure (new industrialized countries) have a higher growth (hypothesis compatible with Keynesian analysis).

Chowdury (1991)

55 developing countries, different periods for each country.

Granger causality test between defence measured by military expenditure/GDP and growth. Time–series estimates for each country.

30 countries: no causality 15 countries: negative effects on growth. 7 countries: defence ‘caused’ by economic growth. 3 countries: double causality between defence and growth.

Ad hoc equations. Study of three types of impact of military expenditure on resources uses, security and policy efficiency. Non-linear regression method.

The effect of military expenditure on growth is not linear: under a specific threshold of military expenditure it is positive and negative upper. But a special study of the three geographical blocks shows that, in most cases, this result is not verified, and that it is impossible to conclude to a continued relation between military expenditure and economic growth.

Landau (1994) 71 developing countries


MILITARY EXPENDITURE AND EMPLOYMENT

Governments often hesitate to reduce defence spending (which thus exerts an inertia effect), because such a decision would increase the unemployment rate. Indeed, military expenditure is, above all, staff expenditure. But on the other hand, an overly important military sector exerts a crowding-out effect on labour, notably skilled labour, which could lead to a slow down in growth and thus increase unemployment. As an example, Dunne and Smith (1984) consider that disarmament represents an economic opportunity rather than a problem for the United Kingdom. In fact, the influence of military expenditure on employment is difficult to estimate, and the various studies conducted on different cases have led to divergent results. Moreover, the answers differ depending on whether the rise in military spending is used to increase the number of employees or not. It seems, in fact, impossible to draw a definite conclusion from the available studies on the relation between military expenditure and employment.

MILITARY EXPENDITURE AND INFLATION

In the 1980s, numerous studies dealt with the issue of the link between military expenditure and inflation. Two types of inflation caused by military expenditure are generally distinguished: •

•

the inflation resulting from the fact that the price index of the military sector evolves more quickly than the civil sector’s (because of the specific characteristics of military production); the increase in military expenditure would also exert macroeconomic effects on inflation. Indeed, military expenditure would increase national income without increasing the supply for goods and services available for civil consumption; this creates an additional demand, thus leading to a full use of production capacities, a decrease in unemployment and a price increase if these adjustments are not sufficient to meet the additional demand.

It seems, however, that the impact of military expenditure on inflation differs according to the general economic situation. For Thurow (1982), in 1981, the American defence effort could only be financed by an important deficit of the public budget, which led to an instability of financial markets and inflationary trends, provoking forced savings or ostentatious consumption. In fact, the effect of military expenditure on inflation depends on their financing, on the reaction of the private sector with regard to the tax system, the national debt or the reduction in other public expenditure. Several economists have concluded that military expenditure has a positive impact on inflation, notably Percebois (1986), Fontanel (1980) and Hébert (1993), in relation to France, and Dumas (1986) with regard to the American economy. Other authors have shown a lack © 2004 Fanny Coulomb

Table 6.10 Some studies of the relation between military expenditure and investment Author

Country – Period

Method

Results

Russett (1969, 1970)

United States

Economic analysis of military expenditure and private expenditure properties, in relation to GDP.

Negative effect of military expenditure on investment.

Smith (1977)

Marxist interpretation The underconsumption of military hypothesis is rejected. expenditure. Military expenditure has an eviction effect on investment. It is a necessary element for capitalism’s stability as it maintains order, but in the long term, it undermines the economic bases of the system.

Smith (1980)

14 OECD countries, 1954–1973

Keynesian demand function. Estimates of crosssection time–series and time–series.

Military expenditure has a negative impact on investment.

Smith and Georgiou (1983)

15 OECD countries, 1960–1970 and 1973–1978.

Correlation analysis of time–series.

Strongly negative relation between military expenditure and investment. The relation of military expenditure/economic growth is a priori negative, but the result is unclear for the second period (especially for the United States, United Kingdon and Western Germany in the period 1954–1978).

De Grasse (1983)

17 industrialized Cross-section countries, regression. 1967–1980

Military expenditure has a negative impact on investment and then on economic growth. Relation feably negative between military expenditure and GDP growth.

Raster and Thompson (1988)

Hegemonic leaders of the nineteenth and twentieth centuries

Demonstration of an opportunity cost between military expenditure and investment.


Demand-side model, following Smith (1980).

Table 6.10 continued Author

Country – Period

Method

Results

Mintz and United States Huang (1990)

Model of flexible accelerator, demandside. Three equations. Estimates with ordinary least squares.

Military expenditure discourages investment (and then economic growth).

Scheetz (1991)

Chile, Argentina, Peru, Paraguay, 1969–1987

Model of Deger type, on the demand and supply sides. Estimates by crosssection time–series estimates and time– series estimates.

Negative effect of military expenditure on investment (as well as on economic growth, current account balance and saving).

Gold (1997)

United States after1945

Demand-side model, following Smith (1980) Study of an eventual cointegration between military expenditure and investment.

Low opportunity costs of military expenditure. There is no trade-off in the long run between military expenditure and investment. On the contrary, a long-run tradeoff exists between military expenditure and consumption.

Fontanel and Smith (1985)

OECD countries

Presentation of military expenditure effects on investment.

• Eviction effect of • investment by military • expenditure. • The centralization of arms • purchases leads, in case of • military expenditure • increases, to a competition • between civil and military • demand, inducing • inflationist tensions and • bottlenecks impeding • investment. • Industrial contraction • effects. • Social consumption effects. • Owing to consumption and • low threat, all military • expenditure increases are • made at the expense of • investment.


Table 6.11 Study of the relation between military expenditure and employment Author

Country – Period

Method

Result

Szymanski (1973)

The 18 richest capitalist countries

Correlations between military expenditure and economic performances.

Governmental expenditure is negatively correlated to employment. Military expenditure is the most efficient governmental expenditure to reduce unemployment.

Smith (1977)

8 OECD countries, 1973


Military expenditure and unemployment are positively related.

Dunne and Smith (1990)

United States Dynamic simple and United regressions under reduced Kingdom: long- form. term time–series since 1945

The importance of military expenditure in the economy has no influence on the level of unemployment. No Granger causality is demonstrated.

Wing (1991)

Indonesia, 1978–1980

Input–ouput model. Model adjusted by imports (each industy imports in a fixed proportion relative to global internal production).

Military expenditure is less labour-intensive than other public expenditure. However, military activities’ conversion towards private activities would have raised unemployment in the short-run.

Dunne (1993) 14 OECD countries, 1962–1985

Aggregated level: Dunne– Smith level regression (1990)

Aggregated level analysis: no demonstration of military expenditure influence on unemployment at the macroeconomic level.

Aben (1981)

Input–output model.

Rather positive effects of military expenditure on employment. Negative effects of DM reduction on employment.

Regressions.

Le fardeau militaire affecte la productivité, et à terme l’emploi.

France

Dumas (1986), United States Boulding (1979) and de Grasse (1983) © 2004 Fanny Coulomb

Table 6.11 continued Author

Country – Period

Method

Result

Anderson (1975)

United States

Input-output analysis.

Military expenditure is rather negative for employment.

LeontievWorld Duchin (1983)

World model.

Disarmament is rather positive for employment.

Mintz, Huang United States and Heo (1992)

VAR method.

