economic theories of peace and war 5

Economic Theories of Peace and War

War often comes down to one thing: money. The role of economics in bothpeace and war is arguably the most important single factor when it comes to thestudy of defence.

The aim of this book is to provide a critical overview of the history of eco-nomic thought on defence, peace and war from its eighteenth-century originsright up to the present day. Important themes covered within the book include:

• the German historical school• classical economics and defence studies• socialism through war or peace• econometric analyses of military expenditures.

This superb book will be of interest not only to those involved in the burgeon-ing field of defence economics – it will also be of vital interest to students andacademics from international relations, defence studies, philosophy and polit-ical science backgrounds.

Fanny Coulomb is lecturer in Economic Science at the University PierreMendès of Grenoble, France.

© 2004 Fanny Coulomb

Studies in defence economicsEdited by Keith Hartley and N. HooperUniversity of York

1 European Armaments CollaborationPolicy, problems and prospectsR. Matthews

2 Military Production and Innovation in SpainJ. Molas-Gallart

3 Defence Science and TechnologyAdjusting to changeR. Coopey, M. Uttley and G. Spiniardi

4 The Economics of OffsetsDefence procurement and countertradeS. Martin

5 The Arms Trade, Security and ConflictEdited by P. Levine and R. Smith

6 Economic Theories of Peace and WarF. Coulomb

7 From Defense to Development?International perspectives on realizing the peace dividendA. Markusen, S. DiGiovanna and M. Leary


Economic Theories ofPeace and War

Fanny Coulomb



First published 2004by Routledge2 Park Square, Milton Park, Abingdon, Oxfordshire OX14 4RN

Simultaneously published in the USA and Canadaby Routledge29 West 35th Street, New York, NY 10001

Routledge is an imprint of the Taylor & Francis Group


All rights reserved. No part of this book may be reprinted or reproducedor utilized in any form or by any electronic, mechanical, or other means,now known or hereafter invented, including photocopying and recording,or in any information storage or retrieval system, without permission inwriting from the publishers.

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ISBN 0-415-28408-2

This edition published in the Taylor & Francis e-Library, 2004.

ISBN 0-203-49596-9 Master e-book ISBN

ISBN 0-203-57126-6 (Adobe eReader Format)(Print Edition)

Contents

List of illustrations

Introduction

PART 1The economy, a factor of peace or war: a theoreticaldichotomy which appeared with political economy during theeighteenth century

1 National power benefits from the economyThe mercantilist movement and the improbable peaceThe economic bases of national security, according to ListThe German historical school: for a pragmatic use of the economic

and military power instruments in favour of the national interest

2 The economy as a factor of peaceThe physiocrats or the desirable peaceThe classical economists: free trade, a factor of peace and

prosperityThe triumph of economics as a factor of peace

3 The hesitations and internal differences within each economicperspective as a factor of war and peaceThe inopportune warThe avaricious peace: the pessimistic classical schoolFrom James Mill to John Stuart Mill: from classicism to the renewal of

the liberal economic analysis of international relations


PART 2War or peace, resultant of an economic system: neweconomic analyses on defence-related issues since themid-nineteenth century

4 War and the threat of war at the heart of the functioning of thecapitalism systemSocialism through war or peace: Utopians’ pacific reforms versus

Marx’s revolutionary warDivergences of Marxist theories about the consequences of

militarization on the stability of capitalism

5 ‘Turbulence’ inherent to capitalismThe heterodoxies of the inter-war years: economists confronted with

warThe economic study of both world wars and their theoretical

repercussionsThe diversity of post-1945 heterodox analyses on defence and

war

PART 3From new debates opened by economics on peace and war factors to a resurgence of the political economy perspective

6 Peace and war factors revealed by economic scienceThe economic analysis of defence strategiesEconometric and formalized analyses of military expenditure and

disarmament

7 The strategic dimension of political economy and the conceptof ‘economic war’The economic weapon: what efficiency?The concept of economic war: support for a new definition of national

security

8 Conclusion

NotesBibliography


Illustrations

Figures

I.1 Great phases of dominant debates on war, peace and defence analysis

6.1 Resource allocation in Nation J6.2 Cone of mutual deterrence8.1 Simplified comparison of the debates on the warlike or

peaceful nature of the economy at the end of the eighteenth century and at the beginning of the twenty-first century

Tables

6.1 The main results of Richardson’s model6.2 Some studies based on Richardson’s model6.3 Brito and Intriligator’s ‘strategic’ analyses and the point of

conflict outbreak6.4 Some studies in the theories of alliances6.5 Some studies in the economic foundations of arms-race

models6.6 Examples of studies of the effect of military expenditure

on economic growth, concluding on an absence ofrelation between economic growth and military expenditure

6.7 Some studies concluding on a negative relation betweeneconomic growth and military expenditure

6.8 Some studies concluding to a positive relation betweeneconomic growth and military expenditure

6.9 Some studies concluding to different impacts of militaryexpenditure on economic growth on each country

6.10 Some studies of the relation between military expenditureand investment


6.11 Study of the relation between military expenditure and employment

7.1 Positive and negative economic sanctions for David Baldwin

7.2 The application of economic values as power resources,according to Klaus Knorr


Introduction

There is an extensive literature on the subject of military conflicts, because oftheir crucial character for humanity, at least because of the induced humanand economic losses. Great works have thus been devoted to war and peaceissues, notably in literature, philosophy, sociology and politics; in this lastfield, international relations even became a discipline after the Second WorldWar, with the opposition between Morgenthau’s realist current and Wilson’sidealism. On the other hand, no great work has been published on theseissues in the field of economics, except perhaps Guerre et Paix (Peace and War)written by J. Proudhon (1861), but which could just as well be considered asdealing with politics as with economics, or The Economic Consequences of thePeace by J.M. Keynes in 1919, but this deals exclusively with post-war economicpolicy issues, or a few other works written by less well-known economists of theinter-war period. The economic analysis of international conflicts thereforeproves to be weak compared to the numerous studies conducted in other fields,notably in philosophy. However, the study of economic laws has often beenintegrated into a general theory of economic and strategic interstate relations.Yet, at this level, the economic analysis was much inspired by philosophicaltheories.

Philosophers were the first to link economic issues and conflicts, or toexplain international relations which influenced economic thought. In an earlyconception, defence and power were presented as the superior social objectives,and economy as subordinated. Plato considers that wisdom rather than wealthshould be the first aim of the ideal Estate. An important military force must bekept, the class of soldiers coexisting with the ones of producers and philo-sophers, the latter dominating the social hierarchy. The class of guardiansensures the internal order and also possesses the moral qualities necessary todefine a foreign policy in accordance with wisdom. Aristotle defends the moder-ation of economic needs through virtue and he does not encourage trade;however, the society must be rich enough to ensure its defence. The conduct ofa war of aggression can only ruin the guilty State, whose territorial expansion isalso, in the long-term, a factor of destruction. Later, Saint Augustine estab-lished the bases of what is known today as the theory of the ‘just war’, whichtends to legitimate armed conflicts under certain conditions, with regard to


their causes and methods. Saint Thomas Aquinas and then the Dutch philo-sopher Hugo Grotius clarified this theory of the just war.

At the beginning of the sixteenth century in Italy, Machiavelli presents waras a decisive factor in public action and he relativizes the importance of theobjective of national wealth compared to political stability. The maintenanceof a powerful army is essential to guarantee the State’s superiority at the inter-national level. Thus, the maintenance of a powerful army serves the State bothat the domestic level (eradication of internal contesting) and the internationallevel (the defence against foreign threats becoming the supreme social aim).Militarization helps to spread the values which reinforce social cohesion andthe feeling of belonging to a community. Finally, war also appears as a ‘remedy’to civil war or internal contesting. However, Machiavelli considers that apeaceful State is, in the absolute, preferable to a warlike state, but is less likelyto occur, the wish to dominate being inherent to the State’s nature.

In these early conceptions of society, defence is thus perceived as a funda-mental need, which guarantees that the ideal Estate works well and economy isconsidered as a subaltern function. But economy was rehabilitated in the seven-teenth century with the adoption of a new philosophical conception of human-ity, based on the concept of social contract, in the context of Europeaneconomic development. Whereas the physiocrat theory outlines a conception ofsociety ruled by harmony among its members’ interests, the political theoryevolves towards an anarchical conception of relations between individuals, andtherefore between states. In Leviathan (1651), Hobbes considers that man has awarlike nature. The state of war is permanent (because of an insatiable desire,taking different forms and always renewed), even if it doesn’t always developinto an open conflict. Humanity adheres to a social pact because of its instinctof self-preservation, transferring their natural rights to a society ruled by anabsolute power, even tyrannical (absolute monarchy), preventing in this way allcivil conflict, more dangerous than war. Peace is inevitably artificial; when itlasts, it does not correspond to a state of nature, but on the contrary to a ratio-nal calculation, as the most efficient condition of the preservation of humanlife. Locke, however, states that peace is natural and positive and that man isnaturally social. The acknowledgement of the necessity to preserve others asmuch as oneself derives from human reason, but also from humanity’s naturalinclination towards neighbours. War isn’t reasonable, but can, however, tem-porarily occur, because of the imperfections of human nature, notably ambitionand love of oneself. States conquered by force and tyranny do not represent alasting political community; they can give rise to civil wars. Locke influencedthe English philosopher David Hume, but he then went on to reject theconcept of social contract. The political institutions ensuring social peace, suchas property, result from imagination and habits, i.e. they arise spontaneously,instead of resulting from a voluntary adhesion. They must be adapted to humannature. These reflections directly inspired the liberal economic theories, accord-ing to which society is ruled by a natural order, in which the State must notintervene. But Hobbes’ thought dominated the whole political thought until


the end of the Second World War, funding the pre-eminent ‘realist’ current inthe study of international relations. Karl Von Clausewitz (1818), who was oneof its main representatives in the field of the military theory, considers thatinternational relations are fundamentally conflicting, and that peace can onlybe an interlude. All social situations contain the seeds of hidden conflicts, liableto degenerate into an open war, when the political resources will be exhausted.War also contributes to the disappearance of internal political conflicts.

Later, several great philosophical theories considered conflict issues.Emmanuel Kant (1724–1804) developed his analysis in opposition to Hume.Kant resolves the dilemma between the economic materialism and idealism byconsidering that humanity is free, finding in ourselves the moral law, the cate-gorical imperative guiding our actions. Social institutions (private property, freetrade) give rise to a general law harmonizing everyone’s free will. An end, ahidden plan of nature, leads all of humanity. In this way, in the very long term,universal peace should be achieved, after several conflicts. Wars can be morallycondemned but they contribute to the progress of societies towards a world fed-eration characterized by a universal and lasting peace. The Kantian theory alsostrongly participated in the genesis of the German philosopher J.G. Fichte’sthought (1762–1814), who later, like Hegel and Feuerbach, had a great influ-ence on economic thought, and notably on Marxism. However, Fichte adopts atotally idealistic position, in so far as he considers that in the last resort, ideasguide the world. His thinking evolves from the exaltation of the FrenchRevolution towards the defence of the German nation-state, with strong stateintervention and a militarization of society. Influenced by Kant and Fichte,Hegel (1770–1831) elaborates a theory of violence, considered as a necessarystep in the process of social change and he uses the dialectical method whichwill also be used by Marx. In the very long term, after a struggle against theexistent social institutions, the outcome of the social evolution should be char-acterized by the settlement of State structures helping each individual to feelfreely fulfilled. Revolutions and wars are often necessary steps in this social evo-lution process, even if one can regret the evils engendered.

In opposition to the richness of philosophical analyses on war and peace,orthodox economic science was established on the conviction that thegovernment must withdraw and let individuals act according to their ownrationality. Peace should then automatically follow. When political economybecame an economic science, it rejected what it did not master, with simplistichypotheses, such as the non-economic character of wars or their irrationality.Two fundamental hypotheses have been constantly applied by the dominanttheory:

• peace is a normal situation;• economic development is the fundamental condition for a lasting peace.

However, dominant theoretical currents have always nourished theories ofopposition and of the several heterodox theories developed, most of them have


been influenced by philosophies which recognize the role of violence in historyand integrate it into their analyses. Moreover, in spite of the very few economicanalyses which have been specifically devoted to war and peace issues, all greateconomists have dealt with them. But their thought on these subjects is gener-ally scattered throughout their works, and requires a detailed reading to bereconstituted. This research should be all the more useful as the economicperspective is essential to enlighten the eventual relations between trade andmilitary conflicts. It at least contributes to the study of the influence of inter-national economic competition on the evolution of international relations. Butthis raises the question of whether our study should include subjects such as eco-nomic war, i.e. the definition of defence and peace.

Yet, economic theories do not have the same conceptions of defence, warand peace. For the mercantilists, military and economic conflicts are two inter-dependent facets of a same reality: the competition between two states on theinternational scene, to establish their power. On the contrary, for the classicalor neo-classical economists, interstate conflicts on economic grounds resultfrom a false comprehension by the ruling class of the real economic interest oftheir country. Only the military conflict can be legitimated but it is excludedfrom the economic field of analysis, because the logic of war (the destruction ofresources) is opposed to economic prosperity. Later, however, neo-classicaltheory developed analyses of situations of conflict and of military expenditures,notably owing to the new tools provided by game theory. As for the heterodoxeconomic analyses, they generally agreed on a conception of conflicts directlyenlarged to the economic sphere: this point of view was notably shared by Listand the German historical school, by the Marxists, even by Keynes and his suc-cessors. For these economists, the analysis of economic and trading relationsbetween two states is essential to understand their conflicting or pacificrelations.

Another difficulty in the delimitation of our subject lies in the fact that theborderline between the state of peace and the state of war is not always clear.During the seventeenth and eighteenth centuries, in a context of confronta-tions between European nations, periods of peace were rather periods withoutmajor conflicts: trade disputes replaced for a time armed conflicts, whichpermanently threatened international relations. On the contrary, after theSecond World War, the international strategic evolution, with the nuclearfactor, was characterized by the absence of major conflicts. Nevertheless, thecompetition between the American and Soviet superpowers led to an arms race,with a mobilization of national resources for the military sector comparable to atraditional state of war. One must then distinguish peace without major conflictfrom an armed peace. This explains how a broader definition of defence wasadopted.

