The Economics of War

The Economics of War
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warThis article is excerpted from Study Guide to Human Action, chapter 34, “The Economics of War” (2008). Reprinted from

1. Total War

The market economy involves peaceful cooperation. The division of labor cannot function effectively amidst a war. Warfare among primitive tribes did not suffer this drawback because the warring parties had not been engaged in trade before the hostilities. Thus they engaged in total war.

Things were different in Europe (before the French Revolution) when military, financial, and political circumstances produced limited warfare. Wars were generally waged by small armies of professional soldiers, who generally did not involve noncombatants or their property. In this context, philosophers concluded that, because the citizens only suffered from warfare, the way to eliminate war was to dethrone the despots. The spread of democracy, many thought, would coincide with everlasting peace.

What these thinkers overlooked was that it is only democratic liberalism that ensures peace. In modern times, states wage total war against each other because interventionism and central planning lead to genuine conflict between citizens of rival states. Under classical liberalism, political boundaries are irrelevant; free trade and free mobility of labor mean that one’s standard of living is unaffected by territorial expansion. Yet under national socialism (and the interventionism of their neighbors), the citizens of Nazi Germany really stood to materially gain from conquest.

Ultimately, treaties and international organizations cannot ensure world peace. Only a widespread adoption of liberal policies will end war.

2. War and the Market Economy

It is a widespread myth that the market economy may be tolerated in peacetime, but in emergency situations — such as a war — the government must seize control of production. During war, resources that normally go into consumer goods must be diverted into products for the military; private consumption must fall.

Entrepreneurs can most efficiently effect this switch if they are allowed to earn profits and cater to the new demand, emanating from the government as it spends funds on military items. Whether the government raises its revenues from higher taxes, increased borrowing, or even inflation, in the end the citizens will have less purchasing power, and their reduced consumption frees up the real resources to produce items for the war effort.

In the United States during the Second World War, this process was short-circuited because the government clung to the union doctrine that the workers’ real take-home pay must not be allowed to fall, even during wartime. Consequently, the government was reluctant to levy higher taxes, and it imposed price controls to prevent “war profiteering.” Given these realities, the only solution was to further intervene in the market, by imposing rationing schemes and other controls, designed to ensure an adequate flow of resources into the war industries.

Modern wars are won with matériel. Capitalist countries defeat their socialist rivals because private entrepreneurs are more efficient in churning out products, whether consumer goods during peacetime or weapons for their governments. Even so, ultimately war and the market economy are incompatible, as the market relies on peaceful cooperation.

3. War and Autarky

If a tailor and baker go to war with each other, it is significant that the baker can wait longer for a new suit than the tailor can go without bread. In analogous fashion, Germany lost both world wars because it could not blockade Great Britain, nor could it maintain its own maritime supply lines.

The German militarists were aware of their vulnerability and so stressed the need for centrally planned autarky. They placed their hopes in Ersatz, the substitute, a replacement that was either of inferior quality, higher cost, or both, compared to what the unfettered market would have imported from abroad. Yet the inferiority of ersatz items is not a relic of the capitalist mind. Poorly equipped soldiers will fare worse against armies using the most advantageous materials, and higher costs of production mean that fewer finished goods can be produced from given resources.

4. The Futility of War

Interventionism generates economic nationalism, which in turn generates bellicosity. This tendency is internally consistent; only laissez-faire policies are consistent with durable peace.

Why It Matters

In this short chapter, Mises deploys his skill not only as an economist but also as a military historian. Contrary to popular belief, government controls do not enhance a country’s military prowess. Entrepreneurs are more efficient than central planners in the production of tanks as well as the production of television sets.

In the long run, however, the market economy relies on the division of labor, which requires peaceful cooperation. The rise of total war in the modern age is due to the rise of “statolatry” and interventionism.

Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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