Military expenditure may in the short-run have positive effects on employment.

of effect. Aben and Maury (1987), who study the case of France, state that the difficulties in estimating these effects prevent a clear link between military expenditure and inflation being found. COMPETITIVENESS, TECHNOLOGICAL PROGRESS AND THE MILITARY SECTOR

Jean-Baptist Say considered that the military spirit and the industrial spirit were antithetic. But historical evolution has shown that both could, in fact, coexist, without hindering the development of economic relations. The twentieth century was widely dominated by the conviction that the military sector gave a decisive impetus to sciences and technologies. Moreover, several economists have underlined the influence of this sector over economic and social changes. One of the arguments is that the diffusion of the military culture, notably organization and discipline, would benefit the whole society. Besides, some military techniques have been used to rationalize industrial production, in particular the coordination of transport and supplies, labour division and mass production. Machine tools and spare parts were also first developed in the army. Wars have often represented an opportunity to experiment new technologies; thus, the First World War accelerated the diffusion of radio and aviation. But the real scientific change occurred at the end of the Second World War, with nuclear weapons and the implementation of numerous advanced technologies in the military sector. The issue of the spin-offs of military research and development on the civil sector has been much debated. Because of the increasing sophistication of armaments, governmental investment in military research and development is essential to insure national defence. In fact, in arms-producing nations, scientific research has been closely linked to the military sector, with the implementation of prestigious research organizations, such as the Rand Corporation in the United States. Benoit (1978) opened the debate on the economic impact of © 2004 Fanny Coulomb

military expenditure in developing countries. He particularly insisted on the positive influence of the army on the economic modernization process. Other studies have dealt with the spin-offs of the military sector on the civil sector, in the field of technologies or human capital (Atesoglu and Mueller 1993). The size effect of the defence sector on the relative productivity of factors in both sectors (civil and military), as well as the positive impact of military expenditure on the technological progress of both sectors have been taken into account. These studies generally conclude that these effects are positive. However, the ‘scientific secret’ and ‘defence authorizations’ have often hindered the diffusion of military technological innovations to the civil sector. Several economists therefore consider military technological spin-offs on the civil sector as non-existent, notably because only a few patents interest the private sector. This idea has been much developed since the 1970s. Melman (1974) notably stated that the military/civil technological spin-offs were nonexistent or expensive, a conclusion which was confirmed by Maddock (1983) and many other studies. Mary Kaldor’s theory of ‘baroque arsenal’ (1982) shows that military research and development is only rarely applied to the civil sector; she considers that weapons are henceforth too sophisticated and that they have a negative impact on civil technology. However, several recent technological progresses, notably in the field of information and communication technologies (the development of which is partially linked to the military sector), have led to the development of opposing arguments. THE ROLE OF THE MILITARY SECTOR IN LONG-TERM ECONOMIC DEVELOPMENT

During the 1980s, some developing countries chose to develop their arms industries, thus more or less following the argument of the ‘industrializing industries’. Investments in the military industry would generate a supplying effect (backward linkage effect), i.e. an increase in demand in upstream sectors, and an outlet effect (forward linkage effect), i.e. an increase in demand of downstream sectors. Such ideas have been criticized, notably by Ball (1988), who considers that the military sector competes with the civil sector for skilled labour and investments, creating important opportunity costs; a policy of military investments could only produce multiplier effects in countries with an industry developed and diversified, i.e. generally in great developing countries. Deger (1986) and Ball (1988) also considered that military expenditure aggravates economic underdevelopment. In the long term, the growth of military expenditure is likely to undermine the possibilities of national economic development (Fontanel and Saraiva 1986). Ward showed that, although military programmes in Brazil and India have had positive effects, other public expenditure would have contributed even more to growth. Ward and Lofdhal (1994) show that ratchet effects are higher in the civil sector than in the military sector, the increase in military expenditure being generally a consequence rather than a cause of economic development. Besides, arms imports negatively affect the © 2004 Fanny Coulomb

savings of non-producing developing countries, because they substitute for other productive imports. They generate currency outflows and an increased indebtedness. Other analyses have drawn opposing conclusions: Looney (1988) shows that the negative impact of military expenditure on economic development only exists for arms-importing countries, although this point of view has also been criticized. Finally, Schmidt (1987) insisted on the role of defence spending in the indebtedness process of the developing countries. THE ECONOMIC CONSEQUENCES OF ARMS EXPORTS AND IMPORTS

Arms production is both an economic and a political issue, and raises the question of national strategic independence. This notably depends on the degree of autonomy of arms purchases, on the domestic technological and productive capacities, on the diversification of supplies, on the confidence granted to countries exporting spare parts, or on imperatives of maintenance (Fontanel 1998). In the short run, arms imports seem to have a negative effect on the trade balance. But the choice of arms imports can favour the development of other non-military national industries, the exports of which could increase. Besides, in times when military expenditure decreases at the international level, armsimporting countries are not subjected to conversion problems. In contrast, arms-exporting countries must consider necessary imports of intermediate consumptions and the interval of payment, which can destabilize the national currency. Smith et al. (1985) thus suggested that arms exports don’t always benefit industrialized nations. Moreover, the most specialized military productions are generally adapted to the buyers’ specific needs, preventing an extension of the scale of production (and thus from realizing scale economies). Sometimes, buyers even get favourable terms of credit. Certain exports can therefore turn out to be pauperizing, all the more so as the system of countertrade is often very expensive. However, arms exports generally play an important part in national foreign policy. This relative foreign power strengthens power at the domestic level. A total independence in arms production is imaginary, especially since the development of manufacture agreements under licence in the 1970s, which means a penetration of foreign capital and an internationalization of military industries. Quick technological changes in armaments weaken developing countries, which often purchase foreign licences which are more expensive than direct arms imports. THE SPECIFICITY OF MILITARY PRODUCTION AND PURCHASES

The concept of the militaro-industrial complex has previously been evoked. Not all defence economists have used this term. For example, Hartley prefers the term ‘defence industrial base’. For his part, Aben (1992) insisted on the difficulty in obtaining empirical results showing the MIC’s responsibility in military wasting. On the contrary, Serfati (1992) considers the military sector as a © 2004 Fanny Coulomb

meso-system, i.e. a set of interpersonal and interinstitutional relations ruling production, with its own rules and an organization outside of all real economic control. One of the military sector’s specificities is to be a monopsony, the State being the only buyer. Moreover, the State depends on a few leading firms; competition with foreign producers being difficult to implement. However, changes have recently appeared in the regulation of the defence industry; with regard to France, Hébert (1993) thus mentions the ‘end of the administered regulation’. Another characteristic of the arms industries is to tend towards concentration (quick technological changes, scale economies, increasing budgets of research-development, etc.). Uncertainty is also an important characteristic of the arms market, notably because of information asymmetries, favouring opportunism and strategic calculations from both contracting parties. Game theory has been used to represent their behaviour on the arms market. The theory of agency has also been used to underline the specificity of military contracts (Sandler and Hartley 1995: 138–140). These contracts (with fixed, incentive prices or ‘cost – plus’) are characterized by significant transaction costs, a limited rationality because of information insufficiency, opportunism, and incomplete specifications. Therefore, business in the defence field is characterized by uncertainty and moral hazard. The theory of ‘public choice’ shows that the bureaucratic organization of military administrations leads to an overestimation of the needs and underestimation of the costs. Thus, the government has only a weak capacity to control costs and performances, once a project has started (Hartley 1991). For Sandler and Hartley (1995: 122), the analyses on costs in the defence industries have been insufficient; notably, they haven’t underlined the inefficiency due to an excessively important arms industry. Yet, this issue is central in the actual context of industrial restructuring. The estimation of the economic consequences of disarmament: a theoretical and political issue At the beginning of 1990s, in the post-Cold War context, with a decline of world military expenditure and a diffusion of democracy (Eastern Europe, Latin America), numerous economists dealt with the economic conditions of disarmament. However, because of the theoretical and technical difficulties of econometric simulations, empirical studies on the economic consequences of disarmament have been rare. Disarmament economics became a specific field of defence economics, with an attempt to insert such concerns into a larger reflection on the objectives a society must aim at. Numerous famous economists have indeed dealt with issues linked to disarmament and international peace. They confirmed the conviction developed in the nineteenth century, according to which economists should contribute to convince governments about the uselessness of wars and of excessive military budgets.