In its strict sense, defence represents all the means aiming at ensuring thematerial integrity of a territory against foreign attacks. In its traditional sense,national security, guaranteed by military power, is ensured when no foreignthreat – relating to the risk of losing national independence or the surrender in


front of foreign exigencies – is credible, and in the absence of war or of itsperspective in the short term. Military means are the most commonly evoked,but several kinds of economic measures are also intended to ensure nationaldefence, such as the control of strategic goods or the use of economic weapons.In some respects, foreign economic policy measures aiming at promotingnational interests (trade barriers for example) can also concern defence object-ives. A clear distinction between war and peace situations can then becomeproblematic, because of the probability of warlike behaviours. Since the end ofthe Cold War, the concept of security has been widened, at least for the super-powers, the security of which has increased with nuclear weapons (balance ofterror). With the world divided between two spheres of influence, militaryintervention became justified not only in case of a direct attack, but also toprotect ‘allied’ countries or national resources located outside the national terri-tory, such as oil fields. The more the military power of the State is important,the more the notion of security will have a broad sense, because values con-sidered as vital are then enlarged. Some economists even link security issues toproblems of international trade competition, since they present national secur-ity and economic power as interdependent, whereas other economists considersecurity as a strictly political issue.

This division can be compared to the one existing on the methodologicallevel between two distinct currents. On the one hand, ‘pure’ economic theorypresents peace as the normal situation and excludes defence from its analyses.This positivist and scientific analysis is based on the idea that the economicsystem is ruled by some immutable laws and that modern societies are built onscience. Utopian economists are also illustrative of this scientific current, aswell as Marx, who agrees on the idea of a historical progress which follows animmanent plan and uses the dialectical method. But this triumph of scientism,which began in the eighteenth century and became particularly dominantduring the second half of the nineteenth century, has been contested. Thedominant theory was attacked on its non-operational concepts, some of whichcouldn’t be proved. The progresses of economics, which are based on the deduc-tive method and on beginnings which for the most part date back to the nine-teenth century, may not be as evident as the ones of physics, which uses theinductive approach and quantitative methods. Some economists, who contestedscientism, based their theories on the observation of economic facts and on eco-nomic history (List, the German historical school), therefore dealing with inter-state power issues. Others integrated the tools of other fields of work, such associology (Veblen), notably to explain war in capitalist economies. This dis-missal of scientism also contributed to the development of a more ‘pragmatic’approach of applied economics with, among other subjects, studies advisinggovernments in the management of war and post-war economies.

The history of economic thought should contribute to the presentation offormer analyses from the point of view of the economists of the time, in order toshow to what extent these analyses foreshadowed contemporaneous develop-ments, and so as to lead to a better understanding of our time. The interest in


developing thought on the theoretical foundations of defence economics is thusthree-fold, since it relates to the following questions:

• how did past economists analyse these issues?• on which theoretical foundation are the commonly accepted ideas on mili-

tary expenditures, defence, war and peace based?• what lessons can be drawn from past economic analyses so as to explain the

present international economic realities (military and economic conflicts,conditions for the maintenance of peace, desirable level of military expen-ditures, etc.)?

But the integration of defence and peace issues into economic analysis is oftenuncertain. A real gap exists between the reality of economic facts and thedevelopment of orthodox economic theory which tended to exclude conflictissues from the field of an economic analysis concerned with the sole idealmarket laws. The importance of the resources devoted to national defencesometimes led to accusations of it being responsible for tax increases. But itseems difficult to deal with military expenditures by only seeing them from thepoint of view of the burden they represent, compared to an economy of welfaretotally pacified. Several examples can be given of the close relations betweeneconomy and the security or defence of a country:

• the arms race between the United States and the USSR certainly corre-sponded to strategic considerations, but it also appeared to be an ‘economicwar’. This is attested by the collapse of the Soviet Union, bled white forhaving sustained a continual military effort for over sixty years.

• defence is often used as an argument to justify governmental economicmeasures. In this way, everything which concerns national security isexcluded from the rules of the World Trade Organization.

• for certain countries, the arms sector represents an important part ofnational production, and decisions in this field have a significant impact.Because of its specific organization, the military-industrial complex alsoexerts a particular influence on national economic structures.

• military superiority confers an important role in international relations togreat arms-producing countries, including in their economic dimension.

• economic and military aims are sometimes closely interwoven. In thisrespect, the current development of information technologies interestsboth the military and civil sectors.

Outline

Historically, there first came a break, which opposed mercantilist analyses toclassical ones (Part 1). For the former, economy is an instrument of power inthe hands of politicians. For the latter, the development of economic interde-pendencies owing to the market, outside public action, ineluctably leads to


Figure I.1 Great phases of dominant debates on war, peace and defence analysis.

State offensive todevelop productive

forces.List.

German historicalschool.

Adhesion toliberalism

Criticism oreconomic reform

Refusal ofcapitalism

Economy in theservice of politics

(mercantilists).

Natural economic order(physiocrats).

Economy as a factor ofpeace (classicals).

State role decreases.

A-conflictual economy(neoclassicals).

Critic of militarism(Pareto).

War economymanagement

(Keyes, Pigou).

Capitalism, socialismand war.

Liberal analysis(Schumpeter).

Peace throughinstitution reforms

(Utopianeconomists).

Models of conflict.Arms race.

Game theory.

Models of militaryexpenditures.Econometry.

Capitalism as a factorof war

(Marx, Engels).

Militarism andcapitalism institutions

(Veblen).

Neo-mercantilism.Economic war.

Neomarxist analyses.Militarism as supportof capitalism. ThirdWorld exploitation.

Economic war.

Theory of imperialism(Interimperialist wars).

Peace dividend.

Economic interventionism.Link between war and

economic crisis.International pacifism

(Keynes).

Macroeconomicmodels.

Burden of militaryexpenditure.

Militarism andcapitalism

inefficiencies(Galbraith).


international peace. While, for the mercantilists, politics dominate economics,for the classical economists, in the long run, the economy leads to a stationaryState in which politics tend to be insignificant, the economic system guarantee-ing world peace. Pursuing this analysis, the neo-classical economists of the endof the nineteenth century were concerned with the establishment of a pure eco-nomic theory, i.e. exclusively centred on the explanation of economic mechan-isms, without any political consideration. But all these analyses do not gofurther than the confirmation of the necessity for the State to withdraw fromthe economy and to limit its actions of foreign policy. They go no deeper in theeconomic analysis of international relations. With these two corpuses of doc-trine, the support or the contesting of the theme of international peace owingto economic development becomes the main point of view from which econo-mists study international relations (Chapters 1 and 2). But beyond theirsystemic opposition, these movements nourished internal divergences, basedprecisely on the interpretation of the relations between economy and politics.In this respect, some liberal aspects appear in later mercantilist works, whilesome classical authors moderate the optimism as to the long-term evolution ofsocieties. Indeed, the ‘pessimism’ of some classical economists regarding futureeconomic potentialities influences their thinking on defence issues. Finally,List’s theory confirms the separation between two conceptions of economicanalysis. It shouldn’t be satisfied with the enunciation of normative principleswhich are not directly applicable to the contemporary international environ-ment. Political thought and the analysis of economic mechanisms are interde-pendent (Chapter 3).

At the end of the nineteenth century, the debate on the nature of the idealsociety which had to be established opened the way to a new economic point ofview on international relations (Part 2). The Marxist movement (and before it,the Utopian economists of the nineteenth century) considered that capitalismwould inevitably lead to class struggles and be doomed to disappear more or lessviolently (depending on the efficiency of the proletarian revolutionary actions)(Chapter 4). But in an international context characterized by the worsening ofinternational conflict, the emergence of a socialist system and the economiccrisis, economics could not just express the liberal ideals of laissez-faire andlaissez-passer. Some heterodox economists, like Keynes or Schumpeter, thentried to develop a political economy interested in the scientific process as wellas in the practical considerations of the governments of the time. Economiststhen went deeper into their analysis of international relations (Chapter 5).

Finally, a new development in the economists’ contribution to the analysisof international relations occurred after the Second World War (Part 3). Theincreased formalization of the discipline opened new perspectives of analysis ofthe strategic interactions between two adversary states or of their level of mili-tary expenditure. But this did not necessarily lead to a better perception of theinfluence of economic variables on international relations (Chapter 6). On theother hand, with the new debate between the proponents of globalization andthose of economic war, some preoccupations dating back to the origins of


economic thought reappeared, such as the alternative between liberalism andprotectionism, for example. Thus, whereas the economists who assess thatineluctable globalization is a factor of peace defend the development of inter-national economic relations, those who use the concepts of security andnational independence reject it. After two centuries of theoretical and scientificconstructions denying the role of the interdependencies between politics andeconomics, we come back today to a debate close to the former break betweenmercantilism and the classical school. The idea that the economy is an instru-ment of political power or a factor of peace owing to development is redundant.International relations therefore remain at the core of the alternative betweenthe existence of an economic science and the permanency of a politicaleconomy (Chapter 7).


Part 1

The economy, a factor ofpeace or warA theoretical dichotomy whichappeared with political economyduring the eighteenth century

A first way of presenting the economic analysis of war and peace is to emphasisethe existence of two opposite points of view, which both developed before theFirst World War.

• The idea that an economy serves the national power, which closely linkspolitical and economic analyses. Several lines of thought developed,notably the mercantilists, F. List or the historical school. They rely on thestudy of concrete facts, or even on a historical analysis.

• The idea that an economy generates international peace, through the riseof interdependencies. This point of view is shared by economists who aimto show the validity of free trade and laissez-faire principles. Progressively,this type of economic analysis will stop dealing with political issues such asthe international balance of power, war and defence.

This dichotomous presentation isn’t sufficient, however, to grasp all the com-plexity of these theoretical currents. Indeed, internal divergences on the eco-nomic analysis of war exist within each current. They partially show thedifficulty in expounding definitive economic principles on issues which don’texclusively depend on economic factors.


1 National power benefits from theeconomy

The idea that the economy serves power is present in several analyses, and espe-cially in certain mercantilist texts, in the work of F. List and in the historicalschool. Their first concern was to give concrete answers to current politicalproblems or to draw lessons from the study of historical facts. These currentsgive a lot of importance to the issues of defence and war, and thus to nationalunity, independence and power. Several economic policy principles, whichanswer political as much as economic objectives, are also developed.

The mercantilist movement and the improbable peace

The mercantilist movement developed with modern capitalism, in a context ofthe political assertion of nations on the international scene and of monarchiccentralization. This new doctrine is pragmatic and nationalist. It suggests solu-tions to increase the level of the national Treasury, by providing the means tolead wars. The theme of war is evident throughout these studies. The interpre-tation of mercantilist works later gave rise to numerous debates. In fact, themercantilist analysis raises the essential question of whether the economy is aninstrument of power or an end in itself.

The rise of mercantilism

From the sixteenth to the eighteenth century, the mercantilist doctrine is char-acterized by its analysis of the State’s role in national economic development.The power of the nation benefits from economic wealth and the nation is asso-ciated to the ‘Prince’. Mercantilists share a static conception of internationaleconomic relations, which leads them to assert that a country can only progresseconomically by disadvantaging another country. In this way, they expressedthe real theory of economic war. Therefore, the matter of the links betweenpower and national economy is thus central in their argumentation. The devel-opment of the mercantilist doctrine occurred during the political formation ofthe European nations. With the development of the concepts of ‘State’ and‘natural boundaries’, the sovereigns were confronted with the necessary unifica-tion of their political territory, while defending national power with regard to


foreign nations. From 1450 to 1750, the mercantilist doctrine developed, whileinternational relations were marked by numerous wars. At the end of the six-teenth century, England overcame the Spanish domination and supplantedHolland during the seventeenth century, before putting a decisive brake onFrench hegemony at the beginning of the eighteenth century.

The development of mercantilist thought coincided with the progressiveconfirmation of the British Empire’s domination of all international economicrelations. Wars were multiplied as states were initiated. Braudel (1979) definesmercantilism as ‘the insistent, selfish, soon vehement, push of the modernState’. By centralizing power, monarchies established juridical and administra-tive structures on which traders could rely. Conflicts between European powersoccurred for commercial reasons. Their main concerns were the control ofcolonies and conflicts over commercial monopolies. For example, the commer-cial rivalry between England and Holland was based on fishing zones. Likewise,European powers were in conflict for the domination of distant territories,particularly when these, following the American example, proved to be abun-dant in precious metals. In this conflictual context, the mercantilist principlesaimed at guiding the Prince’s foreign policy.

The development of mercantilist thought was catalysed by great discoverieswhich led the way to an unprecedented development of maritime trade and to amassive inflow in Europe of gold and silver from South America. These eco-nomic upheavals altered the medieval relation between the individual and theState. The Renaissance glorified the search for power and wealth and rehabili-tated industry and business. The conception of war in a general sense, i.e.involving military but also economic forces, was already evident throughoutmercantilist theory. Economy was indeed an instrument of national power.

The study of the mercantilist theories is based on doctrinal works (Mun orBodin) as well as on concrete measures of economic policy (Colbert). Mercan-tilism does not provide a unique and unchanging thought; its principles notice-ably differ according to countries and periods. This heterogeneity explains thatdifferences remain in the interpretation of this theory, particularly with regardto the importance of the links between power and economic development. Inspite of its significant influence, mercantilist thought has never became a for-mally established theory.

Its main representatives were businessmen (especially in England), statesmen(especially in France) or professors (Germany). Foreign trade and the advan-tages of colonization enabled large national companies to grow rich. To beauthorized to expand their activities, they first had to solicit a charter. Underthese conditions, maintaining good relations with the King and members ofgovernment was essential, all the more so as the competition between variousnational companies was fierce. This explains that this thinking achieved itsglobal theoretical reflection by stating practical rules of economic policy. Theemphasis on the concordance between the interests of traders and the sovereigncontributed considerably to the doctrine’s development. Willing to satisfy theobjective of national power, this doctrine was based on several theoretical


explanations of the way the national economy and its foreign trade functioned.In fact, the mercantilist policy did not exclusively benefit traders or financiers.Sometimes, the military and aggressive commercial policies of the States evenwent against their short-term economic interests. It is, however, necessary tokeep in mind that the main purpose of these public actions was to favour thetrading classes, especially those controlling domestic trade.

We can’t talk of only one mercantilism, but of several ones, because analysesdiffered from country to country, and from one period to another. Notably, themost important economic powers of the time (France, England and Spain) eachadopted a particular conception of the best way to develop national power,giving more or less importance to the colonial policy, the promotion of foreigntrade or the development of national industries.

