War, Taxes, and Doux Commerce

4 December 2009 at 1:27 pm 6 comments

| Dick Langlois |

Uwe Reinhardt, a health economist at Princeton, is eminently familiar with the idea of moral hazard. In a recent blog in the New York Times, he applies the idea to war. “If the monetary and the blood cost of war are shifted mainly to citizens other than the elites who are empowered to declare war and decide how it is conducted,” he writes, “then that elite is more likely to embrace war and to spend on it.” (I’m sure others have said this before, though I’ll rely on my colleagues and readers to supply the cites. Bob Higgs?) Reinhardt points out that, rather than raise taxes to pay for war, Bush cut taxes after entering Afghanistan. This had the effect of hiding the cost and pushing the financing into deficit spending, which is less easy for voters to detect. Those of us of a certain age remember how Lyndon Johnson, with the acquiescence of the Fed, financed Vietnam (and his domestic programs) largely through inflation. Apparently, some in Congress are calling for a law that would require a tax surcharge whenever war is declared.

As I say, these ideas may already be familiar to O&M readers and may even have been touched on in previous posts. But the Reinhardt piece reminded me of an idea I’ve been playing with for a long time. There is a large literature on the doux commerce thesis (see especially Albert Hirschman): the idea that increasing trade and wealth (increasing capitalism, if you will) leads to less violent and warlike societies. Oversimplifying more than a bit, the idea is that increased wealth increases the opportunity cost of war and violence. Maybe this is already in Hirschman or elsewhere, but it seems to me, however, that there must be not just a substitution effect but also an income effect. Higher GDP increases the opportunity cost of war on average (even if, as Reinhardt points out, not necessarily for the elites). At the same time, however, a wealthier society is more able to buy more war, all other things equal. Someone with the wherewithal might try to see which effect is more important by using cross-country historical data sets in the Acemoglu-Johnson-Robinson vein. If you ever run into somebody doing that sort of thing, remember that you heard it here first.

Entry filed under: - Langlois -, Classical Liberalism, History of Economic and Management Thought, Institutions, Public Policy / Political Economy.

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6 Comments Add your own

  • 1. pj  |  4 December 2009 at 2:35 pm

    For a long time war was undertaken for the profits: The ancient Greek warred for the acquisition of slaves; Vikings raided for plunder. The Norman Conquest was a mercentary expedition undertaken to gain the large tax revenues of the English state. Napoleon recruited an army of mercenaries seeking plunder, and the capacity of his enemy states to fight back was limited by their ability to tax and borrow — thus England was a great military power despite a small population.

    So the financial considerations would seem to have been paramount in the premodern era. In modern times they seem to be less consequential, at least for the West, though the Taliban may war in part to protect their opium enterprises.

  • 2. Rafe Champion  |  4 December 2009 at 5:22 pm

    So the US is fighting to protect the opium trade? Run that past us again. I thought the Taliban stomped opium.

    There are too many causes of war. Someone refuted the idea that the English were peace-loving compared with the “militaristic” Germans by pointing out that the English had far more wars than the Germans in the previous 50 years (cant recall the period). It was a function of the number of colonies where they had borders with other countries or they fought dissidents like the Zulus etc

  • 3. pj  |  5 December 2009 at 12:54 pm

    Rafe – “war” is a verb in that sentence, as in “wage war” or “make war”. It is the Taliban who are trying to protect their drug trade, not the US.

  • 4. jck  |  6 December 2009 at 3:36 pm

    The war was done for profit in non capitalistic societies( Greek, Vikings, the Muslims Empires, Ghengis Khan´s Mongols, Romans,Persians )
    Napoleon used an army of volunteers driven by nationalistic impulses to fight and win over armies of mercenaries and convicts with kidnapped children as leaders( the Prussian army of Frederick The Great, the Illustrated Despot). He usually fought in a 1- 5 disadvantage. And France needed to defend herself against the monarchies reaction
    A war destroys capital and is extremely bad for a capitalistic society( Hayek, Socialism and war -Constitution of Liberty).
    Commerce sweetens characters and made war unlikely (Kant, Sommbart)
    Uslar Pietri a venezuelan intellectual said that the future would be more peaceful because population will be older. And old people dont go to war. But someone answered him : old people use to order the war that the young will fight.

  • 5. David Gerard  |  7 December 2009 at 1:11 pm

    I wouldn’t completely dismiss the idea that the current situation has at least a little teensy bit to do with oil.

  • 6. Dick Langlois  |  15 December 2009 at 10:06 am

    I discovered via the test bank for Heyne, Boettke, and Prychitko (it’s probably in the text too) this quote from Adam Smith (Wealth of Nations vol. 2 VII.218): “At the particular time when these discoveries were made, the superiority of force happened to be so great on the side of the Europeans, that they were enabled to commit with impunity every sort of injustice in those remote countries.” Sounds a bit like the output effect I was suggesting. Guns, Germs, and Steel?

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