The difficult estimation of ‘peace dividends’ The liberal economists of the nineteenth century didn’t show concern for any advantages of disarmament other than the direct economic profits gained from the cessation of an unproductive economic activity. However, a disarmament process raises economic and strategic problems that economists must consider. The 1970s and 1980s were characterized by increased economic and strategic interdependencies, with a growing cost of armament (which created a dependence towards foreign suppliers or towards an alliance) and the American–Soviet arms race, which seemed to jeopardize the world security. Moreover, a new idea was developed according to which underdevelopment also represented a threat for international security. The United Nations notably insisted in 1986 on the idea that security was henceforth economic as well as military. Numerous studies tended to link the objective of disarmament to that of development. The huge sums allocated by developed countries to military activities have often been perceived as a waste, contrasting with the nonsatisfaction of primary needs in developing countries. The UN developed the idea of coupling disarmament and development, and of using the sums spared in developed countries as aid to the poorest countries. The studies on disarmament developed in this context have generally been based on econometric simulations from macroeconomic models of national economies. These models are based on hypotheses concerning relations between great macroeconomic variables. To give only an example, the decrease in the military budget following a process of disarmament should, according to Schultze, lead to a reduction of the American budget deficit, with a saving upturn, a fall in the interest rates and an investment increase. The renewed confidence of financial operators would also contribute to improve the exchange rate. These effects of disarmament would benefit not only the American economy but all Western economies, because of economic interdependencies. There are several forms of disarmament, each having different economic implications. One is the destruction of military stocks; it’s an expensive activity and its initial effect is to increase the defence economic burden. The cost of arms control agreements must also be taken into account. Besides, the ban on the production of specific weapons can be considered as equivalent to a disarmament process, although the conversion can be realized in other military productions. A reduction of military expenditure is another type of disarmament. As military expenditure exerts a strong inertia effect, a reduction can cause a regional economic recession in the shortrun. This negative effect can partially be offset by other types of public spending. The concept of peace dividends has been used in several studies by the United Nations and UNIDIR, which tended to show the positive consequences on development and growth which would result from a reduction in military expenditure. The UN therefore considered that military expenditure © 2004 Fanny Coulomb

represented an economic waste, hindering the socio-economic development process. But the expression of a peace dividend was later contested by a UNIDIR report (1992). This emphasised that disarmament did not mean immediate profits. Indeed, in the short run, costs can result from employment losses or the risk of a regional recession (for example, a decrease in the activity of garrison towns and arsenals). Conversion implies a time of adjustment. The costs generated by a disarmament process (for example, the cost of weapon destruction) can explain why the level of military expenditure remains constant. Thus, in spite of all the previous disarmament agreements between the United States and USSR, world military expenditure only significantly declined from the 1990s. The 1992 UNIDIR Report for the United Nations General Assembly therefore suggested the use the expression ‘peace investment’ rather than ‘peace dividends’, disarmament being necessarily expensive (Intriligator 1996). In addition to the technical problems of revealing the ‘peace dividends’, strategic problems arise. Indeed, disarmament is unacceptable if it means a loss of independence of national defence. Yet, the high complexity of international strategic balances is such that any change is likely to annihilate them. Moreover, a reduction in the number of weapons through an international agreement won’t necessarily imply a decrease in military expenditure at the national level. Countries can try to improve the quality of the remaining weapons or increase the production of the weapons which the agreement makes no provision for. These strategic imbalances resulting from a disarmament process could also be coupled with an economic imbalance, with increased trade competition between industrialized nations on civilian markets and greater technological gaps with developing countries. The diversity and contradictions of the formalized analyses on disarmament The debate on the economic consequences of disarmament didn’t cover the traditional theoretical cleavages of defence economics. Thus, some ‘Marxist’ economists criticized the idea of a ‘hypocritical’ disarmament under the aegis of the UN; others are favourable to a decrease in the economic and social influence of the MIC. If some Keynesian analysts present military expenditure as an instrument of economic policy, others consider that they are not as effective as other public spending, and thus that disarmament will have a positive economic effect. Most of the time, econometric analyses of disarmament are based on Keynesian macroeconomic models, even if models of general equilibrium have sometimes been used. The simulations of a disarmament process have generally been based on one of the following scenarios: • • •

a ‘simple’ disarmament, a disarmament with an increase in other public spending, an international disarmament with a transfer to developing countries.


The reduction in military expenditure releases resources, but the question is to know how they will be used. Adams thus suggests distinguishing the peace resource dividend from the peace product dividend, the latter being the only one that concerns consumers. Disarmament will benefit economic growth if it results in an increase in investment (symmetrically to the crowding-out effect of military expenditure). However, most models recognize that a disarmament process entails short-term economic difficulties (notably a fall in demand), but that adjustments are possible, owing to economic policy (fiscal or monetary). Thus, according to Adams and Huang’s (1992) macroeconomic simulations, in the absence of any offsetting demand policy, a gradual and continuous reduction in military expenditure would generate a fall in economic activity, with an increase in unemployment. Adam shows the advantages of adjusting interest rates and/or prices, to favour an increase in private demand; the State can also help in solving microeconomic problems of conversion. From a long-term perspective, several studies have underlined the positive economic impact of disarmament. Klein (1993) thus stated that a reduction in military expenditure would benefit the American economy. His argumentation is based on the difference between military products (which do not generate any economic return) and civilian capital goods (which generate new income flows). With a model of endogenous growth, Berthélemy et al. (1995) showed the benefits that could be gained from a decrease in military expenditure in India and Pakistan. Their simulation shows that, the part of military expenditure in GNP being excessive, their reduction would increase the level of prosperity. Several other studies focusing on other economies reached similar results, notably those of Dunne and Smith (1984) and Barker et al. (1991) concerning the United Kingdom. Military expenditure has been analysed in terms of opportunity cost, notably if one considers that these sums could be allocated to other public expenditures. For example, Kennedy (1987) recommended a reallocation of the sums spared owing to a reduction of military spending to the civil sector; this would enable the United States to finance social programmes and improve the productivity of their economy. Some models aimed at showing the benefits of such a reallocation of the resources released by the military sector, notably for the health system (Harris et al. 1988). Financial aid to developing countries has sometimes been conditioned by a weak level of military expenditure, notably by the World Bank. In addition, the idea of transferring the sums spared through the disarmament of developed countries towards the developing countries has often been mentioned. In a classic study based on an input–output model, the World Model, Leontief and Duchin (1980) have shown the implications of such a transfer. The estimation of their model incorporated more than two-and-a-half million data pieces. It is based on several scenarios of reduction in military expenditure, with possible transfer of resources towards the developing countries. Unlike the hypothesis of a fall in the demand for raw materials due to a reduction in military expenditure, the model shows that the new growth which results from this disarmament © 2004 Fanny Coulomb