Spanish (notably Orthiz, Olivarès and Botero) but also Genoese or Floren-tine mercantilists insisted on the necessity for the sovereign to accumulate pre-cious metals, considered as the basis of military and economic power. This wasthe main purpose of the Spanish colonial policy and is called ‘chryshedonism’,i.e. the search for the maximum of satisfaction in owning gold. Regarding eco-nomic policy, the Spanish policy is characterized by the ‘bullionism’, i.e. theprohibition of gold outflows and the overestimation of foreign currencies. Thispolicy contributed to the decline of Spanish power, to the benefit of industrialEngland. Indeed, the gold inflow generated a price increase, disrupting theentire national economy, notably by reducing the competitiveness of Spanishproducts.

French mercantilists gave priority to industrial development, as well as tradeexpansion which was supposed to guarantee gold inflows, mines of preciousmetals being monopolized by Portuguese and Spanish. French economic policyconsisted of supporting factories, encouraging exports of manufactured goodsand prohibiting imports. However, the economic policy was already subtle,refusing exports of products likely to be used as war instruments (particularlyweapons) and by carrying out an import-substitution policy (Prebisch, Furtado).Colbert shaped his economic policy in application of these principles. Stateinterventionism was at the heart of economic development, as underlined byBodin, Montchrestien and Laffemas. However, their points of view varied morethan is usually admitted, although they favoured State interventionism andindustrialization. The German Cameralists, who taught in universities, trainingfuture public administrators, also favoured industrialization, interventionismand protectionism.

English mercantilism (Davenant, Mun and Child) was based on nationaleconomic development through trade. Individual initiative was recognized andencouraged. Industry and trade expansion were sought, notably by means of lowinterest rates. Mercantilism acquired a certain theoretical legitimacy inEngland, notably concerning the advantages to be gained from an active tradebalance.

It is very difficult to have access to an entire economic literature whichdeveloped over three or four centuries, in several countries, in ancient


languages often difficult to translate. A discussion based on the specificcharacteristics of national doctrines is therefore out of the question. This is whyour analysis intends:

• first to underscore contemporary debates on the interpretation of mercan-tilist thought;

• then to underline the importance of the general principle according towhich the State’s power is the main objective of economic action;

• in chapter 3, we shall show that numerous theoretical differences haveappeared within the mercantilist thought, regarding war, peace, defence ornational power issues.

‘Contemporary’ debates on the power policy recommended bymercantilist doctrines

Studies on the history of economic thought mention little about the analysis ofmercantilism. Numerous authors consider Adam Smith as the ‘father’ of polit-ical economy, without mentioning that the study of mercantilist and physio-cratic thought holds an important place in The Wealth of Nations. However,mercantilist thought went through several periods of ‘revival’, notably inGermany in the middle of the nineteenth century or during the systemic armsrace of the Cold War. An approach to this doctrine by the contrasting analysesof the German historical school, by Heckscher, Viner, Keynes, Schumpeter orSilberner, of power, war and defence issues turns out to be very interesting. Thedebates were limited to two main subjects:

• what is the priority objective of economy, power or wealth?• is economic power necessarily a response to an economic situation of con-

flict?

Power and/or wealth: which priority objective for mercantilists?

In his presentation of mercantilism, by way of an introduction to his work onwar and peace in economic doctrines, Edmund Silberner (1957) insists on mer-cantilists’ bellicosity, in opposition to liberals’ pacifism. He comments onseveral characteristics of mercantilism, notably the search for autarky, the xeno-phobia and the idealization of war. According to the author, mercantilism wasdominated by the war factor and shared an antagonistic conception of inter-national relations, which determines its monetary and commercial ideas, its willto economically and politically dominate other nations, and its rejection of for-eigners. Silberner considers that the great majority of mercantilists did notmistake money for wealth. But precious metals played an important part inwarfare and in support of defence.

However, numerous economists qualified this bellicose interpretation of mer-cantilism. In his famous book, Mercantilism (the first edition of which was pub-


lished in 1931), Eli F. Heckscher devoted an entire part to mercantilism as asystem of power. For the author, mercantilism was basically aimed at the objec-tive of the State’s power. Jacob Viner (1948) believed this interpretation wasexcessive. He considered that, for mercantilists, economic progress was apurpose as important as the promotion of a strong or dominant State. Moreover,he noticed that, often very critical of the governments economic policies of thetime and little interested in general welfare, mercantilists were above all con-cerned with the defence of their own advantages. In answer to these criticisms,Heckscher (1955) admitted that economic and political objectives werestrongly interdependent in mercantilist thought. If the State’s power is animportant economic factor, it cannot, in the long term, disregard neglect of cit-izens’ welfare without being contested. But power also benefits from wealth asstocks of resources are at the Prince’s disposal for him to satisfy his politicalobjectives. Therefore, there is no basic disagreement in the analyses of mercan-tilism by these two authors. This interpretation found a broad echo amongcontemporary economic literature, which insists on the fact that politics andeconomy are inextricably connected in ‘mercantilist’ texts. Thus, for Albert O.Hirschman (1945), policies recommended by mercantilists aimed at a doubleobjective: the country’s enrichment and the increase of its power. The balanceof trade theory made wealth increase and the search for a national powerincrease by disadvantaging rival states compatible (see also, more recently, thework of Lars Magnusson (1994) on this question).

The policy of power as an answer to a political and economic situation ofconflict

Subject to repeated attacks by classical and neo-classical economists, mercantil-ism fell into disgrace at the end of the eighteenth century. But the protection-ism rebirth in Europe and the 1870 war revived the economists’ interest for thisthinking. Mercantilists were then presented as defenders of ‘realistic’ measures,in the economic and political context of the time.

The conviction that ensuring the State’s power was the objective of the mer-cantilist economic policy was expressed by William Cunningham (1892), themain figure of the historical school in England. In Germany, Gustav Schmoller(1857) wrote a short book on the ‘historical meaning’ of the mercantilistsystem. Mercantilism is presented as a response to a historical necessity, deriv-ing from the States’ wish to assert themselves with regard to foreign nations, butalso to strengthen their authority at the national level, through a policy ofpower and warfare. This was the first expression of economic nationalism.

The economic crisis in the 1920s and 1930s coincided with a strong protec-tionist revival, in a political context marked by international tensions. JohnMaynard Keynes, in General Theory (1936), used his defence of mercantilism(against the attacks of ‘classical’ economists) to confirm his conviction that anunsuitable international monetary system contains the germs of internationalconflict by making the various national interests antagonistic. As stated by the


author, the mercantilists’ bellicosity was mainly a realistic answer to the mone-tary problems of the time. They realized the organization of international mone-tary relations led to economic war. In the fixed gold standard internationalsystem, the balance of payments is a decisive factor for the money stock and theinterest rate, and thus for the national economic health. It is therefore neces-sary to promote national exports to attract the maximum of precious metals, atthe expense of other nations. In this context, the preservation of internationalpeace seems highly improbable because the international monetary system pre-vents the realization of full employment in all nations.

In his History of Economic Analysis, Joseph A. Schumpeter (1954) alsodefended mercantilists against those who accused them of having supportedirrational and contradictory economic policy measures. According to theauthor, mercantilist policies were, on the contrary, based on a strong practicalargument. The policies based on the public monopoly of exports and on thecontrol of imports and exchange rates (embargo on precious metals) are ration-ally explained by the situation of conflict and the international tensions of thetime. As stated by Schumpeter, mercantilists were not theorists, but ratherinterpreters of the popular common sense, in a political context of internationalconfrontation. Besides, most mercantilist authors belonged to business circles,which directly benefited from aggressive foreign policy. They put forward thearguments of the King’s wealth and of England’s security to hide their (real)imperialist motives.

For John K. Galbraith (1987), according to the mercantilist doctrine,economy is subordinated to political objectives and is of benefit to nationalpower. But, gradually, there was an evolution in the identification of thepower’s economic bases, modifying or substantially qualifying the too abruptanalysis of the mercantilists’ bellicosity. We shall try to bring this evolution tothe fore in Chapter 3.

The general principle of the Prince’s power as a cause of economicaction

Whereas English classical economists will later aim at economic developmentthrough the expansion of peaceful trading relations, mercantilists have under-scored the power and the domination relations of a nation through economicweakening, or even military conquest of neighbouring countries. Above all,economic development was of benefit to military power, by providing the meansto ensure the State’s defence and by financing military expeditions abroad. Poli-tics benefited from trade.

The precious metals trade surplus: a factor of power

Mercantilism was characterized by a few main principles, which justified eco-nomic and military conflicts between European states, as well as colonial con-quests. The trade surplus enables the constitution of a treasure (or of public


savings) likely to protect national wealth. Mercantilists then developed thebalance of trade surplus theory.

In the sixteenth century, while the economy had gradually monetized, insuf-ficient credits explain the importance given to the accumulation of preciousmetals. But, above all, the State was newly in charge of permanent mercenaryarmies, and the changes in military techniques had created substantial financialneeds that only the constitution of an important war chest could meet. Antoinede Montchrestien (1615) pursued the idea stemming from Antiquity thatmoney is the ‘sinews of war’. Many other authors, notably Jean-Baptiste Colbertin France and John Locke in England, also shared the view that the power of aState depends on the importance of its Treasury. The dominant idea was thatthe power of a State was determined by its capacity to have sufficient monetaryresources available at any time to achieve its foreign policy, in particular tofinance its wars (this point of view was illustrated by John Hales (1581) forexample). Thus, there is an immediate relation between supply and demand, inthe sense that the money disposal (of which neutrality is an underlying hypoth-esis) leads directly to the ownership of desired goods. Therefore, the existenceof a war chest composed of precious metals or the concrete availability ofweapons in case of conflict are assumed to be two equivalent situations. Thisanalysis contains the premises of ‘Say’s law’.

However, the role played by the precious metals stock in war success waslater minimized. English mercantilists in particular insisted on the importanceof manufactured goods exports and of the national production of goods neces-sary for warfare.

The mercantilist argumentation was based on the ‘balance of trade’ theorywhich was first expressed, as far back as 1616, by Francis Bacon (1625): thedevelopment of trade is of benefit to the country if it generates an excess ofexports over imports, the trade balance returning to the nation as money. Asstated by Charles Davenant (1696), the Prince’s interest implied an aggressivecommercial policy, because precious metals reserves could only be acquiredthrough trade. However, conflicts between private interests and public interestcould occur. Although they favoured the development of English exports, mostmercantilists were opponents of currency exports, therefore hindering tradedevelopment. Some of them, like Milles (Spiegel 1971: 100), did not hesitate toprescribe the control of foreign trade, in the medieval tradition of ‘bullionism’.We notice the concept of treasure explains both budget surplus and tradesurplus, as if they had to go together and as if the Prince could take possessionof the trade surplus.

In fact, mercantilists considered that only production leading to an exportsurplus was really productive and could create wealth. According to SimonClément (1695: 371), trade within the national territory does not createwealth, but only represent transfers from one person to another (the profit ofone making up for the loss of the other). In this way, the production devoted toexports and the traders’ role were glorified. Mercantilists therefore favouredimport limitations and encouraged exports.


According to certain mercantilists, currency was necessary to the circulationof goods and to economic activities;1 others considered that it represented aliquid capital, which allowed an increase in exports and eventually in stocks(Magnusson 1994: 162–165). This interpretation explains why they favouredboth the balance of trade theory and the quantitative theory of money. As earlyas 1568, Bodin expressed, in answer to Malestroit, the quantitative theory ofmoney, according to which a currency’s value, whatever its nature, is inverselyproportional to its quantity. It did not prevent mercantilists from spreading theidea that a nation’s wealth is proportional to its precious metals stock. Bodinhimself did not abandon the chryshedonist point of view. Indeed, he consideredthat gold and silver represented the real wealth of a country and having them inabundance was an advantage which widely compensated for the inconvenienceof the price increase following the precious metals inflow, notably by provokinga decline in interest rates favourable to the development of economic activities.Moreover, Bodin’s analysis is not contradictory, in the context of an inter-national monetary system based on the gold standard. Because of public exportand import restraints, the quantitative theory only applied to the restrictivecase of the non-intervention of the government in economic activities.

The question of economic self-sufficiency

Can the search for self-sufficiency be considered as a mercantilist principle?Answers differ according to periods and countries. French mercantilists wereproponents of a progressive autarkic economic organization. They expressed aprofound mistrust with regard to foreign nations and more generally regardingtrade activities. This point of view was totally incompatible with that of theEnglish mercantilists, who insisted more and more on the beneficial effectswhich a nation could gain from foreign trade (see Chapter 3).

The economic policies of European states during the fourteenth century werecharacterized, in Heckscher’s words, by their ‘policy of provision’. This methodwas introduced in the thirteenth century and culminated in the fourteenthcentury (and continued until the end of the eighteenth century for manufac-tured goods) (Heckscher 1955: 91). The purpose was to stop exports of certaingoods, especially food, but also military goods. A part of these export prohibi-tions were applied to trade relations with the enemy, and to ‘strategic’ goods(armaments or other goods useful to national defence). But this ‘policy of provi-sion’ was not only concerned with strategic considerations. Indeed, the mothercountry still depended on its trade with the colonies, which were difficult tosecure. Besides, the need to prepare for an embargo enforced by the enemy wasalmost never mentioned to justify this policy, which was at first primarily basedon the scarcity of goods. Colonial conquests used this logic by giving access tocomplementary products, different from those produced in the mother country.

Heckscher (1955: 131) makes a necessary distinction between the mercan-tilist policy, which recommended autarky, and the mercantilist doctrine, whichrecommended the expansion of exports and the limitation of imports. The wish


to ensure national independence only resulted from a misunderstanding of thefact that these exports necessarily created links between the national economyand foreign economies, forcing the country to import certain goods. Thus, thesearch for economic self-sufficiency cannot be considered as a main characteris-tic of the mercantilist doctrine in England. Besides, we must keep in mind thatEnglish mercantilists generally favoured the arrival of immigrant workers onnational soil, since the population, and thus the capacity of national enrich-ment, grew subsequently.

On the other hand, the economic self-sufficiency principle was crucial inthe works of two important French mercantilist authors: Laffemas andMontchrestien, whose work much influenced Colbert.

