Freeman

ARTICLE

Armaments and Our Prosperity

MARCH 01, 1961 by EDMUND OPITZ

The Reverend Mr. Opitz is a member of the staff of the Foundation for Economic Educa­tion.

Two fears fill us with dread. The first fear is that war will break out, killing millions of people, de­stroying billions worth of prop­erty, and wrecking what’s left of the institutions of a once free so­ciety. The second fear is that peace will break out and bring our vaunted material prosperity crash­ing to earth. There is an untenable assumption in this fear of peace, but if it be accepted, the dilemma is a cruel one. The desire for ma­terial well-being is legitimate, but the dilemma spells out into some­thing like the following three stages: Material well-being de­pends on an arms race; an arms race is likely to eventuate in a hot war; a hot war is a device guaran­teed to end prosperity and threat­en very survival. Here is a series whose first term is a natural de­sire for well-being, but whose last term cancels out everything which precedes it. This hardly sounds like progress, but if—as many people believe—the vitality of the civilian economy is so dependent on military spending that a de­pression looms if this spending stops, this is the logic of events. Let us examine these two fears which have so many of us walking a razor’s edge, held in balance by the terrors on either side.

We are in the Cold War, we are told, and the Cold War is not war in the old sense. War used to be a thing of bombs dropping, tanks maneuvering, and infantry slug­ging it out in the mud; but war is now an engagement in another di­mension—the psychological. The aim of war, then and now, is the same—to impose our will on the enemy, or at least to resist the imposition of his will on our own—but the means have changed. Formerly, we damaged his prop­erty or the bodies of his soldiers until the will to resist was broken; but now we are done with such crudities, having discovered subtle ways of getting at the will directly to bend or break it. In the old days, a victor nation or coalition was one which possessed a preponderance of military might, as demon­strated in the field. On the eve of a war the question of which na­tion actually had such a prepon­derance might be a matter of de­bate, to be settled only by fighting it out. But the matter of prepon­derance is now hardly ever posed. "Preponderance" has been over­come by "sufficiency." If several nations each possess a sufficiency of military might—armament enough to clobber rival nations no matter who strikes the first blow—the possession of a preponder­ance confers only the most dubious of advantages. The apparatus of civilization reduced to rubble, the victor nation stands astride a bone yard. The desire for mere physical survival is a primordial instinct which, in civilized man, may some­times conflict with certain values which take precedence over it. But in the aftermath of the next war the civilized values may well be the first casualties so that mere animal survival may become the highest good.

Many Are Mistaken

The fear that war may break out appears to be well grounded. What about the fear that peace may break out?

The fear that peace will have a disastrous effect on the civilian economy is not a delusion of the unlettered. This fear, on the con­trary, afflicts and is fostered by the sophisticated who have un­learned the capacity for taking a common sense view of things. Turn, for example, to an article in a recent issue of the Bulletin of the Atomic Scientists, a journalis­tic outlet for writers who stress the social responsibilities of scien­tists. The article is entitled "The Economics of Disarmament," and opens with a question: "Can the U.S. peacetime economy maintain its high prosperity without heavy governmental spending in the arms economy?" To which, the author returns a gloomy answer. "So long as armament is not used," he says, "it serves its economic purpose in an ideal way. The in­come created in the development and production of arms represents a clear net gain to the total pur­chasing power available to sustain the consumer economy."

Good Keynesian doctrine so far, but now the catch: An arms race, the author points out, heads na­tions toward a disastrous military conflict which must be avoided. It is equally necessary to fend off the economic collapse which threatens if the arms race slows. What is needed, says the author, is an "economic equivalent of arma­ment"—some prescription which promises to sustain present levels of civilian prosperity without theatening to bring on World War III. The author’s remedy, in­creased government spending, has a familiar ring: "No stretching of the terms of this elementary dis­course is needed to show that pub­lic works and public services pro­vide the economic equivalent of armament."