does not endanger the economies of raw-material-producing countries. Their results show that developing countries could gain very important benefits from such measures. However, these results are estimated at a very general level. This study doesn’t take into account the specificity of each national growth path. Moreover, the quality of the (official) information used in the case of Eastern countries is questionable. Other models simulated a reduction in military expenditure with transfers towards Third World countries (Fontanel 1995b). For its part, the MULTIMOD of the IMF was used in 1993 to evaluate the impact of a 20 per cent reduction in world military expenditure, but also in military aid and arms transfers. It showed that this process should lead to long-term profits amounting to 45 per cent of world GNP (10,000 constant 1992 US dollars). In developed countries, this measure would increase private consumption and investment; if, moreover, a policy of interest rate reduction and public purchases was followed, then the temporary reduction of GNP resulting from this measure should be overcome as soon as the second year. According to this scenario, the benefits gained by developed countries after eleven years would amount to 60 billion US dollars (with 11.5 billion US dollars for developing countries). But it is, in fact, difficult to make exact forecasts on this issue, given that models do not integrate the changes resulting from such measures, at the level of the terms of trade, interest rates and international debts. Moreover, all the criticisms usually associated with aid to developing countries apply here (such as the risk of monopolization by certain groups, induced costs, inflationary pressure). The conversion of military industries, after a disarmament process, has been a widely studied issue since the end of the Cold War. These empirical analyses use both macroeconomics and industrial economics. The specificity of military production hinders its conversion, with a lack of commercial culture. Besides, the civil markets entry barriers are very high. The conversion of the arms industries in the former Soviet Union has been a particular area of study in recent years. The peace movement in economics Several organizations have promoted peace research, such as UNIDIR or ECAAR. These initiatives have been supported by several famous economists. Their contribution on this subject generally aimed first at convincing political leaders and public opinion of the advantages of disarmament. Thus, Boulding (1987) denounced the harmful economic influence of the war industry of the UNDO (Unilateral National Defence Organizations), which remains out of economic culture, producing large diseconomies, therefore endangering the security of neighbour countries. Tinbergen (1987) also showed his concern with peace issues, and advocated the development of new institutions promoting world peace: a real-world police force should be organized and financed by a world Treasury. Aid to developing countries should be increased, economic © 2004 Fanny Coulomb

difficulties remaining the main causes of conflicts. For his part, Galbraith (1987) called on economists to show how to use the available resources efficiently and intelligently. He criticized the silence of current economic thought on the development of the military sector out of all democratic control; he seemed particularly concerned with the influence of the military sector on poor countries. Arrow, Isard, Klein and Schwartz are some of the illustrious economists who have denounced the arms race logic and called for disarmament as well as for aid for developing countries. Many famous economists, mostly in the United States, have taken part in conferences or in works which aim to promote the idea of disarmament and world peace. Thus, Eisner (1996) dealt with the relationship between disarmament and employment, and Tobin (1996) focused on American military expenditure with regard to the budget deficit. Defence and peace economics therefore cover two different but complementary aspects: a vast scientific literature is devoted to the study of the economic consequences of armament and disarmament, with the development of mathematical models and statistical tests. Besides, the tradition of pacifism in the economy has experienced an unexpected renewal during the Cold War, with publications developing more general and philosophical arguments. The association between disarmament and development was, however, a novelty.


7

The strategic dimension of political economy and the concept of ‘economic war’

During the post-war years, numerous formalized and empirical studies on the conditions of war or peace were carried out. While these analyses remained globally apolitical, a whole part of the economic research on conflicts and defence was also developed in the field of ‘political economy’. Two currents can be distinguished here. First, some Keynesian–Marxist analyses were focused on the role of the military sector in capitalist systems; these studies have been previously mentioned. But at the same time, a new kind of analysis appeared, dealing with interstate power relations, the economic dimension of foreign policy and the political dimension of governmental economic measures aiming at promoting national interests at the international level. The concept of ‘economic war’ has often been used in these analyses.

The economic weapon: what efficiency? The idea of economic war is not a new one, even if this expression wasn’t much used before the mid-twentieth century. This notion (but not the expression itself) was already present in mercantilist texts; it was later used by several economists, such as List, Marx and Hirschman. The expression itself appears in many recent economic texts. Nevertheless, in the absence of a clear definition of economic war, this notion has had different meanings. According to a present widespread conception, it refers to an exacerbated international economic competition, with the use of unfair measures by governments, notably ‘beggar-thy-neighour’ strategies. The difficulty in this definition is that it doesn’t distinguish economic war from economic competition. The issue for the States is to improve their relative positions in the world economic hierarchy. The matter isn’t a war with the wish to destroy enemies, it is simply an economic conflict in which States intervene to favour their own economies, owing to their influence in international organizations or to the implementation of appropriate trade or industrial policies. A stricter conception of economic war limits the use of this expression to describe acts of violence against another country: measures taken by a country which aim at weakening the other party, even at the expense of its own economic advantages. Thus, a situation of embargo causes important economic © 2004 Fanny Coulomb

damage to the target country, but it also represents an expensive operation for the country which initiates it. It is a negative-sum game, henceforth comparable to a real war. The economy as an instrument of power, security and war If the use of the expression ‘economic war’ to describe situations of intense economic competition is questionable, on the other hand it is justified to characterize the measures States take to damage an opposing economy, in an economic, political or military purpose. A few analyses on power policies using the economy have been developed since the end of the Second World War. They give a view of all international economic relations from a strategic angle, resulting from the complex game of the international balance of power. However, very few studies have considered the ‘economic weapon’, compared to the frequency of its use. List (1841) was the first economist to insist on the economic dimension of national security. The neo-mercantilist discourse developed at the end of the 1980s also extended the analysis of national security to the economic sphere. The relationship between a country’s industrial capacity and its ability to influence the standards of the international system and to widen its sphere of influence, notably through policies of trade and technical aid, has been underlined. On the other hand, this perspective leads one to consider the issues of dependence and the vulnerability of national economies. A.O. Hirschman (1945) published a founding analysis in this field, entitled Foreign National Power and the Structure of Foreign Trade. In the presentation of his book, he distinguishes himself from the liberal and imperialist analyses of international relations and he often refers to mercantilist theory. His theory focuses on an issue still unexplored by the economists of his time, i.e. the relationship between foreign trade and national power. Hirschman is today considered as a ‘political economist’. In his work, he develops an analysis on the economy’s vulnerability to the use of the economic weapon (quotas, trade controls, capital investments and other instruments of economic war) by one or several countries. With regard to his theoretical affiliation, he aspires to go beyond the divisions between the traditional economic analyses. Hirschman only claims his affiliation to a general current accepting the idea according to which nations lead ‘power-minded policies’ (1945: XV). First, he shows that the issues of State ‘economic strategies’ have never been well put; he notably regretted that Machiavelli hadn’t understood the close links between the economy and politics. The key issue is then to demonstrate the potential of foreign trade (foreign aid, capital flows or trade negotiations) as an instrument of political pressure. As the real author of the coefficient today known as the ‘Gini coefficient’, Hirschman developed a measure of trade concentration which measured the dependence of a country towards foreign countries, i.e. its vulnerability. He thus underlines the preference of large countries for the smallest and weakest countries, when choosing their sources of imports. His analysis also shows that ‘laissez-faire’ is an © 2004 Fanny Coulomb