For Barthélemy Laffemas (1598), the ‘traffic and trade’ of foreigners onnational soil brought about the ruin of France. Furthermore, imports made bynational traders were also harmful, because they generated an outflow (and thusa loss) of precious metals. The country had to base its economic developmenton national production rather than on trade openness. Antoine deMontchrestien (1615), who was the first to use the term ‘political economy’,also supported self-sufficiency. His Treaty of political economy was marked by astrong nationalism and by a virulent attack against foreigners, in particulartraders, accused of being responsible for all the disorders from which France suf-fered. In this way, the mercantilist doctrine was also characterized by the exac-erbation of xenophobic feelings.2 The recommended solution was to limit therights of foreign traders and progressively search for self-sufficiency, as the goodsproduced in France ought to be primarily used for national consumption.Montchrestien advocated the growth of factories and the implementation ofrights on exports as well as on imports. But he was not concerned with provid-ing the abundance of goods within the kingdom, nor was he interested inencouraging prodigality and luxury expenditures, dangerous for ‘the greatness ofFrance’. Regarding foreign policy, the search for autarky is coupled with thewish to expand colonial conquests, but without open trading ambitions. Frenchmercantilist theory was fundamentally bellicose. Its theorists exalted war, whichhelped to maintain unity and national virtue and supply public funds. In thisway, they justified the war of aggression.

The promotion of economic war

According to the mercantilist doctrine, all means are good to ensure thenational economic and political domination. Its development was accompaniedby the exacerbation of nationalist feelings and the wish to weaken foreign coun-tries, even if it penalized national prosperity.

Mercantilists considered that the possession of a money stock superior tothat of other States was a fundamental economic objective. In this way, theysupported the numerous commercial wars of the time, because of a lack ofnatural harmony among national interests. Francis Bacon (1625) associated thebalance of trade with ‘the balance of greatness’ or of power. According to him,


the English policy should aim at developing both the nation’s power and trade.The increase of England’s power and Treasury disadvantaged rival countries.The rule according to which ‘one only wins what the other one loses’ (‘zero-sumgame’ principle) justified the State in directing its foreign trade policy towards areal economic war. As stated by Josiah Child (1681: 30), a State’s power andwealth are only relative. Trading relations allowing both countries to grow richwere only desirable if they improved the power of the nation compared to thatof its trading partners. The core of the mercantilist doctrine relies on a staticconception of economy, i.e. on the idea according to which world economicresources are fixed. Montaigne, Montchrestien, Bacon and Colbert were themain representatives of this conception.

At the economic policy level, the main effects of the mercantilist doctrinewere the implementation of numerous import restrictions, the encouragementof exports and several measures leading to continual commercial wars betweenEuropean states. Mercantilists unanimously defended legislative or militarymeasures aiming at increasing foreign trade. In this way, they supported theActs of navigation, the control of commercial roads to promote manufacturedgoods exports, as well as trade between the metropolis and the colonies.

However, mercantilists works often (strongly) disapproved of wars. Thus,wars entailing a gold outflow (because of the expenditures required to maintainarmies in distant countries) were criticized (Clément 1695: 371). This negativeeffect does not appear for wars fought at the realm’s borders or at sea (Mun1664: 99). Furthermore, some of the wars led by monarchs are unfair; theydon’t aim at the ‘necessary defence of their own rights’, but respond to‘the pride and the greed to add realms to the realm’ (Mun 1664: 128). As forJohn Locke, wars of conquest are expensive and create an ‘increase of theneeds’, an ‘increase of the Luxury and the Vanity of the People’; business mustbe preferred to wars (1691: 63). Therefore, there are ‘right’ or ‘opportune’ wars(based on the Prince’s power) and inequitable wars (based on destruction androbberies). Besides, we discern the first stages of an analysis in terms of cost-advantages.

In spite of this hesitation about certain military conflicts, mercantilistsremain convinced that trade expansion depends on the support of a strong mili-tary force which is beneficial to defence, deterrence and offensive, according totrade policy needs. This doesn’t mean mercantilist authors are necessarily inter-ested in ensuring or optimizing the populations’ welfare. The objective of theState’s power and wealth prevails over individual well-being, which can be sac-rificed to the public cause. Thomas Mun (1664: 135) considers that the more anation suffers from scarcity, the more it will be ‘wise and industrious’. Abun-dance shouldn’t prevail in the realm, because it corrupts the population’s capac-ities of obedience and sacrifice. Similarly, Josiah Child (1668: 20) suggests thecreation of legislation to prevent the population from idleness. ‘Human capital’was an underlying concept of this thinking: John Hales (1581) considers thatthe population’s training (which should develop its courage, fighting spirit andeducation) must be carefully maintained, because of its beneficial effects on the


Prince’s power policy. As stated by Charles Davenant (1696: 230), the popu-lation’s prosperity would be better ensured by the limitation of England’sforeign trade, but such trade is necessary to preserve the State’s power. JeanBodin developed the idea according to which war against foreign enemies hadbeneficial effects on national peace. Antoine de Montchrestien pursued thesame idea, but added that the same results could be achieved through the rise ofthe subjects’ living standards.

The French, unlike the English mercantilist authors, did not attempt todevelop a ‘science of trade’, notably because non-orthodox economic viewswere subject to an austere censorship, all the more effective as most Frenchmercantilist authors were statesmen. Jean-Baptist Colbert, superintendent offinancial institutions, then general controller of Louis XIV, implemented theFrench mercantilist principles, giving rise to a whole set of precepts now named‘colbertisme’ in France. By expressing these precepts, Colbert was primarily con-cerned with the need to provide the financial means required for Louis XIV’snumerous wars and to thwart the Dutch commercial expansion (owing to theFrench trading companies), which he interpreted as the sign of a political willto dominate Europe.

With regard to foreign trade, Colbert’s policy consisted in forbidding rawmaterials exports, promoting manufactured goods exports, as well as prohibitingimports. However, he emphasized especially international industrial competi-tion and the need to develop French industries, owing to an ‘educative protec-tionism’. Colbert considered that the State had to use the instruments ofinvestments, of the granting of privileges or of the creation of public factories.The national economy’s construction entails the easing of restrictions ondomestic trade, notably through the abolition of tolls (Edict of 1664) and thedevelopment of communications. According to Colbert, national ‘laissez-faire’increases wealth, as well as exports, by mobilizing the ‘productive force’. Asearly as 1576, Jean Bodin, in his work, The Republic expressed similar ideas.These measures enabled France to become one of the leading world economicand military powers.

Beside the promotion of exports, the population policy was another mainstayof the mercantilist analysis. It was a matter of providing the means to imple-ment the foreign policy. The more the State was populated, the more it wasconsidered as powerful.3 In France, Jean Bodin exalted the advantages that acountry gained from an abundant population, namely wealth and power. In thisway, he expressed the famous proverb: ‘Il n’est de richesse ni force qued’hommes’ (‘There is no wealth nor strength but men’).

In the same way, a high birth rate was of benefit to the interests of tradersand manufacturers, who needed a labour force to take part in the national eco-nomic development. John Hales (1581) searched for the means to developindustry so as to maintain a constant population level, and thus maintain thearmy’s strength, while the policy of ‘enclosures’ had created a massive move-ment of rural exodus. He thus suggested the development of England’s foreigntrade.


However, in this field, mercantilism can’t be reduced to a ‘fanatical national-ism’. Botéro, for example, sets forth the principle of appropriateness betweenpopulation increase and available subsistence goods.

Some mercantilist works mention precepts which fall within a ‘strategy ofimpoverishment’, with the refusal to implement an embargo on the exports ofnational products with the enemy, even during wartime. On the contrary, thesubsequent gold outflows should contribute to weaken the enemy and increaseits economic dependence. Therefore, the development of trading relationscould contribute to the increase of one country’s power compared to another.John Cary writes in 1695 about France, at war with England at the time:

I wish he were better furnish’d with our Product and Manufactures, and wehad his Money for them, which would much more weaken him, than theother would enable him to carry on the War.

(Quoted in Heckscher 1955: 99)

Mercantilist writings also mention a first expression of the concept of an armsrace. The anonymous author4 of the text Britannia Languens considers that thesovereign of a rich country will achieve his military aims faster by arminghimself rapidly (forcing the country he wants to defeat to do the same), than bycoming into open conflict with his enemy. The opponent being poorer, itsresources would very quickly run out, increasing its vulnerability (Silberner1957: 30). Here are expressed the main hypotheses of Richardson’s arms racemodel, but also the broad lines of the strategic policies implemented during theCold War by the Soviet Union and for the ‘Strategic Defense Initiative’ byReagan.

Finally, traders could be employed as intelligence agents, by providing thenation with precious information on the enemy’s economy and resources, whichcould not have been obtained by military means. This idea was notablydeveloped by Lewes Roberts (1641: 262).

In this way, mercantilists shared a real conception of ‘economic war’, veryclose to our modern analyses of commercial wars, of the economic weapon andof industrial intelligence. The modernity of these analyses is remarkable.

Conclusion

Mercantilists established a direct link between economic development and theconfirmation of national power. From this time onwards, economic reasons jus-tified war. They believed international economic relations were marked by eco-nomic and military competition for the conquest of markets and resources. Thenation’s power was relative, and government had to improve the national posi-tion in the hierarchy of powers. Therefore, the State had to intervene on theinternational scene to promote national interests. At the national level, itcould undertake actions in favour of the development of export industries.These mercantilist principles opened the way to the modern concepts of protec-


tionism and economic war. In fact, by justifying aggressive trade and militaryconquest policies, it opened a debate on the opportunity of trade intervention-ism which still exists today.

The economic bases of national security, according to List

Friedrich List, German economist (1789–1846), inspired the German customsunion (Zollverein). His most important book, The National System of PoliticalEconomy (1841), appealed for national unity and for the implementation of acommon trade and customs policy in Germany, but also in all countries wishingto develop their industry, to face the domination of leading economic powers,mainly Great Britain, over international trade. He pursued the traditional prac-tical teaching of economy in Prussia and inspired the German historical school.His analysis is very useful to defence economists, because it always refers to con-cepts of defence, independence and national power. War and peace issues, pre-sented along with protectionism, also held an important role in his work.

List’s theory has sometimes been misinterpreted. It has been defined as atheory of protectionism or of national power which would have foreshadowedthe German theories of ‘lebensraum’. However, the Listian analysis is not thecaricature it may seem. More than a theory of war, it is a theory of security.More than a theory of power, it is a theory of the national economy’s develop-ment and organization. List describes a strangely modern picture of the defencefield of analysis, wider than the one depicted by English classical authors.Indeed, according to List, military issues are not subsidiary, notably when theybecome instruments of the geo-economic security. Moral aspects intervene withmaterial ones as elements of defence. List is the first economist to have placedsecurity in the centre of economic analysis, and to have made it become anexplanatory element of the way State economy works and of its integration tointernational economy. In this respect, his analysis is fundamental.

• Unlike the liberals, List links defence issues to other issues, and goes furtherby suggesting a new conception of national security.

• His theory significantly contributed to the analysis of international eco-nomic relations. Indeed, it gives a meaning to economic and military con-flicts issues, by relating them closely to matters of development.

The economy is beneficial to national strategic interests

In opposition to the classical school, List considers State intervention in tradepolicy as indispensable to ensure the development of national productive forces.National defence and economic security issues are evident throughout histheory. International economic relations are competitive, and even conflictual.


From military defence to economic security

For List, defence implies the development of productive forces, the growth ofnational industry, economic patriotism and the implementation of a powerfultrade policy to defend national interests.

Adam Smith and List, who used the concept of ‘productive forces’, had twodifferent conceptions of defence. Whereas Smith considers defence as the most‘unproductive’ expenditure, List asserts that this expenditure, as well as thosedevoted to education and justice, allow an increase in national productive forcesin the long run, even if they represent a ‘destruction of values’ in the short term.

All expenditures devoted to the education of the youth, to the respect forjustice, to the country’s defence, etc., is a destruction of value which is ofbenefit to the productive force. The major part of a country’s consumptionaims at the education of the new generation, the care of the future produc-tive force.

(1841: 247)

The American politician Alexander Hamilton (1791) had already expressedprinciples similar to those defended by List. According to Hamilton, a solid eco-nomic base ensures a country’s security in the long run. He recommended theUnion, at the level of which the prohibitive tariffs necessary to face the Englishand Dutch competition could be implemented. Besides, public support for armsproduction is essential. Military security is a condition of America’s industrialdevelopment, because it enables the country to free itself from its dependenceon foreign powers. He suggests an import substitution policy, with the creationof a tariff to protect industries essential to national security. He wonders whatopportunity there could be in a governmental organization for arms production.Indeed, the arms production necessary to national defence shouldn’t be subjectto the risky speculations of individual initiatives.

These ideas will be pursued by List, for whom the power of production is thekey to national security. The ability to wage war is based on the potential ofwealth production and on the development of productive forces. The danger ofwar makes the protection of productive capacities necessary. Society’s institu-tional frame is also productive. List underlines the importance of the freedom ofthought and of conscience in the development of productive forces. Notably,the abolition of slavery and serfdom is a source of productive forces. Therefore,laws and institutions must not be considered as unproductive, even if theyproduce no value; indeed, they contribute to the development of productiveforces, which are the instruments of economic prosperity. Besides, the nature ofthe national government system is a decisive factor of the nation’s industrial,commercial and maritime success. Thus, institutions have to guarantee ‘thecivil freedom of institutions and laws, of administration and foreign policy’, aswell as ‘the national unity and power’ (1841: 214). Political institutions have todirect individual forces towards the collective project. ‘Everywhere History


shows us an energetic action of social forces and individual forces one againstthe other’ (1841: 214).

Freedom is thus the basis of economic development. Yet, the ownership ofan industry by the nation ensures the liberalization of its institutions. In fact,industrialization has highly interdependent relations with political freedom,social progress and the confirmation of national power. Therefore, purely agri-cultural nations are the nations where political institutions are less free andbusiness is less encouraged (slavery, tyranny, theocracy). ‘The School5 hasassigned this civilizing power to foreign trade; in this respect it serves as inter-mediary for the cause’ (1841: 250).

Therefore, industrialization is at the basis of every economic development,but also of the nation’s moral values. It enables the realisation of the differentobjectives which List has always related and considered as essential: prosperity,civilization, power and independence of the nation. Industrialization is thenecessary condition for the community to become an independent nation andthen an economic power. The mainsprings of List’s theory of defence are thusset out: defence is an important element of political life and justifies State inter-ventionism. The State economy must be directed towards two clearly assertedobjectives, besides economic prosperity: national power and independence. Inthis respect, List innovates with regard to the classical conception of defence.