Some industries are totally com­mitted to military production while others are committed in part. The "prosperity" of these segments of society is irrevocably yoked to military spending. It is easy to imagine a factory for the making of an essential weapon, the Gismo, being erected in 1942 in the sleepy little village of Rural-area. The plant now employs 5,000 people, three times the number of citizens who responded to the town’s 1940 census. The plant pay­roll now sustains those who work there plus bankers, butchers, teachers, ministers, and one inte­rior decorator. Peace breaks out, military spending stops, and it isnot hard to imagine what happens to Ruralarea. Admittedly, in this and similar situations, there will be hardships and some painful but necessary readjustments. But Ru­ralarea is not the United States, and it is not permissible to gen­eralize its problems as if they afflicted a whole nation. The argu­ment we are considering is that the prosperity of the society as a whole depends on national spend­ing for arms.

Production Comes First

This argument is a modern ver­sion of the fable of the emperor’s new clothes. It contains a glaring fallacy which is easily grasped, but this fallacy in turn rests upon a faulty premise of a more subtle nature. The fallacy first: Prosper­ity is equivalent to an abundance of the things people consume and enjoy—houses, clothing, food, au­tomobiles, recreation, gadgets, and so on. These items come into exist­ence as the result of economic pro­duction. A few individuals here and there may live well on stolen goods, but society is provisioned in only one way—by human effort, augmented by tools, applied to raw materials. Thus, and in no other way, are produced the goods and services we now have in abun­dance and which constitute our prosperity. Our prosperity would cease if we stopped producing, and we can’t produce without working. Some 61 million people are pres­ently at work to produce the things which make up our pros­perity.

Alongside this abundance of consumer goods which constitute the civilian economy are jet fight­ers, aircraft carriers, tanks, rock­ets, and the like. There is no civil­ian market for these items; Uncle Sam and his satellites are the only customers. Even though you and I are not in the market for mili­tary hardware, some six million of our people are engaged in pro­ducing it according to the same old economic equation—by the ap­plication of human effort and tools to raw materials. While thus en­gaged they cannot produce goods for their own consumption. They must be supported, in this respect, by the rest of society. Further­more, there are large quantities of machines, tools, and other capi­tal tied up in defense projects which otherwise might be em­ployed to make things for con­sumers.

Putting these two segments to­gether, it is obvious that the total active labor force in the country is roughly 67 million people. Is it not self-evident, in the first place, that 67 million workers—other things being equal—will produce more than 61 million? Therefore, the present level of prosperity is

lower than it might otherwise be by the amount of civilian goods which the 6 million would produce if they weren’t engaged in produc­ing arms. If the withdrawal of six million is the cause of the high level of civilian prosperity, why not withdraw 60 million and have a real boom? Thus, we would de­feat our old enemy Work, that built-in curse of every economic system of the past.’

The 6 million now engaged in armament production are not sim­ply off to one side, a neutral factor. They are consumers of civilian goods without producing any themselves or even producing things which might be exchanged for them. Millions of producers of food, clothing, housing, and other services work to provide these necessities for the 6 million en­gaged in armament production. Far from the arms race sustain­ing the civilian economy, the re­verse is true; it is the incredible productivity of the civilian economy which makes it possible to spend our substance so prodigally in military hardware! Not so many centuries ago, in subsistence days, nations called off their wars so the folks could get in the har­vest. Our present mastery of eco­nomic problems is so nearly com­plete that the productive sector of our economy can maintain a high level of civilian prosperity even though it is forced to support a swollen governmental structure along with its bureaucracies and its military establishments. Pros­perity supports the arms race, not vice versa!