exception: controls, protections and unequal exchanges being the rule. Under these conditions, States exert their influence so as to modify trade flows to their advantage. A few authors pursued Hirschman’s ambition to study policies of power. In his work entitled International Economics (1958), Thomas C. Schelling insists on the necessity of studying the relationship between a nation’s political objectives and the instruments of its foreign economic policy (protectionism, economic sanctions, control of strategic products, etc.). His aim was to integrate the analysis of these measures into a unified economic theory. More recently, David Baldwin (1985) studied, in his work Economy Statecraft, the various economic techniques likely to be used as instruments of foreign policy. This analysis thus focuses on the economic instruments governments use to exert pressure on other countries, so as to make them act in a specific way. Referring to the ambition of the first economists, Baldwin considers that it is a matter of ‘helping the Prince’, in a context of increasing economic interdependence. From his point of view, the theory of globalization and Marxist theory both share an erroneous conception of the State’s role. The first doesn’t give enough importance to it, whereas the second reduces it to a simple reflection of the dominant class interests, without any collective objective. All of these analyses reveal the real meaning of the concept of economic war: economic power or vulnerability has a direct influence on the level of national security. Economic weapons and their efficiency The use of the economic weapon is not a zero-sum game, because it implies losses not only for the target country but also for the initiating country. In the case of multilateral sanctions, the whole world economy is in a sub-optimal situation. Several strategies have been used, which don’t aim at national prosperity or development but, rather, at the decline or subjection of another economy. The efficiency of an economic sanction can be assessed by comparing losses of each party; it therefore follows some principles of war. The strategies Relatively few economic analyses have analysed economic war. With regard to their typology, all the economic weapons used during the Second World War or in former conflicts have been listed in several works, notably by Paul Einzig (1942), or Wu (1952). It is impossible here to make an exhaustive presentation of these various techniques used in wartime. We shall rather focus on the economists’ contribution to the analysis of economic instruments used even in peacetime to promote interests of national power. In this respect, Baldwin’s analysis (1985; see chart 12) is particularly interesting. He distinguishes negative economic sanctions (such as embargoes, © 2004 Fanny Coulomb

boycotts, import restrictions, assets freezing and aid suspension) from positive economic sanctions (such as financial aid, investment guarantees, favourable tariff discrimination). Many other presentations of the economic weapon have been made. Most of them are not formalized and are mainly based on case studies. This methodology has notably been used by Klaus Knorr (1984; see chart 13), who wished to reveal the interest of international economic sanctions. In his work, he develops an analysis in terms of costefficiency, even if he admits that estimations are difficult to carry out. He lists the different uses of foreign economic relations as a mean of political pressure, notably the supply of goods and services, markets opening, loans extension, financial donations, technological transfers and assets freezing. These economic instruments are not only used to exert coercion, but also to reinforce the structural power, to support allied countries or to weaken foreign countries. While recommending the use of the resources of economic power at the level of international policy, he explains that the numerous failures of the United States in this field can be explained by an insufficient preparation and bad estimates. The fragmentation of political and economic expertise between various bureaucracies would thus largely be responsible for the relative failure of these measures. Table 7.1 Positive and negative economic sanctions for David Baldwin Negative sanctions Trade

Embargo Boycott

Assets

Freezing of assets Control of capital import or export Aid suspension

Positive sanctions

Favourable tariff discrimination Guarantee of the most favoured nation Tariff increase Tariff reduction Unfavourable tariff discrimination Direct purchase Withdrawal of the most favoured nation Export or import subsidies Black list Licence guarantee (exports or imports) Promise of the above measures Import or export quotas Licence refusal Dumping Preventive purchase Threat of the above measures Less obvious measures: purchases, free trade, tariffs.

Unfavourable taxation Suspension of the payments to an international organization Threat of the above measures © 2004 Fanny Coulomb

Aid supply Garantees of investment Incitation to private capital export or import Favourable taxation Promise of the above measures

Table 7.2 The application of economic values as power resources, according to Klaus Knorr (1984) Type of measure

Description

Objective

Structural power

Fixation of international trade If it has a structural power, a rules by a State or group of States. country may influence international economic relations for its profit (dependency theory). An agreement with other great powers may be necessary.

Support of foreign Aid of more developed countries countries in favour of less developed countries, bilateral aid or aid through an international organization.

To help the recipient to survive, in exchange of a submission to the donor will. Objectives are difficult to define: humanitarian, power, etc.

Voluntary weakening of foreign countries

To weaken enemy’s economy. To prevent imports of goods which would increase the enemy’s strength. The cost of these measures may be important. It was notably the case for the COCm and the CHINACOM, owing to the imperfect co-operation of allies.

• Withdrawal of goods and • services, of assets or freezing of • foreign assets. • Economic war during a conflict. • Commercial embargoes, total or • partial. • Exports restrictions of a good • (COCm or CHINACOM: • American embargo on strategic • products towards China or • USSR).

Coercion through Threat to withdraw all economic economic means values from one country, or the execution of the threat.

Will to influence the behaviour of one country in a direction which is favourable for the initiating country. It is confirmed by several examples. Success depends on the application context of this measure.

Positive economic sanctions

Gifts and/or promises of gifts relative to an economic value.

Will not influence the behaviour of one country in a direction favourable to the initiating country. Success depends on the context. Efficiency must be analysed.

Pseudo-sanctions

Economic sanctions taken without former sufficient reflection to ensure their success.

Objective: vengeance or ripost. Impossible to conduct an analysis in terms of efficiency.


With regard to the field of economic analysis, studies on economic weapons are also quite rare. However, two kinds of economic theories seem particularly adapted to the study of economic sanctions: public choice theory and game theory. The former has been used to show how economic sanctions can have a political impact on the target country, even if they do not create decisive economic damages: indeed, they send a signal to the groups opposed to the ruling regime in this country. Game theory can also be used to analyse economic sanctions, as all situations of incomplete information are concrete cases of the application of economic variables for politico-strategic purposes. However, this method encounters several limits, as shown by Lisa Martin (1992) (such as hypotheses of simultaneous decisions, of the players unity and rationality). Yet, there are still very few studies on economic weapons, compared to the importance of their use in the history of international relations. The difficulty raised by the estimation of their economic and political consequences probably explains this. Some examples of the use of the economic weapon The examples of the use of economic weapons have been numerous since the end of the Second World War, in particular by both superpowers during the Cold War. If most of the time the United States have used it against countries out of their sphere of influence, such as USSR, Cuba or Nicaragua, the Soviet Union used it against East European countries which did not follow the dogma imposed by Moscow, such as Yugoslavia at the end of the Second World War, Albania or Mao’s China. The United Nations also used the economic weapon, by imposing economic sanctions against Rhodesia, South Africa, Iraq and Serbia. The issue of the efficiency of economic sanctions remains very controversial today. The retaliatory measures imposed by the Soviet Union against China, Yugoslavia and Albania have certainly contributed to limit the industrial capacity of these countries, but they did not succeed in weakening their systems; on the contrary, they have probably reinforced them. Only military intervention has been effective in reducing political dissent, like in Hungary or Czechoslovakia. In the same way, by implementing an embargo on cereals against the Soviet Union, the Carter administration aimed at creating social problems in this country; this strategy also failed. The examples of failures of economic sanctions are numerous. Besides, the cost of these measures for the initiating countries is often high, economically as well as politically. For example, numerous estimations have revealed the important cost of the use of the economic weapon by the United States, with export (and thus job) losses, and a decrease in American firms’ competitiveness in international markets. For example, the COCOM (created in 1949 and abolished in 1994), which controlled the export of strategic products (ultramodern technologies, not exclusively military) to the USSR, would have benefited European more than American industries. © 2004 Fanny Coulomb