According to List, the formation of a national industry is necessary to ensurethe growth of productive forces, the ultimate purpose being national independ-ence. National independence is multiple, i.e. moral, economic and political,and is obtained through the development of industries and of a ‘powerful classof factory owners and tradesmen’ (1841: 111). Like defence and educationexpenditures, public support for national industries is an investment which willgenerate an increase in productive forces in the long run. There are two import-ant points here.

First, List pursues the idea, expressed earlier, that material capital and humancapital are closely related when it comes to ensuring national survival. There-fore, according to List, the ownership of a manufacturing industry enables theincrease of ‘intellectual forces of the nation’ – as well as ‘public incomes’ and‘material and moral means of defence’ – and it guarantees national independ-ence (1841: 320). The development of a manufacturing industry directly con-tributes to the improvement of national defence:

At a time when art and mechanics have such a strong influence on warfare,when all military operations highly depend on the situation of the Treas-ury, when the country’s defence is more or less ensured, according to thepopulation mass, i.e. if it is rich or poor, intelligent or stupid, energetic orplunged in apathy, if its sympathies belong unreservedly to the country, orare partially in support of foreign nations, if it can arm more or less soldiers;more than ever, in such a time, industry must be viewed from the politicalpoint of view.

(1841: 320)


Thus, List establishes very close relations between economic and moral forcesand appeals for economic patriotism.

Second, the State must undertake a real economic development policy andcreate protective taxes, which, even if they represent a loss of value, contributeto ‘the industrial education of the country’ and lead to an increase of productiveforces in the long run, by ensuring prosperity and power (1841: 253).

Therefore, the nation’s survival relies on the existence of a real political willin favour of national power. List accused ‘the School’ of having mistaken ‘themaxims of private economy for those of public economy’ and of having ques-tioned ‘the existence of nationality and of national interests’, by refusing toencourage the growth of the merchant navy, finance its protection and preparethe country for naval warfare (1841: 274). He therefore blamed Adam Smithfor having considered the nation as an individual, by recommending savings. Anation which would prefer savings to its own defence, trying to avoid expendi-tures generated by wars, would be later condemned to ‘poverty, inhumanity,powerlessness, dissolution’, because foreign countries could then monopolize itsassets. The search for cheaper products through free trade should not necessarilybe the ultimate objective of a nation, as protectionism plays an essential role innational unity. List appeals to all members of the nation to continually defendtheir present and future existence, through appropriate economic actions,guided by State intervention. Defence must always be taken into account alongwith economic concerns. Therefore, military expenditures and protectionistmeasures must not be considered as exceptional.

List criticizes the idea that war establishes a kind of state of exception. Heconsiders peace as a temporary suspension of conflicts, in a world marked by thedisparity in levels of national economic development. Therefore, even in peace-time, States must develop their navy and establish a prohibitive and protectivesystem in order to direct capital towards specific industries, notably thoserelated to national security. Restrictive measures on exports of strategic prod-ucts, such as powder or artillery, would then be unnecessary in wartime. But themilitary or strategic sphere is not the only one concerned. The entire economycontributes to national defence. Thus, List disapproves of the trade retaliationprinciple advanced by Smith; he condemns its risky and temporary character. Awell-led policy of restraints is a continuous one, and must not correspond to alogic of economic war, but rather of national independence. Therefore, Smith’sargument to justify the protection of industries necessary for national defencemust be extended to all industries, because a nation’s potential for defence isdetermined by its global industrial development. In the same way, List considersthat the third exception to free trade mentioned by Smith (when domesticmanufactured goods are disadvantaged compared to foreign countries withregard to taxes) is not satisfactory: why are the other disadvantages not con-sidered (1841: 432)?

In his argumentation, List mistakes economic for military matters, anddefence for economic security matters. And in fact, a central element ofhis analysis is the search for national economic self-sufficiency, because it


is closely related to the government’s economic policy. Unlike liberals, whoonly considered war, List enumerated three kinds of events which couldthreaten national economic security: ‘foreign restraints, trade crises, wars’(1841: 415).

Indeed, if war occurs, a purely agricultural nation may lose its products’outlets as well as the means to buy foreign goods. To overcome this danger, thenation must develop both agriculture and industry, in order to guarantee fullemployment of productive forces, which will prevent their reciprocal actionfrom being disturbed by war or by foreign measures. Thus, the continual protec-tion of national industries is necessary, not only in wartime but also in peace-time, as it has beneficial effects on both economic development and nationalindependence.

A national offensive on foreign markets

Under full employment of productive forces, national defence is better ensuredif the society is imbued with an appropriate culture and knowledge. Indeed,politics may hinder the course of international trade. These disruptive factorscan be ‘a bad policy of monarchs, unintelligent or left to their passion; domestictroubles; war, devastation or oppression of a tyrannical or fanatical system’.(1841: 457). They can cause the downfall of the most economically advancednations which subsequently lose their comparative advantage. In this presenta-tion of war, List considers that it is never waged for justifiable objectives, andthat it is often the result of a political constitution unfavourable to nationaleconomic progress. However, there is a positive side to war if it can help leadersto remember the importance for national economic security of having a strongnational manufacturing industry.

In this way, the United States benefited from war with England, becausethey had to abandon free trade and protect their manufacturing industries,which turned out to be favourable to the development of an economy whoseagriculture had already developed well. The nation should maintain this systemof restraints in peacetime, so as to help the development of industries still inca-pable of withstanding international competition.

List does not consider the search for national power as a bellicose aim, but asessential to the protection of national independence: ‘The idea of independ-ence and power arises with the concept of nation’ (1841: 292). By reviving theconsciousness of national interest, war encourages the implementation of bene-ficial economic measures. But it would be even more advantageous if such meas-ures were undertaken in peacetime, within the framework of a good politicalconstitution. More than a competitive struggle between leading powers, it is amatter of national economic survival, in an international context characterizedby differences in the levels of national development.

However, by appealing for independence, List also appeals for the growth ofnational power. Although he doesn’t mention them, he wasn’t against warswaged to conquer new colonies. According to him, a nation must ‘train men,


manufacture machines and build communication routes’ in order to ensure itsdefence (1841: 57). But the colonial policy is also a logical continuation of thetrade, education, defence and civilizing policy of an enlightened government.As stated by List, the enhancement of national power enables a country to takeadvantage of foreign countries’ ‘natural forces’, and to do so for several genera-tions, through foreign trade or colonization. The nation’s power, which isassessed by its ability ‘to extend civilization world-wide’, is necessary for thedevelopment of productive forces. Indeed, it inspires in individuals ‘a spiritwhich spurs them on at the level of the whole nation’ (1841: 251). Accordingto him, there are ‘reciprocal relations of cause and effect between civilization,political education, the peoples’ power and economic development’ (1841:247). The school shouldn’t exclude political and power issues from the politicalfield of analysis, otherwise, it will neglect the ‘intellectual capital of the livingeconomy’, i.e. the fact that a population benefits from the accumulation ofknowledge by previous generations.

[. . .] Every single nation is productive as long as it knows how to assimilatethis conquest of the previous generations and increase it with its ownacquisitions; the extent and geographic situation of its territory, thenumber of inhabitants and its political power are as important as naturalresources if a nation wishes to cultivate, exceptionally and harmoniously,all the branches of labour, and extend its moral, intellectual, industrial,commercial and political action to less developed nations and more gener-ally world-wide.

(1841: 248)

According to List, both moral and economic reasons justify colonization.

• Colonies wish to benefit from the contributions of industrialized nations,regarding civilization and economic development.

• Colonial trade, such as exchanges of manufactured goods for raw materials,are necessary to the industrialization process. Besides, the possession of acolonial empire represents the crowning achievement of the developmentof industry, trade and national power.

Furthermore, List defends the particular attention paid by mercantilists to pre-cious metals against the classical authors. Indeed, the trade balance surplus canhelp to limit monetary fluctuations. And the level of this surplus depends onthe nation’s trade policy and on its position in the hierarchy of powers (inparticular the size of its colonial empire).


The pacification of international relations through economicdevelopment

List considers that, in the very long term, all nations having the same level ofdevelopment could unite in a ‘universal confederation’, which would guarantee‘perpetual peace’, notably with the abolition of custom duties. But in thecontext of trade wars and uneven development of nations of the time, the ideaof perpetual peace could only be an illusion, advanced by the dominant theory,which was in fact mostly concerned with England’s supremacy in the worldeconomy. Nations must avoid being trapped in ‘the universal association basedon the wealth and power of a single dominant nation, the others being submit-ted to subjection and dependence’ (1841: 441). In this context, every nationwhose agriculture is prosperous, but whose industry is insufficiently developed,must protect it with custom duties.

List distinguishes private economy from social economy, and within thelatter national political economy from cosmopolitan economy. The cosmopol-itan economy supposes that all nations of the world form a single and uniquesociety living in perpetual peace. Quesnay, Smith and Say were the first theo-rists of this cosmopolitan economy, as they recommended universal free trade,without mentioning the idea of a nation. It is interesting to notice that thedominant theory is here defined with regard to its supposed pacifism. As statedby List, the principles of free trade are only valid in the case of a universalassociation or confederation of all peoples of the world. According to him, thereis a risk for a nation in opening up its economy too much to the outside world;he rejects the principle of the international division of labour and recommendsnational economic independence. Notably, he states that ‘England can export,through cheap products, its trading problems’ (1841: 321). The best way toprotect the economy from commercial crises or from fluctuations due to wars orforeign restraints is to bring all national productive forces together in co-operation. As long as States resort to wars and protectionist measures, the unionof peoples is inconceivable.

However, the possibility to have recourse to armed conflicts decreases asstate economies develop; there is a gradual shift towards the peaceful settlementof conflicts.

Two peoples with an equally developed industry would do more harm toeach other within a week than they could undo within the space of a gener-ation.

(1841: 230)

Already, in the congress of leading powers, Europe has the embryo of thefuture congress of nations. From today onwards, the tendency to settle byagreement the conflicts between peoples prevails over the use of militarymeans. [. . .]

(1841: 231)


In the future, an association of all humans is possible and desirable for rationaland religious reasons. It would represent the success of the scientific, artistic,industrial and social progress of humanity. List is in favour of commercialtreaties through which nations make reciprocal concessions and he recom-mends a progressive decrease in protectionist measures throughout the world.These measures are only useful at a certain level of economic development,but should disappear with the ending of international trade rivalries due tothe search for independence, and even for economic domination, by everynation. However, a nation will only be able to ‘enter the future universalcivilization’ if it is prepared for it, i.e. if it notably possesses a territory whichguarantees its economic independence and its military security. Yet conquestscan be the solution to the imperfections of the territory, to ‘round it off’. Buteven then, a peaceful settlement of conflicts should prevail. List underlinesthe tendency of his time to modify the territory by ‘purchase, conquest orsuccession’ or by ‘the association of the States’ interests by means of treatiesfreely agreed’ (1841: 214). The German customs union is an example of thisevolution.

List’s plea on behalf of ‘the universal association’ is also an appeal for emigra-tion and colonization, justified by the differences in climates and naturalresources from a country to another, but also by over-population and ‘overabun-dance of capital and talent’ (1841: 98). Moreover, the civilization of ‘barbarian’nations is one of the missions of politics. Before benefiting the human race ingeneral, the expansion of civilization has beneficial effects on the economy ofthe nation which impulses it. Economic profits expected from the expansion ofthe colonial empire are highly superior to those which could result from war ortrade conflicts. Therefore, the civilization of all peoples is not only ‘the missionof human kind’, it ‘is also guided by natural laws’ (1841: 286). Colonizationserves both economic and moral interests. The nation’s natural economicdevelopment thus corresponds to the expansion of civilization which is ofbenefit to the colonized peoples.

According to List, a certain determinism of economic progress correspondsto another determinism of the evolution of national political structures towardsan enlightened government that respects liberties and does not undertakeunnecessary conflicts which would disadvantage national economic interests.Furthermore, colonization is more efficient and less risky than war to exaltnational feelings. Thus, List has a mainly defensive conception of war. Moreprecisely, the fact that a population is conscious of the eventuality of war rein-forces national unity and stimulates the wish for economic independence.Regarding the long-term future of humanity, List talks about the ‘universal con-federation of human kind’, when all nations will have reached the same levelsof development, culture and power (1841: 98).

However, according to his theory, the confederation of peoples can be partialat first, before becoming universal, when all nations will be equally developed.And, in actual fact, the issues of economic development and emancipation ofcolonized countries are not mentioned, nor is the colonial spheres of influence


among leading powers challenged. List considers that colonial trade is ‘in thenature of things’ and that it will continue, as all the countries cannot demand aprotective system. Such a system can only be of benefit to nations already suffi-ciently developed to aspire to the rank of leading economic power. In fact, thedeterminism of resources confines the ‘countries of the torrid zone’ to the pro-duction of agricultural products and raw materials; they might never becomeindependent nations with a real military force. Therefore, it seems that theworld must remain fundamentally divided between an industrial North,guardian of civilization and progress, and an agricultural and dependent South,confined to a lower level of development by a determinism of resources. Implic-itly, it seems that the pacification of the ‘countries of the torrid zone’ can onlyresult from the intervention of industrialized nations and not from their pro-gressive access to economic power, which is not considered. List’s theory alsoenvisages, in the long run, a separation between, on one hand, developed coun-tries, at peace and united in a confederation, and on the other hand, non-civilized countries, still at war. Peace could therefore be ‘separate’ and notuniversal. Besides, other questions remain as to the interpretation of List’stheory regarding contemporary economic facts.