Despite Keynes, the "Law of Markets" Stands

When things are put in straight­forward economic terms without introducing the complicating fac­tor of money, the glaring fallacy of the thesis that Americans are prosperous because their govern­ment is spending so much on arm­aments is obvious. It is equally obvious that such an inversion of the facts would hardly find general acceptance if men based their con­clusions on primary observations of the facts. At this level fallacies are relatively easy to detect. The detection of fallacies is more diffi­cult if the discussion is conducted at the secondary level of infer­ences. An inference may be incor­rect, and that’s that. But an infer­ence may be correct and still con­ceal a fallacy if the inference is drawn from an unsound premise. The unsound premise in the pres­ent instance is based upon the sup­position that the late Lord Keynes had refuted Say’s Law—a suppo­sition shared by the master him­self. Keynesians acknowledge this as a critical question and admit that if the validity of Say’s Law be conceded much of Keynes’ theo­ry becomes untenable. So let’s argue this fallacy out in terms of Say’s Law—although a matter so complex can hardly be thrashed out in any space short of a book or a series of books.

Crudely put, Say’s Law of Mar­kets—named after the French economist who advanced it in 1803—holds that aggregate supply cre­ates aggregate demand, that pur­chasing power grows out of pro­duction. Benjamin M. Anderson in his Economics and the Public Wel­fare opens his chapter 60, "Digres­sion on Keynes," with this descrip­tion of what he calls "the equilib­rium doctrine":

"The twentieth century world consumes vastly more than the eighteenth century world because it produces vastly more. Supply of wheat gives rise to demand for automobiles, silks, shoes, cotton goods, and other things that the wheat producer wants. Supply of shoes gives rise to demand for wheat, for silks, for automobiles, and for other things that the shoe producer wants. Supply and de­mand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as sup­ply of its own kind or as demand for other things. But this doctrine is subject to the great qualifica­tion that the proportions must be right; that there must be equilib­rium."

Keynes’ alleged success in dis­posing of Say’s Law consisted in ignoring the qualification; he "re­futed" a proposition which had never been seriously advanced. "Say’s Law of Markets," writes Henry Hazlitt, "is based on the assumption that a proper equi­librium exists among different kinds of production, and among prices of different products and services. And it of course assumes proper relationships between prices and costs, between prices and wage-rates. It assumes the ex­istence of competition and free and fluid markets by which these proportions, price relations, and other equilibria will be brought about."

Say’s Law is not regarded as a central doctrine of classical econ­omics, but by disposing of a fal­lacy it paved the way for the es­tablishment of what Adam Smith called "the liberal plan of equality, liberty, and justice." This is the system of liberty, one of whose facets is the free market. Econ­omics, ostensibly the study of market operations, is really con­cerned with the stewardship of the earth’s scarce goods, such as human energy, time, material re­sources, and natural forces. These scarce goods are our natural birth­right. Use them wisely, as natural piety dictates—that is, provi­dently and economically—and hu­man well-being is the result. Turn a blind eye to them and one con­sequence is the promulgation of such nonsense as that the arms race which makes us billions of dollars poorer is actually the cause of our prosperity! Men act upon their beliefs, even when beliefs are fallacious, and acting upon this one we careen ominously toward the Total State and war.

A tiny leak in the dike, if not plugged, can open up and let the flood through. What begins as a simple economic fallacy can end with a bang or a whimper.

The fallacies of John Maynard Keynes have been fully orchestrated and demolished in a recent book by Henry Hazlitt, The Failure of the "New Economics" (D. Van Nostrand, 458 pp., $7.50). More recently he has compiled an anthology containing Say’s original statement together with critical essays on Keynesian eco­nomics, The Critics of Keynesian Economics (D. Van Nostrand, 427 pp., $7.00).

Foot Notes

1 This is not to deny the need for mili­tary hardware nor to minimize the im­portance of our defense establishment. Perhaps we should divert twice as much manpower and capital for these purposes, but that is another argument. The only point at issue here is the fact that man­power and capital devoted to military purposes are not available for civilian production and diminish the latter by that much. Every dollar spent for guns is a dollar less that might be spent for bread, housing, travel, and the like.

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March 1961

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