The American sanctions against Cuba in 1960 are a good example of the difficulty in using economic weapons, because of the possible ‘boomerang effects’ that would make the cost of economic sanctions more important for the initiating country than for the target country. The United States imposed an embargo on all American exports towards Cuba (with the exception of pharmacy), with a withdrawal of the sugar quota in favour of Cuba, which meant the loss of its main customer (with high guaranteed purchase prices) and technical and financial aid supplier. These measures aimed at sanctioning Castro’s policy, which affected the interests of American firms by nationalizing the big agricultural properties, in particular in the sugar sector. The nomination of Che Guevara as president of the national bank, then the visit of Soviet citizens to Cuba in 1960, further damaged American–Cuban relations. In answer to American measures, the Soviet Union suggested buying sugar from Cuba, in exchange for products, notably oil. The opposition of the refinery companies present on Cuban territory led to their nationalization, along with the one other American interest in Cuba. American sanctions were then increased but the United States succeeded neither in imposing a vote on collective sanctions against Cuba nor in interrupting the other OECD countries’ trade with this country. American sanctions were gradually reduced from the end of the 1960s, but were later reinforced. This use of the economic weapon by the first world power against a small nearby State has failed, and has strengthened rather than weakened the Cuban government, in spite of the impoverishment of the Cuban population. It also contributed to the development of a strong anti-American culture in the country. This example shows that economic sanctions are only effective if there is no alternative source of trade appears, which has never been the case for Cuba (which benefited from the Soviet support but also from the questioning of the United States’ policy by their allies). Similarly, the sanctions voted by the international community from 1991 to weaken the Iraqi leader Saddam Hussein weren’t sufficient to create the conditions of his deposition. Like all wars, the economic one has a cost, all the more important as economic relations interrupted by the conflict were already developed, and the degree of trade concentration between both countries was high. But beyond a simple comparison between the losses of each party in conflict, an assessment of the economic weapon’s efficiency is difficult to achieve; indeed, it must take into account different parameters, economic but also political.

The concept of economic war: support for a new definition of national security In recent years, the concept of economic war has often been used to characterize international economic competition, exacerbated by economic ‘globalization’. If its definition remains relatively vague today, this expression appears in texts in which the authors wished to go beyond the traditional division between the Marxist and the liberal analyses of international relations, and to provide an © 2004 Fanny Coulomb

alternative theory. Their common feature is a reference to the mercantilist doctrine and the importance given to the interaction between economic and political objectives at the world level. However, several arguments raise the question of the excessive use of the expression of ‘economic war’ in studies of international political economy. The development of a globalization theory Recently, the concepts of ‘globalization’ and ‘economic war’ have been used in parallel. Both expressions suffer from a lack of consensus on their definition. In the first analysis, they may even seem contradictory. The characteristics of globalization can be interpreted as being fundamentally peacemaking, in a liberal perspective. This is the case for the development of cross-border flows and the increasing interdependence of national economies, the increasing liberalization of international trade under the aegis of the GATT, then of the WTO (real, in spite of an important non-tariff protectionism), the creation of regional trade unions which accelerate the process of trade liberalization within borders, or the implementation of international trade laws limiting ‘unfair’ trade measures . . . Moreover, at the beginning of the 1990s, many analyses dealing with the idea of the ‘end of history’ widely took up the liberal optimism regarding the pacification of international relations through economy, which had already been expressed at the end of the nineteenth century, in the context of an unprecedented opening of national economies. The expression of ‘economic war’ during the last decade also referred to the often painful economic changes caused by globalization, which would justify State intervention to limit their negative consequences. Thus, Reich (1992) in the early 1990s stated that the unavoidable disintegration of national economies is likely to increase insecurity and pauperization, with, notably, a modification of the nature of jobs which increases inequalities. He then recommends an appropriate policy for the United States, a State he considers to be designed for being the only leaders of a henceforth global economy. Economists are, however, far from giving the concept of ‘economic war’ unanimous support. As early as 1942, it was directly criticized by J.A. Schumpeter. More recently, P. Krugman (1994) denounced the negative views linked with the idea of economic war, especially the analyses encouraging a certain obsession with competitiveness. According to him, some policies followed in the name of economic war and competitiveness are likely to be harmful for the national economic interest. Calls for national patriotism don’t aim at improving the economy’s competitiveness, ‘a country not being a company’ (1996); indeed, the State’s power of influence on the economic structures remains weak. Krugman also questioned the efficiency of the ‘strategic trade policy’, notably because of the risk of trade war associated with it. The use of the concept of economic war therefore seems to imply a bias. And in fact, it refers to a specific current of today’s economic analysis. © 2004 Fanny Coulomb

The contemporary analyses of economic war Neo-mercantilism and geoeconomics The concept of economic war has rather vague theoretical origins. The Russian Marxist, N. Boukharine, is the economist who developed this subject the most explicitly, in his work published in 1915. However, the evolution of international economic relations did not confirm the forecasts of most Marxist theoreticians of ‘imperialism’, according to whom economic and political tensions between major powers always increases. The development of international trade agreements and laws, the fact that several markets are today dominated by a few big firms, the control of which is unquestionable, all constitute characteristics showing that the idea of an economic war isn’t enough to describe the current world economy. Moreover, the pertinence of this concept in characterizing situations of strong trade antagonisms between rival economies can be questioned; in fact, it has only rarely been used in the history of economic thought. The term ‘war’ implies the acceptance of losses, ‘deaths’, a will for destroying the opponent: yet such elements cannot come into a description of economic competition, however intense it is. The mercantilist analyses certainly showed that power benefits from the economy and recommended aggressive trade measures to generate a trade surplus. However, the great majority of these texts show that their authors aimed both at wealth and power. The term ‘neo-mercantilism’ has sometimes referred to contemporary analyses insisting on international economic rivalries and on the use by governments of industrialized countries of a new kind of economic interventionism. The theoretical foundations of these analyses remain vague, even if they can be associated with the ‘neo-realist’ current, as well as with the legacy of mercantilists, of List and of institutionalist economists. The neo-mercantilist analysis is empirical and descriptive; it claims its ‘realism’ in contrast with the lack of realism of the orthodox theory’s hypotheses. Moreover, the expression of international political economy is often used to distinguish itself from the field of international economics dominated by the orthodox theory. However, even if many of these authors aimed at developing a new theoretical field, apart from the liberal and Marxist analyses, the debate remained very scattered, notably because of the great variety of studies. One of the distinctive features of these analyses is to have revealed the interdependence between the States’ political and economic objectives on the international scene. Besides, these analyses generally reject the idea of a progressive evolution towards an economy without borders, and identify new fields of interstate confrontation, at a national as well as a regional level. Thus, Robert Gilpin (1987) presents his ‘structural’ theory as an alternative to the three ‘classical’ ideologies of international relations: liberal, Marxist and nationalist. Referring to mercantilist theory, he recommends a ‘realistic’ interpretation of international relations; he therefore deals with the structural evolution of the world system and with the contradictory game of the various national ambitions during © 2004 Fanny Coulomb