In List’s work, at first sight, power is not conquered by means of an armedforce, nor does the author recommend economic war between equallydeveloped powers. The evolution (mentioned above) towards peace and eco-nomic agreements is natural, is ‘the country’s destiny’. Political institutions willhave to adapt themselves to these changes, or national power will decline. Theweight of social hierarchy must not check individual initiatives; thus, we canenvisage a political standardization among leading powers, which would definit-ively ensure the preservation of peace. Therefore, List’s thought does not fore-shadow the theories of the ‘German myth’ which were later condemned, byKeynes for example. List’s work is subject to democratic and liberal influences,and it is favourable to a peaceful share-out of economic territories betweennations. Even if the search for economic power implies the mobilization ofnational resources and productive forces, in order to achieve economic self-sufficiency and extend foreign markets, this doctrine is fundamentally peaceful,by conviction but also by pragmatism. According to List, the universal associ-ation of human kind does not lie in the disappearance of nations, but inthe alliance of independent peoples. We can consider List as a precursor.Indeed, his thinking contains the idea (widely admitted since the advent of thenuclear era) that the destructive capacity of arms production increases in time,until the resort to force to settle conflicts becomes impossible, therefore encour-aging the inauguration of new forms of interstate dialogue. List’s universal con-federation does not necessarily imply the replacement of the governmentstructure by a larger one. It could just as well be an international structure coex-isting with the States and enabling them to regulate international relations.Nowadays, the UN could represent a first outline of this universal confedera-tion. The discussion about the possible domination of the world by the UnitedStates (and American interests) does not contradict List’s thesis. On the


contrary, he in fact underlined the eventuality of a single state’s domination onall others.

A ‘Listian’ interpretation of the contemporary economy could be to considerthat all international economic relations will remain dominated by leadingpowers, and that less-developed countries will be maintained at the rank ofdependent nations, because of the uneven balance of power. Another interpre-tation lies in the idea of a reorganization of the industrialized nations’ spheres ofinfluence around three main poles (Triad), the Third World countries beingconsidered as ‘new colonies’.

List’s theory on economic and trade policy closely links political to economicobjectives. This author is mainly concerned with national power and denouncesthe dominant liberal theory’s hypocrisy on this matter. In his theory, the studyof defence and power issues is essential for economic analysis. This conception,although totally opposed to the dominant theory, has nevertheless had anessential impact on the following ‘heterodox’ currents of analysis.

The German historical school: for a pragmatic use of theeconomic and military power instruments in favour of thenational interest

List’s criticism of the classical school in the middle of the nineteenth centurywas partially based on the observation of historical facts. However, only laterwas the historical method used in a systematized way, by authors who wished toentirely renew the method of political economy. Naturally, this movementamply deals with war issues and asserts its essential role in the development ofmodern societies. The virtues of war and economic interventionism are glori-fied, as are the measures favouring the population’s cohesion around the objec-tive of national power on the international scene.

A new method of analysis

While Germany was implementing a policy of power for the first time, in astrained international context of British domination but also, towards the endof the nineteenth century, of American and Russian domination, a new schoolof thought, partially stemming from Cameralism, developed in this country.Keith Tribe (1988) mentions that, in the nineteenth century, German econo-mists did not talk about political economy but rather about ‘Nationalökonomie’(State economy), thus insisting on the symbiosis between State and economy.At the end of the nineteenth century and at the beginning of the twentieth,these economists established the first outlines of a science of the moderneconomies’ administration, which will only fully be developed by Keynes, andthey coined the modern language of economic management or political andeconomic strategy (Tribe 1988: 34). In this respect, the origins of concepts suchas ‘regulated capitalism’ or ‘planned socialism’ can be found in the works ofthese German economists. The economic studies on the Nationalökonomie were


preceded by Cameralism, favourable to an ‘administrative economy’. It haddirected the elaboration of the Prussian administrative apparatus, which servedthe government’s political ends, in a context of a strong militarization ofthe economy. According to the Cameralists, the State dominates economiclife, the individual initiative is not recognized and the social order isautonomous, self-generated and stems from natural laws. The differencebetween Cameralism and Nationalökonomie lies in the importance given tohuman needs, to their variety and the necessity of their satisfaction. Thisthought, which began with criticism of liberal theory, only became a fully estab-lished general theoretical system in the middle of the nineteenth century, withthe publication of List and Roscher’s founding works. Adam Smith was particu-larly blamed for not having considered the various characteristics of humanneeds and of national economic development necessities. ‘The historicism’ ofGerman economists was in opposition with ‘the universalism’ or with the‘cosmopolitanism’ of liberal theory.

The German historical school shares a conception of defence radically differ-ent from the liberals’ view: it places defence in the centre of economic stakes,the State reinforces its internal power by confirming the nation’s position onthe international scene, through an interventionist trade policy. The ideal ofworld peace is rejected and considered as too Utopian. However, these econo-mists acknowledged that trade had some pacifying virtues and they were not,strictly speaking, ‘warmongering’. The German historical school wishes to initi-ate a new economic analytical method, based on the observation of facts.Gustav Schmoller (1902: 313) condemns both the liberal and Marxist theories,as ‘twin products of a non-historical rationalism, the last offsprings of the 18thcentury’s philosophy’. Like those of Whilhelm Roscher, his texts pay particularattention to war and national defence issues and to the promotion of nationaleconomic development, in opposition to the ‘cosmopolitanism’ of the classicalschool. The view of these authors is however different from the mercantilistone. Just like Friedrich List, they do not consider international relations asimmutably doomed to antagonism; it all depends on the level of developmentthat nations have reached.

The theorists of the historical school defend state interventionism and justifythe numerous wars that have punctuated international relations in the past asbeing necessary to strengthen the national political and economic unity of eachnation. The preservation of a strong national defence is recommended, and theidea of disarmament is rejected.

The historical justification of war and the insistence on nationaldefence

In his work on ‘the historical meaning of mercantilism’, Schmoller (1857:59–62) shows that economic and military conflicts inevitably accompany thebirth and rise of nations. The mercantilist policy represented a historical stagenecessary to maintain the existence of national entities. Smith’s criticism of the


disastrous economic effects of this policy must thus be reconsidered. Mercantil-ism was indeed related to this historical reality. It enabled the State to imple-ment national political reforms (administrative reforms, centralization) and toestablish useful barriers against international economic competition. Thispolicy, led by monarchs or ‘enlightened’ despots, helped in the formation ofnational entities. In fact, free trade was only the natural continuation of mer-cantilism: it appeared when State intervention was not useful any more topromote national economic interests abroad.

In this way, a ‘newly created’ political community can only survive if thepopulation adheres to it. The search for self-sufficiency and independence, aswell as the commitment in conflicts with foreign nations, are of benefit to theunification of particular interests around the collective interest. As stated bySchmoller, the mercantilist doctrine only answered problems of its time andmany of its proposals appeared to be erroneous: ‘The doctrine of the naturalharmony of the economic interests of all states is just as false as the opinionthen entertained that an advantage to one state is always a disadvantage toanother’ (Schmoller 1857: 63).

Therefore, the German historical school should not be considered as anadjustment of the mercantilist theory. For example, Roscher (1872: 470), whenhe comments on Frederic le Grand’s convictions on economic policy, blameshim for having embraced mercantilist principles, and for having ignored thetheoretical progresses of his time, especially the lessons from Cameralism.

Although they rejected economic mercantilist policies (at their time), theGerman historical school theorists defend State intervention in trade andappeal for the population’s support for the promotion of national power.Regarding this matter, they often insist on the virtues of war. Silberner (1957)enumerated the numerous apologies for war which had been made by econo-mists such as Roscher, Schmoller or Stein. The necessary defence of a nationwas expected to inspire a national feeling and a sense of sacrifice into indi-viduals. According to Schmoller (1902: 63), political economy has to study twodecisive factors of economic organization: the ‘natural and technical causes’ andthe ‘causes entailed by the psychological and moral life of the peoples’. Hebelieved economic theories only considered the first one.

The German historical school economists do not believe in the imminentdisappearance of war. The nation must be prepared for the eventuality of aforeign invasion, potential enemies being all the more numerous as the nationitself will be wealthy.

Roscher considers disarmament as a dangerous choice (Silberner 1957: 139).Peace can only be achieved by keeping national defences at a high level,according to the well-known principle of deterrence. As the old proverb says, ‘sivis pacem, para bellum’ (‘If you want peace, prepare for war’). An army protect-ing the territory from foreign conquests is considered as productive (Knies,Schäffle), or as a national insurance (Stein) (Silberner 1957: 141). Knies andRoscher were in favour of a permanent army, whose values of discipline andexactness have beneficial effects on economic development. Schmoller (1902:


137) suggests that soldiers belonging to the poorest classes of society should beindemnified for their loss of income, during their service. From his point ofview, the national service strengthens national solidarity, endangered by anexcessive division of labour, and also contributes to the population’s educationand to the levelling out of social classes, as universal suffrage does.

In the same way as they disapprove of disarmament, these economistscondemn political projects aiming at the rapprochement between States.Indeed, as stated by Schäffle, a European federation or a world political unifica-tion in the name of peace are Utopian principles (Silberner 1957: 145). More-over, a simple disarmament would not be sufficient to ensure the end of wars,which are waged for economic but also political and religious motives. Accord-ing to him, the ratification of an international mutual disarmament treatywould favour the militarily strongest nations and disadvantage the weakestones, because of the lack of an international executive power and of the tech-nical difficulty in implementing such agreements (problems in the definition ofthe various weapons at stake and risks of circumvention of these agreements).As inequality and power relations underlie human relations, war is likely to last.

The political implications

The German historical school’s arguments, particularly those of List, havesometimes been presented as an introduction to extremist political theories pro-moting an increase of national power worldwide, especially National Socialism.However, such an assertion is certainly improper. As stated by Birken (1991:179–189), Hitler’s economic ‘conception’ was centred on individualism. Thesociety had to be organized in order to stimulate the individual potential of cre-ative production; the aristocratic principle consisted in granting a higher posi-tion in society to the most creative personalities, those who could increase theglobal value of the ‘race’. The faith in the superiority of the Aryan race wascoupled with a search for the means to confirm its everlasting domination onthe world, by eliminating the Jews, considered as a potentially inferior race, buta race which controlled numerous productive activities of the country. Theseideas inevitably resulted in the promotion of Germany’s territorial expansionand in the extermination of Jews; these objectives being expected to be ofbenefit not only to Germany but also to the whole world, the productive poten-tial of which would rise. Yet, the more a race is densely populated, the more itschances to dominate the world are important, because it is in this case morelikely to find individuals capable of expanding national productive and culturalforces. However, a disequilibrium between the territory and the population waslikely to occur because of insufficient agricultural productivity. Wars of con-quests were therefore recommended; trade competition and trade wars wereconsidered as unable to establish a permanent superiority of a people. As well asleading territorial wars, the empire should organize itself as an autarkic block, inresponse to internationalism. In his presentation of Hitler’s economic ideas,Birken doesn’t mention a possible relation with the German historical school.


On the other hand, he underlines the classical foundations of the Nazi concep-tion of economic relations, notably by insisting on the promotion of individualproductive capacities.

As for Pribram (1983: 391), he mentions the close relationship betweenNational Socialism and the German ‘idealist’ philosophy. Philosophers, andFichte in particular, assigned a universal mission to the German people, sup-posed to be endowed with superior intellectual faculties (especially the capacityto use ‘introspection’ to understand ‘reality’). National Socialism, whichintended to co-ordinate the administration, armed forces and economy in orderto advantage the ‘superior national objectives’, was not compatible with ‘theconception of economy as an instrument which benefits the satisfaction of indi-vidual needs’. However, Pribram states that some of the historical school propo-nents accepted important compromises with the National Socialism principles;they notably asserted that economy should be adapted to the value judgementsof a specific social philosophy (1983: 394). According to him, the Germanhistorical school was particularly well prepared to accept National Socialismprinciples, because it was adopting a relativist conception, according to whichevery truth or ethical principle is conditioned by history. It is necessary to dis-tinguish the work of the school’s founders (Roscher and Schmoller) from theirlater interpretation. Moreover, Pribram asserts that the scientific principles ofthe historical school were clearly incompatible with the anti-intellectual atti-tude of the representatives of the ruling parties and that the ‘takeover’ of thisschool’s theories by National Socialism gave rise to many criticisms in Germanyon the eve of the Second World War (1983: 394).

The historical school therefore stresses the important part played by wars inthe development of modern nations. Its authors have often glorified war andnationalism, supported by past examples. However, few general principlesregarding the relationship between power and economy or the issue of nationaldefence are highlighted. In fact, the historical method itself is contingent; itdoesn’t provide universal economic principles itself.


2 The economy as a factor of peace

The economy has become an autonomous discipline by excluding defence issuesfrom the field of economic analysis. Indeed, the economic laws revealed areonly valid in a context of laissez-faire and free trade. Wars disrupt the free-market mechanisms. By reasoning in terms of pure and perfect competition,neo-classical economists finished separating the pure theory from the study ofpolitical and policy issues. However, liberal theories have often been normative.Concerned to show the superiority of their rules, they insist on their benefits, inparticular the achievement of economic prosperity and world peace, the crown-ing achievement in the revealing of ‘economic truth’.

The physiocrats or the desirable peace

From the eighteenth century onwards, the physiocrats asserted that the Prince’sinterest lies in the acceptance of a decrease in taxes and hindrances weighingheavily on the agricultural sector. The nation’s power was ensured by itsprosperity, which mercantilist measures checked rather than favoured.Physiocrats promised the King powerful, numerous and efficient armies, if theirprinciples were adopted. Therefore, the opportunity of ceaseless wars was gradu-ally questioned. War was considered as a cause of waste and economic chaos,disrupting the natural order established by the divine Providence. During theAge of Enlightenment, following Rousseau, Voltaire, Diderot and Mon-tesquieu’s ideas, peace was analysed as the crowning achievement of humanity’sprogress.

Physiocracy was the first real ‘homogeneous’ school of economic thought. Itopened the way to a completely new field of work and marked a shift from themercantilist conception of economic issues. Quesnay, the central figure of thisschool, had numerous disciples, such as Mercier de la Rivière and Dupont deNemours. But this ‘sect’ also had its precursors, notably Pierre de Boisguilbert,and his ‘independents’, such as Anne Robert Turgot. All of these authors men-tioned defence and conflicts in their works. In a century marked by numerouswars, they defended or tried to save, through radical economic reforms, theFrench government system, which was subject to controversy because of itsunsuitable tax system and its excessive burden of military expenditures.


Pierre le Pesant de Boisguilbert, or agriculture as the basis ofmilitary power

In his work, Boisguilbert (1695; 1705; 1707a; 1707b) differentiated himself frommercantilists, by stressing the necessity to implement economic policy measuresin favour of agriculture, the French leading economic sector at the time. Onlyits recovery could enable France to overcome the economic crisis. A rise in agri-cultural prices could have improved the rural sector’s situation, which was sacri-ficed in favour of industry by export restriction measures which kept prices at alow level. Thus, non-intervention and submission to the natural order weredesirable.

