The True Cost of War
A war economy is characterized, above all, by an extremely high time preference (i.e., a focus on the present). The conduct of war requires that scarce resources—previously allocated to the production of capital or consumer goods—be reallocated to the mobilization and operational readiness of the nation’s fighting forces. As Mises said, “War can be waged only with present goods.”
The economy, therefore, rearranges and “shortens” the overall structure of capital to favor the immediate production of finished goods. Capital is then consumed in great haste to satisfy the war effort. Labor, resources and capital goods are directed towards the production of consumer goods, instead of the more distant stages of the capital structure, which, as stated before, are oriented towards the future and the perfection of the production structure. The whole capitalist structure is turned upside down. Joseph Schumpeter explained,
Our poverty will be brought home to us to its full extent only after the war. Only then will the worn-out machines, the run-down buildings, the neglected land, the decimated livestock, the devastated forests, bear witness to the full depth of the effects of the war.
The transition to a present-oriented war economy leads to what Salerno calls a regressive economy, no longer building for future prosperity but for the present destruction of capital. War is synonymous with lost opportunities, wasted time, and the abandonment of the use of resources in genuinely productive alternative enterprises. Since the state has privileged access to stocks of resources, it also destroys all incentives for individuals and private companies to renew these stocks.
The general decumulation of capital is, therefore, the logical conclusion of any war economy. It is impossible not to think of Frédéric Bastiat—what we see and what we don’t see—and of all the opportunities and wealth lost forever. It is also impossible not to point out the enormous hypocrisy of Keynesian economics which believe that war and material destruction can generate wealth if they lead to production and full employment.
Financing War through Taxation
From the point of view of economic theory, it is perfectly possible for a state to raise the funds needed to achieve its war aims by raising taxes and borrowing from its population. On paper, there is no need for monetary inflation.
Taxation—which amounts to a seizure of the disposable income of a population—takes two forms: a reduction in consumption by individuals or a reduction in the income they save. These choices reflect a change in the time preference of consumers: where the former maintain a low time preference, the latter adopt a higher one. During w
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