international negotiations on monetary, trade or investment issues, in a general context of unemployment and development inequalities. Protectionism and trade wars between large regional blocks would then be likely to reappear. Other economists expounded, in the early 1990s, the scenario of the regional rivalry within the Triad. Multinational firms participate in this process of economic regionalization, because they remain committed to their country of origin. In this system of near blocks with ‘administered trade’, competition is no more military but economic. The role of the State is then central to overcome the weak competitiveness of the domestic economy. Once again, the use of the concept of economic war must remain cautious. ‘Neo-mercantilist’ policies only aim at protecting national industries and at developing international market shares, rather than at harming competitor nations. Therefore, this expression doesn’t seem to be appropriate to a rigorous analysis of current international economy. The economic role of the military sector: a key issue Since the beginning of the twentieth century, the issue of the link between civilian and military sectors within capitalist economies and of its impact on their respective performances has been widely discussed. The results of these analyses have differed with time. While, in the 1980s, most economic studies denounced the insufficiency of military technology spin-offs on the civilian sector, this tendency reversed during the 1990s, notably with the renewed success of the American economy owing to the information technologies, partially developed in the defence sector. Yet the idea that a link exists between the performances of the civilian sector and the military sector contributed to reinforce the conception of international economic relations in terms of economic war. The military sector being widely subsidized by the State (it is even the main channel of the American industrial policy), policies in favour of the military sector (notably research and development) have been considered as new elements of ‘geoeconomics’. In the same way, the involvement of certain elements of the defence sector in civilian activities, notably through ‘economic intelligence’, a central issue of the current competition, has contributed to reinforce the debates in terms of ‘economic war’. But again, this concept can seem inappropriate, as far as nothing distinguishes economic war from international competition. Some economists, who believed there were different types of capitalisms, more or less adapted to economic war, also developed the thinking on the relations between the civilian and military sectors. These analyses, which were developed in the 1980s, pursued to a certain extent Veblen’s thinking, based on the analysis of historical facts and political sociology. They more or less defended the idea of a decline in the Anglo-Saxon capitalist model (and thus in the American economy). Thus, Galbraith (1993) links his concept of technostructure to the importance of the military sector in the American economy. © 2004 Fanny Coulomb

In his work published in 1993, he considers the problems of American society as partially resulting from its excessive militarism. The decline in the international power of the United States is directly linked to the climate of contentment which prevails, inherited from the 1945 victory. On the other hand, Germany and Japan led their post-war development with the typicial ambition of defeated countries. Thus, the United States seem to be disadvantaged in the economic war which brings them into conflict with their main competitors. In addition J.K. Galbraith denounced American capitalism’s tendency to self-destruction, because of the general commitment to laissez-faire and market freedom. From this point of view, military expenditures represent a ‘security margin with great inertia’, partially designed to control the growth of the economic surplus. In this way, this analysis is close to that of Baran and Sweezy. Thurow’s study, published in 1992, is another interesting work. The author identifies two types of capitalism: Anglo-Saxon and Rhenish. He considers that the competition between them has replaced the one between communism and capitalism. The differences between the two models of capitalism are notably explained by the different part played by the military sector in the industrialization process. Anglo-Saxon capitalism is thus strongly influenced by the tradition of State non-intervention in the economy, because of the privileged conditions for productive accumulation during its development. For Japan and Germany, the search for economic development was closely linked to national defence; economic elements have always been determining in national political independence, industry being considered at least as important as the army. This conquering spirit in the economic sphere has been perpetuated up to the present time, supported by an active state policy. This contributes to modify national comparative advantages through industrial and economic policies, in a ‘neo-mercantilist’ perspective, in contrast with the neo-classical conception of specialization through comparative advantages. E. Luttwak (1991) also developed similar ideas, with the concept of ‘geoeconomics’. Thurow (1992) also considers the military sector’s role in the economy, different in each type of capitalism. In the Rhenish capitalism, production imperatives prevail; this system creates products that are directly marketable and competitive, including in the military field. On the other hand, in Anglo-Saxon capitalism, the importance given to profit and finance leads to an autonomous development, out of all market constraint, of the military sector, which is considered a prestigious activity. This resulted in the implementation in the concerned countries of strong militaro-industrial complexes, which have their own dynamics and which are little concerned with economic constraints. Thurow’s analysis thus presents economic war as being the main characteristic of current international relations. It contributes to the wish to assert national existence and power at the international level, and in this way has the same nature as an armed conflict. Similar issues have also been discussed in Väyrynen’s analysis (1992). In a UNIDIR study, this author develops a detailed analysis of the historical role of © 2004 Fanny Coulomb

the military sector in the industrialization process; his conclusions are similar to Thurow’s. Väyrynen shows that the first countries to have had a clear perception of ‘economic war’ have an advantage in the current international economic competition. His study analyses the role of the military sector in the industrialization process of four countries: Japan, England, Brazil and the United States. In Japan, military industries have had positive effects on the civilian sector, during the industrialization process, notably because they encouraged State interventionism, in favour of the development of technologies and heavy industries. However, the continuation after the Meiji era of a policy based on military programmes and a significant bureaucracy and centralization have had negative long-term consequences. Therefore, the idea according to which the military sector is economically necessary is not always confirmed. Besides, according to Väyrynen, countries in decline, such as the United States and Great Britain, which traditionally allocate important resources to the military sector, can no longer rely on important technological spin-offs from the military sector towards the civilian economy. For structural reasons, high technologies can no longer be initiated by military research and production. The Japanese example shows that a strong basis in civilian and dual technologies will later generate important potentialities for arms production. However, the military sector never stimulates economic growth. On the contrary, the domestic military capacity depends on the strength of the civilian economy and on the global technological basis of the nation. These ideas, developed by Väyrynen in the early 1990s, are very representative of the views most economists had on the link between military and civilian technologies; these are however less widespread today, notably because of recent technological developments, which are closely linked to the defence sector. Moreover, all these theories (Galbraith, Thurow, Väyrynen and others) developed at the beginning of the 1990s believed in the ‘American decline’, the Rhenish social-corporatist model being considered as more effective. Recent economic trends tend to contradict this opinion. The concept of economic war has thus been widely used recently to describe the exacerbation of international economic competition in the context of globalization, with numerous offensive strategies led by States or firms on foreign markets, which could imply the use of ‘unfair’ measures. Nevertheless, this concept doesn’t include all the characteristics of the contemporary world economy. Besides, its use may appear excessive, the term ‘war’ referring to an idea of destruction, opposed to the trade logic. The permanence of an old debate: is the economy pacifying? During the 1980s and the 1990s, several studies have specifically analysed the issue of the relation between economy and international conflicts, in a more political, rather than strictly economic, perspective. For example, Bueno de Mesquita (1981) and Siverson (1991) show that governments wage wars if they consider them to be useful. However, economic variables are only © 2004 Fanny Coulomb