In spite of the liberal orientation of its economic policy proposals, Boisguil-bert particularly considered economic development within national borders andremained concerned with ensuring national power.

Hindering agriculture weakens national power

At the time of Boiguilbert, France was engaged in numerous wars. Yet, the poorresults of the rural sector entailed a decrease of the population, and thus of thearmies’ strength.

Boisguilbert’s arguments clearly announced a shift in the way relationsbetween defence and economy were considered. According to him, mercantilistmeasures hindered economic development; they thus directly affected militarystrength, which strictly depended on the country’s prosperity. Trading powerwas not the primary objective; the accumulation of precious metals was not thereal wealth: ‘Money is only the means and the transporting, and the commodi-ties useful for life are the end and the purpose’ (1695: 618).

By emphasizing the importance of consumption in economic development,Boisguilbert was a precursor of the theory of supply and demand elasticity and ofthe multiplier theory: ‘The downfall of consumption is the downfall of income’(1695: 602). The development of his ideas was in accordance with the interestsof the rising bourgeoisie, which was favourable to a liberalization of the eco-nomic policy.

In Le détail de la France (1695), Boisguilbert showed the negative effects ofvarious taxes, in particular the ‘taille’. He denounced the unfairness of the fiscalsystem, recommending its abolition, as well as that of the ‘state aids andcustoms on the realm’s exits and passages’, which slowed down the circulationof grains, thus preventing efficient provision for the entire kingdom (1695:590). These obstacles, which limited trade expansion, induced a drop in prices,and thus, in the long run, in quantities supplied. This work gave rise to numer-ous criticisms. Boisguilbert answered them in the Factum de la France, contre lesdemandeurs en delay (1705), and notably stated the argument according towhich the context of war forced a delay of these reforms. He asserted that thesemeasures put a strong brake on French conquests, as they hindered nationalprosperity. The preservation and the development of national power are pre-


sented as the supreme objectives guiding economic policy. The economy, more-over, has an undeniable strategic role. Boisguilbert states that the reforms whichhe recommends are the best means to achieve an ‘advantageous peace’. Indeed,a strong economy has a deterrent effect on the opponent, who is more easilyinclined to surrender (1707: 1005).

Besides, Boisguilbert considers that the system of tax collection maintains areal ‘civil war’ within the realm, more harmful to the economy than foreign con-flicts and limiting both power potential and national wealth. He therefore inau-gurated a change in the way of considering the relations between power and theeconomy. The State has no power without a developed and liberalized economy.

National power is inevitably limited by the divine Providence

Although he didn’t use this expression in his work, Boisguilbert considers thereis a ‘natural order’, that economy is subject to laws similar to those of naturalsciences, that the economy can be compared to a mechanism which can beobstructed by erroneous measures of economic policy. However, this liberalismwas not ‘unconditional’. Boisguilbert remained favourable to the trade of grainswith foreign countries, although he favoured domestic trade. However, hewasn’t in favour of the freedom of imports which was only worthwhile if sup-plies in cereals were insufficient, in which case it could be prevented through arise in agricultural prices. But in the case of sufficient national supplies, importsshould be limited by high entrance fees, to prevent a fall in agricultural priceswhich could disrupt the economy (Spengler 1966: 16).

According to Boisguilbert, peace should be ‘the purpose of all wars’; this ideawas relatively new compared to mercantilists, for whom peacetime was markedby trade conflicts, representing at best a temporary ‘non-war interlude’. More-over, Boisguilbert clearly specified the causes and conditions of war. Praising theunrivalled strength of the French navy, he asserted that the King used forceonly to ‘acquire his possessions’ or ‘defend his religion’ and that his ‘justice andrestraint’ encouraged him to limit his conquests (1705: 760).

Thus, according to Boisguilbert, at first sight war has no economic causes.‘Just’ or ‘holy’ wars are justified, and are limited for moral and not economicreasons. However, peace must be chosen, not enforced, and is only conceivableif the country is much more powerful than its enemies. Besides, Boisguilbertconsiders that the French economy is potentially strong enough to provideunlimited resources and to significantly extend its sphere of influence (likeRomans and Turks were at the time of their magnificence). However, when anation is potentially superior to all other nations in relation to economic andhuman wealth, then Providence hinders power, and thus its conquests, toensure ‘world harmony’. Wrong measures of economic policy can be interpretedin this way:

Here are the three tariffs which curbed the monarchy just when it was ableto conquer the entire world. As its greatness and its power were unequalled,


Providence had to intervene, to sustain the world harmony, by hinderingits greatness, prevent its overly violent consequences.

(1705: 764)

Owing to the divine Providence, the Prince could thus be subject to balanceprinciples. Boisguilbert therefore strongly differentiated himself from mercan-tilist principles, as he admitted the possibility of a natural harmony in inter-national relations. The national ambition of world hegemony is limited bydivine laws, even if the author’s enthusiasm about France’s superiority underLouis XIV leaves no doubt as to his belief in God’s favour towards a countrywho deserved to lead the world.

Therefore, Boisguilbert apparently agreed with the Sun King’s ambitions. Buthis thought prepared the ground for the acceptance of a limitation of nationalambitions, subject to a fundamentally harmonious and peaceful natural order.His work contains the first expression of the idea of a long-term stationaryState, when agriculture reaches its maximum development, later resumed byDavid Ricardo and John Stuart Mill.

The physiocrats: peace, a necessary condition for the growth of theState’s income and power

The physiocrats defended the respect of economic natural laws, and were thusagainst State economic interventionism. Besides, they minimized the import-ance given to foreign trade in national growth and recommended the develop-ment of agriculture. Nevertheless, they were concerned with power and securityissues which helped them to justify their liberal theory, the implementation ofwhich was still limited.

Emerging physiocratic ideas challenge mercantilist principles: the primacy ofeconomy as the basis of power

The physiocratic theory inaugurated in France during the eighteenth century –the conception that the economy is based on specific laws – should appear to beobvious. The economy is compared to a living being or a circuit, where non-interventionism inevitably leads to the best possible situation (optimal, as onewould say nowadays). Political institutions were destined to perfectly adaptthemselves to the natural order.

Thus, physiocrats contradicted mercantilist rules against which theystood from the very beginning. Furthermore, middle-class merchants defendedthis thinking; they were against Colbert’s policy, characterized by theimplementation of numerous trade barriers, and disapproved of the numerouswars waged by Louis XIV which were blamed on mercantilist policies. Factoriesand trade were considered to be economically ‘sterile’ by the physiocrats.Only the agricultural sector could generate a surplus, i.e. a net product com-pared to production cost, owing to agricultural products. Therefore, fiscal


reforms were recommended in order to establish a tax system more favourable toagriculture.

For the first time, the economy was preferred to political and military power,much prized by mercantilists. Its ‘natural laws’ should allow the emergence of anideal society, without state intervention.

Regarding the government system, the physiocrats were in favour of absolutemonarchy, i.e. the ‘Ancien Régime’. The King was considered to be God’srepresentative on earth. He was the only one who could establish positive lawson the way society worked, which corresponded to the natural laws dictated by‘Providence’. Physiocratic theory already expressed the fundamental principleunderlying liberal theory: the search for individual interests is of benefit to thegeneral interest. In actual fact, this implied that individual actions were notrestrained by social forces, and thus that there was an adherence to the ‘laissez-faire’ principle. Although they supported monarchy, physiocrats recommendedmany reforms to state interventionism, especially the abolition of the varioustaxes and their replacement by a single, fairer tax. Besides, all barriers ondomestic trade should be abolished. The respect for the natural order shouldlead to the highest possible level of development. This theory extended its fieldof work to the international level, but without establishing the theory ofoptimal free trade. In fact, physiocrats disdained foreign trade, which they onlyconsidered to be a stopgap, when the national market couldn’t absorb the entiredomestic production. Therefore, they did not insist on the advantages of freetrade. They rejected the balance of trade theory, considering that the source ofwealth is in agricultural production and not in the accumulation of preciousmetals. Defence was excluded from the field of work which is now known as‘political economy’, in Montchrestien’s own words. However, even if defenceissues are not mentioned in the physiocratic analysis, this omission is revealingin itself. Implicitly, peace is necessary to the physiocrat’s natural order. Theeconomy therefore contributes to peace. Liberal theory later confirmed this evo-lution of the theoretical relation between defence and economy.

François Quesnay: power through population, free trade and agriculturalwealth

François Quesnay (1756; 1757a; 1757b; 1758a; 1758b; 1767), apostle of cerealfree trade within the French territory, took the opposite view of mercantilism,by considering agriculture as the mainspring of economic life, and by minimiz-ing the importance of foreign trade. However, he remained concerned withensuring the King’s power, all the more since he held an important politicalpost. He challenged most mercantilist convictions; the armies’ strength was notthe most important factor of their efficiency; the States’ wealth was not assessedby their stock of precious metals, but by agricultural prosperity. Defence andsecurity issues are often mentioned in his work.

In his Tableau économique (1758a), Quesnay described the circulation ofincome flows among the various economic sectors. Adopting a ‘medical’ model


of the economy (he was a famous doctor of the time and treated Louis XV andMadame de Pompadour), he compared the circulation of national income ineconomy to that of blood in a living being. The movement begins with theexpenditure of the property owners’ incomes. The three classes – farmers, prop-erty owners and artisans – were interdependent, but only the agricultural sectorgenerated a surplus. In an ideal situation, when State interventionism respectsthe natural laws, the system reaches an equilibrium.

According to Quesnay, a nation’s force does not depend on the size of itsarmies. Indeed, the evolution in the way wars were waged showed that a largenumber of soldiers was a less decisive factor in victory than the level of incomesthat the State could devote to the financing of conflicts. Besides, Quesnayalloted an important role to diplomats and to their ability to lead political nego-tiations. Society was based on two elements:

• the subsistence of the population;• the wealth necessary for national defence.

National force depended on the existence of a sufficient public income in peaceand wartime. Therefore, rather than leading an active population policy, theinterest of the State was to favour the increase of inhabitants’ incomes. Indeed,the more a population was prosperous, the more it could contribute to defence.

It is good for the soldier and the officer limited to military expeditions, tobelieve that the nation’s fate only depends on the success of sieges, ofbattles; to think that a densely populated State is very powerful, because itcan provide a higher number of combatants [. . .]. But the governmentwhich has wider views won’t depopulate the countryside, and won’t destroythe source of public incomes, to seek a particular best enemy of the generalgood.

(1757b: 520)

A policy in favour of agriculture is the best way to encourage an increase innational income. An excessive trade and industrial development could havedisadvantageous consequences for the whole economy: ‘The downfall ofEmpires often closely followed a prosperous trade . . .’ (1756: 454). To ensure itsharmonious growth, it was thus necessary to prevent the ‘Milice’ and the taxesfrom hindering agriculture, the key to national power. Quesnay was concernedwith curbing the rural exodus. According to him, gains from trade should beused to improve cultivation, instead of being ‘collected in big cities’: ‘When anation spends in luxury what it gains in business, the only result is a movementof money without a real increase in wealth (1756: 455).

The fear of seeing their children enlisted by the Milice is one of the mainreasons for the population’s rural exodus. The defence of the State is one of thefirst duties of the nation, but sons of farmers, so useful to the nation, should bespared and only tenant farmers should be enlisted. Even if Quesnay rejected the


excesses of trade, he nevertheless considered that it was of first importance toensure the State’s power. Indeed, this one didn’t depend on money, but on ‘theabundance and the market value of agricultural products’ which could only berevealed through trade. According to Quesnay, favourable to free trade, thedevelopment of foreign trade took part, with agriculture, in national enrich-ment. Commercial measures against foreign countries disadvantaged nationaltrade, notably because of the risk of retaliation.

National power through economic development

Quesnay condemned wastes resulting from wars. According to him, armed con-flicts depopulated nations, initiating a decrease in national wealth: ‘The govern-ments too avid for wealth destroy the possibilities of it’ (1757b: 520).

He was also against the possession of colonies, which generated a decrease innational wealth because of the wars they generated. Yet, according to him, awise State was necessarily pacific, as diplomatic action helps to prevent con-flicts. Protectionist commercial measures, as well as wars, were of benefit totraders but were against general interest.

However, Quesnay’s arguments may sometimes seem contradictory. In thisway, he stated that the ultimate purpose of the government was the confirma-tion of France’s power throughout the world, and he favoured the developmentof its navy, compared to England’s. He also thought that France should be‘Europe’s peacemaker’ (1758b: 628). The peace he considered as the wisestpolicy was thus under French domination. He did not believe in the equality ofdevelopment among States. A long-term economic domination of France overthe other nations could be achieved through free trade. According to thephysiocrats, free trade was most of all of benefit to national wealth, but Quesnaydid not present a ‘cosmopolitan’ theory of trade advantages, even if his discipleswent into this matter more closely than he did. Above all, a nation’s pacifismhad to strengthen the Prince’s international power. Thus, nationalism pervadedthe physiocrats’ liberalism, unlike the English classical economists’ one. More-over, according to the physiocrats, as the King was the representative of God,the economic policy had to be accepted because it was created by Providence.Therefore, when they defended free exports of grains, they omitted to state thenecessity of free imports. Implicitly, their theory justified measures supportingagricultural prices, in order for this sector to keep on generating a net product.In the same way, the consumption of agricultural products should be encour-aged. Quesnay also recommended an interest rate policy of benefit to farmers.The development of manufactured goods exports was undesirable, because itwas generally accompanied by a comparative decrease in agricultural pricesnecessary to cut down production costs.

However, physiocrats began a movement which was confirmed later: eco-nomic thought was progressively dissociated from foreign policy issues, espe-cially defence and security. They certainly mentioned in their work theimperatives of defence and national power. However, the mainspring was the


search for economic development, rather then national power. The nation’sdefence capacity is expected to grow with economic wealth. The physiocrats’systematized and mechanical presentation of economic laws has also influencedthe economic conception of war and peace issues. The search for power wasprogressively excluded from the field of economic analysis and peace wasimplicitly considered as essential to prevent a disruption to the economy.

