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Commentary

Free Enterprise and War, a Dangerous Liaison


     
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Some prominent pro-market think tanks are promoting more than free enterprise these days. They’re also peddling war. Among the American Enterprise Institute’s recent offerings, for example, is a forthrightly bellicose bulletin written by AEI resident fellow Reuel Marc Gerecht entitled “A Necessary War.” Although I do not find Gerecht’s arguments in favor of a U.S. military conquest of Iraq to be compelling, my purpose here is not to comment on the essay itself but rather to make some observations about the more general phenomenon that its issuance exemplifies, namely, the death wish expressed in the postwar conservative embrace of free enterprise and the warfare state.

Ever since the demise of the Taft wing of the Republican Party in the early 1950’s, U.S. conservatives with few exceptions have believed, and acted on the belief, that we can have free enterprise and a warfare state at the same time. They have been mistaken.

The sprawling, voracious, military-industrial complex has constituted anything but free enterprise from its very inception during World War II. In this vast cesspool of mismanagement, waste, and transgressions not only bordering on but often entering deeply into criminal conduct, no consumer-determined bottom line has dictated which firms would survive and which would go bankrupt. Instead, recurrent government bailouts have been the order of the day. The great arms firms have managed to slough off much of the normal risk of doing business in a genuine market, passing on many of their excessive costs to the taxpayers while still realizing extraordinary rates of return on investment. Meanwhile, high taxes to support the military-industrial complex have punished all those striving to operate businesses in the actual free market.

Nor has this economic mess been the worst aspect of the operation of the military contracting business. Far more malign has been the role these semi-socialized firms have played as powerful insiders in the making of strategic and foreign policy, constantly exerting strong direct and indirect pressures to maintain America's imperial posture in the world, to keep up the quick pace of the arms race, and to increase the already enormous bulk of the defense budget. Working for peace, not to speak of free enterprise, has never been their profession, as anyone attending their trade-association conferences or reading their advertisements in defense-industry magazines can easily attest.

Had the postwar conservatives given any thought to the effects of U.S. participation in the two world wars, they would have realized right away the futility of trying to combine free enterprise with preparation for or engagement in war.

In World War I, the government imposed a variety of unprecedented controls on businesses. It nationalized outright the firms in the railroad, telephone, and telegraph industries and, for all practical purposes, those engaged in the ocean shipping industry as well. It fixed scores of industrial commodity prices, intervened extensively in management-labor relations, and promoted unionization and collective bargaining. It hiked corporate income taxes to undreamt-of heights and added a huge excess-profits tax on top of them. The net result of all this government dictation, taxation, takeover, and all-around meddling became known to contemporaries as “war socialism.”

Although the government released its grip on private enterprise after the war ended, government-business relations never returned to their prewar status. When Congress returned the railroad companies to their private owners in 1920, for example, it did so with so many strings attached that thereafter the great U.S. railroad industry became little more than a quasi public utility. Corporate tax rates were lowered, but never to their prewar levels.

The war’s ideological legacies put even more pernicious pressures on the free enterprise system. The government’s economic managers, led by the chairman of the War Industries Board, Bernard Baruch, emerged from their wartime service convinced (against the bulk of the evidence) that they could, and should, preside over the economy even in peacetime. As one historian wrote, they “meditated with a sort of intellectual contempt on the huge hit-and-miss confusion of peace-time industry.” As Baruch himself put it, “Our experience taught that government direction of the economy need not be inefficient or undemocratic, and suggested that in time of danger it was imperative.”

Imbued with this ill-founded hubris, the former wartime central planners, led during the 1920s by the energetic Secretary of Commerce Herbert Hoover, undertook to “rationalize” industrial practices by fostering product standardization, the formation of trade associations, and more intimate “business-government cooperation.” This quasi-cartelizing activity helped to suppress normal market competition and softened up businessmen for later acceptance of the semi-fascist National Industrial Recovery Act of 1933—the complete realization of the Baruch gang's ambitions and, with respect to recovery from the Great Depression, nothing short of a disaster.

During World War II, the government went even further in imposing its will on free enterprise. The wartime central planners implemented comprehensive wage-and-price controls, rigged interest rates, rationed credit, and capped rents. The War Production Board didn’t just allocate scarce raw materials. It dictated which industries might operate and which might not—the great civilian auto industry, for example, was shut down completely for more than three years. Corporate income taxes went sky-high and, again, gigantic excess-profits taxes added insult to injury. So completely did the armed forces dominate the allocation of economic resources during the war that the privately owned capital stock actually shrank because, except in the munitions industries, the owners were unable to secure enough investment funds and replacement materials to make up for normal wear and tear.

Again, as it had after World War I, the government abandoned the bulk (not all) of its wartime business controls when the war ended. Corporate income-tax rates were reduced from their wartime heights, yet they remained at extraordinarily high levels for decades afterward. The government’s meddling in international economic affairs, which had assumed massive proportions during the war, persisted in the form of “foreign aid,” in large part a disguised business-subsidy program that rendered the participating firms beholden to their government benefactors and left the great majority of firms sharing its costs but receiving none of its subsidies.

During the war, tens of thousands of business executives had served in the government’s planning-and-control bureaucracy. According to contemporary economist Calvin Hoover, writing in 1959, that experience “conditioned them to accept a degree of governmental intervention and control after the war which they had deeply resented prior to it.” Thus, it is scarcely surprising that even the pro-business Eisenhower administration did nothing of substance to diminish the pervasive federal government presence in the economy that had been spawned by World War I and nourished by the New Deal and had reached its zenith during World War II.

Historically, as government has sought to extend its sway over private enterprise in the United States, only one great faction has had the power to resist effectively, namely, the business sector. But this potential defender of free enterprise had its ideological back broken twice in quick succession, during the two world wars. By the time the Cold War began in the late 1940s, businessmen had been tamed once and for all, put in their place of subservience to government masters. Resigned to making the best of a bad situation, entrepreneurs have searched for opportunities in the little spaces not yet closed off by the government's interposition. For the past half century, however, free enterprise has been at best a hobbled and heavily burdened horse. If it has continued to pull the economic load, it has done so in spite of all that government has done to cripple it, not because its effective functioning has proved congruous with the operation of the warfare state.

For conservatives who now claim to support both free enterprise and a U.S. war of conquest against Iraq, the lesson ought to be plain: they cannot foster free enterprise and support war—the greatest of all socialistic undertakings—at the same time. Unfortunately, it appears that once again they are willing to sacrifice free enterprise on the altar of Mars.


Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

Full Biography and Recent Publications


  New from Robert Higgs!
CRISIS AND LEVIATHAN (25TH ANNIVERSARY EDITION): Critical Episodes in the Growth of American Government
The size and scope of government power has grown in response to crises of war and economic upheavals. Such increased power remains long after each crisis passes, threatening both civil and economic liberties, all at the behest of special interest groups.






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