poorly represented in their models. Besides, studies of ‘international political economy’ have developed a great deal during this period. They are based on the presupposition that international trade relations are first determined by political factors, and that economic factors exert a weaker influence. The neo-realist theory of international relations gives considerable importance to the distribution of power. In this respect, Conybeare (1990) develops the idea that economic incentives don’t encourage the dominant powers to follow a liberal trade policy, but rather to try to influence the terms of trade to their advantage by different means. Therefore, the neo-realist movement doesn’t consider wars to result from a decrease in international trade, but rather from trade expansion. Many specific analyses have been conducted on these issues. One of them was made by Mansfield (1994), who aimed at pursuing and improving the realist analyses of international relations, by studying the relation between power, trade and war. The power of a State is assessed by its economic, demographic and military capabilities, which can change the war outcome and modify trade flows. Mansfield’s analysis concludes that war is determined by power and economic factors. In the same way, power, war and economic factors influence international trade. This complex study thus ends in a truism. Besides these analyses of ‘international political economy’, several empirical studies have been carried out to analyse the relations between trade and conflict; they have led to contradictory results. The underlying stake is the confirmation or the rejection of the liberal hypothesis that the development of international trade favours international peace. These studies developed considerably from the beginning of 1980s to the beginning of 1990s. S.W. Polachek’s analysis (1980) is a good example; by using a model, he empirically tests the hypothesis of a negative link between armed conflicts and trade development. The results confirm the hypothesis that causality runs from trade to conflict, which means that the development of trade between two countries decreases the possibilities of mutual conflicts. These results have, however, been questioned by Roemer (1977) and Pollins (1989). The latter shows that bilateral trade flows are differently distributed depending on whether the two countries belong to the same political sphere of influence or not. If it is the case, then the dominant country’s trade with the country under political influence will concern the sectors of production for which the dominant country is the least effective. Reuveny and Kang (1998) also conducted their own study on the conflict–trade relation, without making any preliminary hypothesis on the direction of causality. Their results show that causality between conflict and trade runs both ways, therefore indicating a mutual dependence. If causality is stronger in the case of strategic products (such as raw materials or oil), on the other hand, the existence of a political rivalry within a dyad only weakly influences causality. All of these studies show the topicality of the idea that conflict probabilities decrease with the development of international economic interdependencies. However, given the difficulties inherent to the creation of an appropriate © 2004 Fanny Coulomb

model, and to their empirical verification, this liberal hypothesis, which developed at the same time as international trade, can’t be definitively accepted. Since the end of the Cold War, however, economists are less interested in this issue. However, new fields of investigation appeared, supported by empirical analyses, notably on the link between the diffusion of democracy and international peace (Ward 2000).


8

Conclusion

One may wonder whether the situation at the end of the twentieth century is not, in a way, similar to the one at the end of the eighteenth century, when several radically conflicting theories coexisted. Indeed, the old dichotomy between two opposed conceptions still exists, with: •

•

a liberal theory, which today, in the field of economic policy, asserts its faith in economic globalization and its refusal to hinder free-market mechanisms; an interventionist theory, which supports State intervention to strengthen economic power and which uses the argument of national defence and of the fight against the different effects of domination.

However, the current theoretical context differs from that of the end of the eighteenth century. It has indeed been enriched, since the First World War, by several analyses dealing exclusively with defence economics issues. The application of microeconomic and macroeconomic analytical methods allowed defence economics to become an independent field of work. The concept of an arms race certainly represented an important novelty in the post-Second World War economico-strategic reflections; arms race models have reached a high level of sophistication in the explanation of the level of military expenditure in a situation of strategic interaction between two countries (enemies or allies). But, finally, their capacity to explain the reality turned out to be limited. Indeed, no model had predicted the collapse of the Soviet economy, maybe because the economic determining factors in an arms race haven’t been given enough importance. Yet, this arms race was also considered as an economic war, with a strategy of ‘impoverishment’ through the military burden. Besides, no decisive conclusions have been drawn from the studies on the economic impact of military expenditure, because of the wide range of concrete situations and of the importance of extra-economic factors. They have, however, succeeded in identifying the multiple problems generated by a disarmament process, thus qualifying the optimism which generally develops at the end of all wars on the profits which could be gained from a decrease in military expenditure. However, this current of defence economics does not include all studies on © 2004 Fanny Coulomb

Economy as a source of conflict Mercantilism Economy serving war

Economy as a source of conflict Economic war

WAR

WAR

Capitalism Wealth protection Rise or maintaining of States

Maintaining of Marxist thought

Physiocrats Respect of the natural order

Arms race Disarmament

Socialism Peace resulting from free trade Classicals Cosmopolitan economy

War, a non-economic problem

Globalization as a factor of peace Cosmopolitan economy

Figure 8.1 Simplified comparison of the debates on the warlike or peaceful nature of the economy at the end of the eighteenth century and at the beginning of the twenty-first century.

peace and war issues developed since 1945, which have remained scattered among several theoretical movements. The diagram above shows a kind of symmetry between the dominant theories of the end of the 18th century and those of the end of the 20th century. In other words, after two centuries of important economic research on defence, peace and war issues, the question of the warlike or peaceful nature of the economy is still debated. These debates have certainly been renewed, but they always lead to the same uncertainties, as if the economy could not, by itself, deal with all war and peace issues. This leads us to raise objections against Michel Serres when he denies the learning of sciences through history (1974). The economic analysis cannot develop without the help of history and without the support of its own history. Economic research specializes, it opens new horizons, it uses new methods, it expounds behaviours and relations regarding economic issues, it provides the information necessary for political action. But the price of precision is sometimes represented by important simplifying hypotheses on the economic system, necessary to deal with complexity, such as a peaceful context. Under such conditions, the reading of former texts reminds us that the economy is inserted into a social field. It refers to a certain conception of mankind in both its individual and social nature. If humanity is a product of history, then history helps to understand our economic and social organization. Keynes presented economics as a moral science in which the ‘values’ exerted an © 2004 Fanny Coulomb

influence at least as important as the scientific methodology. For Rawls, it cannot avoid ‘value judgements’, in spite of its permanent attempts to apply rigorous methods. The history of economic thought provides an irreplaceable ‘mine of information’ on human nature, notably because the first great economists were also great philosophers. After a period marked by excessive expectations from mathematical reasoning and econometrics, the return of the ‘economists philosophers’, who base their analyses on a certain conception of mankind, necessarily subjective, seems likely to occur. Peace and war issues should become important again, and economists should refer to their predecessors’ analyses. It is certainly still possible today to write a fundamental text in international economics without referring to the military or strategic balance of power. But it is no longer possible to assert, without other explanation, that the market economy, today dominant, leads to peace. One should rather try to understand the part played by the economy in human conflicts; it is also essential to analyse economic relations in terms of power and conflicts. It may be an important field of research for the economists of the twenty-first century.


Notes

1 National power benefits from the economy 1 At the borders of mercantilism, John Law has put forward the central role of money as an instrument of circulation, and as stimulating trade and production. 2 However, Heckscher (1955: 14) considers that it is erroneous to say that mercantilism was influenced by nationalism, as this concept only developed during the eighteenth and nineteenth centuries. 3 See for example L. Roberts (1641: 262). 4 This text, published in 1580, is generally ascribed to William Petty. 5 List speaks here about the English classical school. 6 Peace and war factors revealed by economic science 1 Wagner et al. (1995) undertook to find the complete solution to Richardson’s equations. However, their study shows that no data series on the European military expenditures before the First World War confirm Richardson’s model, because national self-stimulation is more important than the mutual stimulation of rival or enemy States. 2 Pastijin and Struys (1986) considered that the lack of information on Soviet military expenditures during the Cold War hindered the empirical estimation of Richardson’s model applied to the American–Soviet arms race. 3 See also Saperstein (1991). 4 For a more complete analysis of these often very empirical and positivist studies, refer to Manas Chatterji’s publications.


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