Our purpose here is not to provide a complete presentation of all physio-cratic works on military and commercial conflict issues. Quesnay’s main disci-ples, particularly Dupont de Nemours and Mercier de la Rivière, took theopposite view of mercantilism, by condemning the cost of trade wars, whichwere based on the false principle that a country can only grow richer by dis-advantaging another one. Mercier de la Rivière (1767) highly recommendedfree trade, directly derived from property rights, and asserted that it was alwaysto the advantage of a State to respect this principle, even if other States didn’t.A ‘natural, general and tacit society’ existed among nations. In particular, therewas a ‘general confederation of all European Powers’ derived from the naturalorder, notably by enabling all countries to join in order to ensure their militarysecurity. Le Trosne (1777) extended the concept of natural order to inter-national relations. Free trade was both fair and advantageous for all States, theinterests of which converged. Dupont de Nemours (1764) came to the sameconclusions, and also condemned the net cost of France’s trade with India. Asfor the marquis de Mirabeau (1760), he presented humanity as a large familydivided in several branches, which should join in order to prosper; he also criti-cized commercial agricultural measures.

We don’t think it is worth lingering over the presentation of these econo-mists, although they were important, but their thought is a direct continuationof Quesnay’s, even if some of them insisted more than he did on the applicationof natural order principles. In fact, the physiocrats’ position regarding foreigntrade seems to be most of all characterized by a certain refusal, trade being con-sidered as ‘sterile’. It is thus necessary to minimize the importance of the state-ments made by physiocrats favourable to international trade, especially as powerissues remain essential, as shown in the works of Boisguilbert and Quesnay.

Peace according to Anne Robert Turgot: a human progress and aneconomic necessity

Anne Robert Turgot (1750; 1751; 1767) defended several physiocratic prin-ciples. However, he always distinguished himself from this school. He recom-mended free trade, but not only to support agriculture. The development ofindustry and trade was also important for him. Being himself a statesman, hetried to implement economic reforms in the first years of Louis XVI’s reign,which began in 1774. The King appointed him general controller of financialinstitutions. Turgot started to implement a set of reforms, but his influence wasshort-lasting. Weakened by the ‘Guerre des farines’ (a popular revolt in April1775, explained by the rise in wheat price and popular hostility to his policy),


his political influence quickly declined, and he was forced to give up hisreforms. From that time onwards, the monarchical system probably lost all itschances of survival.

Turgot took part in the writing of the Encyclopédie from 1756 onwards andhis appointment was considered by the philosophers of Enlightenment as achance to see their principles implemented. Following Locke, they generallydefended the principle of a society’s government by an enlightened despot andthe idea of humanity’s progress towards a universal morality, lying within thenature of a man endowed with reason. Therefore, progress was, above all, of thehuman spirit. Turgot underlined the central role played by war in this evolu-tion. He presented two conceptions of war:

• regarding humanity’s general evolution, war was a necessary stage;• at the economic level, war generated useless waste and encouraged the

State to get into debt, notably through loans, which could hinder theFrench economy.

War: a necessary stage towards progress and world peace

In his Discours sur l’histoire universelle (Discourse on Universal History) (1751),Turgot went back over the evolution of humanity’s progress since its origins, asVoltaire did in the Essai sur les moeurs et l’esprit des nations (Essay on the Moresand the Spirit of Nations), but also and especially as Condorcet did in the Esquissedu tableau des progrès de l’esprit humain (Sketch of the Picture of the Progress of theHuman Spirit) (1794). According to this thesis, human relations could onlybecome more and more pacific, until the achievement of world peace. Turgotpresents wars and revolutions as essential stages in this evolution:

We can see the establishment of societies, the formation of nations, whichalternately dominate and obey other nations; Empires rise and fall; laws,government systems follow one another; arts, sciences are alternately dis-covered and improved; alternately delayed and accelerated in theirprogress, they go from climates to climates; Interest, ambition, vain glorycontinually change the international scene, flood the earth with blood; andin the middle of their ravages, mores are soothed, human spirit becomesclearer, isolated nations get closer to each other; trade and politics finallyreunite all parts of the globe, and the total mass of human race alternatelycalm or agitated, good or evil, always progresses, although slowly, towards agreater perfection.

(1750: 70)

Turgot also established a relationship between human progress and nature. Theevolution of humanity can only be slow and halting. Nature unfairly distributedthe gifts among humanity, which explains why groups progress at differentrhythms. Wars, but also revolutions and conquests, significantly contribute to


this evolution, as they create a mix of peoples and an expansion of empires.Gradually, nations move closer to a more stable equilibrium; war then confinesitself to the borders of empires. Conflicts are thus necessary evils in the develop-ment of nations (1751: 105).

By establishing a relation between his conception of human progress and hisdefence of laissez-faire, Turgot prepared the ground for a paradigm which pre-vailed with the English classic economists: peace through free trade.

Loans to finance war: a reason for the French economy’s downfall

Just like Quesnay, Turgot considers the economy as a gigantic mechanism ledby laws imposed by Nature, equivalent to those ruling physical science. Histheory was a significant contribution to the development of economic analysis.He is considered to be the father of the theory of capital. Unlike the phys-iocrats, he asserted the importance of industry and trade; all fields of economiclife had to be subject to the maxims of laissez-faire.

Turgot also applied his liberal principles to defence issues. The fast rhythm ofwars waged by France increased the risks of State bankruptcy. Turgot must havecondemned the continual military conflicts of his time, although his public rolelimited his opportunities for criticism. He structured his economic programmeon three proposals (1767):

1 put an end to the increase in taxes, and abolish the royal ‘corvées’;2 save on the budget, notably by reducing expenditures that favour nobility

and ministers;3 abolish economic interventionism, notably by removing all hindrances to

agriculture, industry (excess of controls) and trade (numerous octrois). TheEdict of 13 September, 1774 established the free trade of grain within therealm. Finally, the military burden on the French economy was con-demned, and more particularly the technique of loans, which encouragesone to spend more than one has.

The only difference between the private individual and the sovereign is thepossibility which the latter has to go bankrupt and keep all the same hisfunds and his income. I suppose that if we had converted the sums we bor-rowed into taxes, instead of taking out the first loans to support war, wewould have spent at first the product of the taxes and would have soonbeen forced to borrow. All the abuses we complain about here are aninevitable consequence of the unlimited power to increase expenditures.

(1767: 251)

For the first time, military expenditures and the loan system were condemnedfor their disadvantageous economic consequences. This is the first expression ofthe liberal analysis of defence, war and peace, asserted at the end of the eight-eenth century, notably by Adam Smith. With Turgot, economic issues are dis-


sociated from political ones. ‘Economics’ was becoming a fully established fieldof work, leaving power issues to the political field of analysis. Ideally, peace wasthe natural and necessary condition of economic development.

Conclusion

The first real developments of the economic theory appeared in Europe duringthe sixteenth century, with the mercantilist doctrine. Until the eighteenthcentury, it stressed the State’s role in national economic development.Mercantilists shared a static conception of international economic relations,which led them to assert that a country could only economically progress by disadvantaging others. The decline of the mercantilist doctrine, and thedevelopment of the physiocratic thought at the end of the eighteenth century,meant a reversal in the way of considering the relationship between defence andeconomy. While mercantilists recommended the use of economy to achieve theState’s objectives, the physiocrats minimized the importance of foreign trade andfocused on respect for the natural economic order within national borders.However, even if they defended free trade, the physiocrats were still concernedwith national power, so, later, would be the English classical economists. Theeconomy only gradually became a ‘science’, freed from ‘political’ concerns; thisprocess ended in the nineteenth century, with neo-classical theory.

The classical economists: free trade, a factor of peace andprosperity

The classical authors underline the uselessness of wars and their fundamentallyextra economic character. The knowledge of the true principles ruling theeconomy should convince the political leaders to abandon their aggressive tradeor military policy. In England, Adam Smith strongly opposed mercantilist prin-ciples and defended the conception of an economic body naturally governed byan ‘invisible hand’. Several years later, the economist J.B. Say expressed his‘Say’s law’ which he considers as a fundamental discovery, notably because itmust encourage people to become aware of the benefits of world peace. Thesetwo authors founded a relatively optimistic liberal current with regard to thepossibility of achieving world peace by free trade.

Jean-Baptist Say: peace for and by industrial and trade development

Jean-Baptist Say is an ‘optimistic’ classical economist. The first edition of hisTraité d’économie politique (Treaty of Political Economy) was published in 1803,after the publication of the Principles of population by Malthus (1798) and beforePrinciples of Political Economy by Ricardo (1815). Popularizing Smith’s theory,Say’s Traité immediately had a great success. He was known by Ricardo, Malthus,James Mill and Bentham, and was considered by his contemporaries as a majorauthor of the classical school. On many points, he only followed Adam Smith’s


thought, but he also made an original contribution, founding an ‘optimistic’liberal thought, asserting the virtues of trade and military peace. Insisting onthe important role played by economists in society, he denounced the policiesof his time and made concrete proposals on defence issues. But he was also theprophet of a more prosperous and peaceful world in the future.

He used his ‘Say’s law’ to show the uselessness of wars and the ineluctabilityof their disappearance. In the long run, the progress of political economy willeventually convince governments of free trade’s superiority. The idea of peacewill spread worldwide through education and a sound knowledge of economicmechanisms.

Say’s law: a demonstration of the economic absurdity of war

Jean-Baptist Say thought that his law was going to lead humanity on the path ofprogress, by enlightening governments, but also and especially national publicopinions, on the interest of the liberal peace.

Chapter XV of his Traité (1803), entitled Des débouchés (On Outlets),expresses the famous ‘Say’s law’, according to which ‘products are exchanged forproducts’ or ‘supply creates its own demand’. The influence these pages havehad on the development of political economy is considerable. Keynes himself,when he denounced classical theory, presented this law as a central elementrepresentative of this thought, even if such a generalization was criticized as toorestrictive. According to Say, currency is only a veil and, all things considered,trade can be reduced to the exchange of products for other products. Each pro-duction creates its own outlet. Without any disruptive influence, notably due tostate intervention, overproduction crises can only be temporary; because of acurrency’s neutrality, an increase in production will always lead to an increaseof outlets and, subsequently, of general economic prosperity. This principle, firstapplied to the national economy, was then extended to the international level,justifying in this way free-trade policy.

A nation, compared to an adjoining nation, is in the same situation as aprovince compared to another province, as a city compared to the country:it is interested in seeing it flourish, and ensured to take advantage of itsprosperity [. . .]. One gains nothing from peoples who have nothing to give.It is precious for humanity that a nation, among others, behaves, in everycircumstance, according to the liberal principles.

(1803: 144)

To facilitate sales and thus encourage industry, it is important to continuallystimulate the citizens’ appetite for consumption, and to multiply their needs.International trade enables a nation to increase the outlets for its industrialproducts. Reservations and reluctance expressed with regard to trade are inher-ited from the mercantilist ‘exclusive system’, which is based on false beliefs. InSay’s argumentation, peace is implicitly considered as an inevitable condition of


economic prosperity, because commercial outlets can only develop through freetrade, in a peaceful world.

Throughout his work, Say insists on the destructive effects of war and on theeconomic importance of peace in economic development.

1 On the moral plane, wars are scourges. Provoked by vengeance or thesearch for a ‘vain glory’, they compromise the ‘rest and the honour ofnations’ and ‘harvest virtues and talents’ (1803: 462).

2 Armed conflicts constitute a waste of people and resources, as well as a lossof income. Warfare is counterproductive (1803: 495). One can assert thatwar, by eliminating an excess of men, improves the economic situation ofsurvivors. In fact, exactly the opposite occurs, initially because the decreasein the population originated by a conflict is only temporary. By killing con-sumers, war also kills producers. Therefore, Say’s law is no more valid, tem-porarily. Under these conditions, the birth rate would increase, familiesconsidering the objective of the improvement in their living conditions ofsecondary importance. Human losses must also be regretted from an eco-nomic point of view, as men constitute a real ‘capital’ (the ‘human capital’concept). Moreover, war represents a loss of resources, as it ‘costs what itprevents from gaining’ (the ‘opportunity cost’ concept) (1803: 494).

3 Even a victorious country will gain no economic advantage from goodsacquired by ‘plunder’. Instead of increasing its industry, these goods tend todisorganize it, notably by hindering the circulation of goods and money(1803: 150).

4 Furthermore, when they are financed by loans, wars have incalculable dam-aging economic consequences; this financial burden, a real ‘tribute imposedto the conqueror’, weighs heavily on the economy for several years after thereturn of peace.

5 Besides, and this idea had already been developed by Adam Smith, the willof political leaders to expand the colonial empire is economically unjusti-fied, because of the costs represented by not only conquests, but also themaintenance of sufficient armed forces to guarantee peace in the Empire(1803: 227).

6 Finally, conflicts cause important material damage to the territories onwhich they take place, which will be all the more important if the countryis rich and endowed with numerous industrial and agricultural installations(1803: 495).

Say also pursues some of the ideas previously developed by Smith about theorigin of prohibition systems, so often a source of war, and notably the idea thatthese measures would be of benefit to particular interests instead of the generalinterest (1803: 174). He also denounces mercantilist prejudices, according towhich a country can only grow rich at the expense of the others, which repre-sents an offence against the ‘first principles of political economy’. As to theorigin of war, Say suggests, in addition to trade or colonial conflicts, there are


the ‘prejudices’ of statesmen, regarding their conceptions of honour or glory.Other more original ideas are advanced by Say, notably:

• the arms race. Indeed, the maintenance of important permanent armies bya State could be interpreted by its neighbours as threatening for their ownsecurity. To a certain extent, the phenomenon of the arms race is describedthere.

• the naturally peaceful tendencies of the citizens-producers.

The change from an offensive to a defensive foreign policy: a fundamentaleconomic issue

Not only did Jean-Baptist Say denounce the uselessness of wars stemming froma false conception of national interests, but he also gave practical advice on thepolicy of defence which would be the most favourable to the general interest.

• Set up a defensive force rather than an offensive one, enabling the nationto lessen the economic burden of military expenditure (1803: 496).

• Promote a general policy which could mobilize citizens around the cause ofnational defence. A government which benefits from the people’s supportshould always be able to withstand foreign invasion (1803: 156).

• Replace permanent armies with militias. Say mistrusted the military: theyoften disrupt the economy, notably the movement of products, even inpeacetime; furthermore, they have an important role in maintaining a war-mongering spirit within governments, but also among the population(1803: 162).

• Avoid the use of the economic weapon (1803: 180): Say strongly disap-proves of governments’ resorting to trade restrictions. He does not evenmake the same concessions as Smith on the matter of trade reprisals;according to Say, the economic cost of such measures is always superior tothe political benefits a nation expects to gain from them. In the same way,he questions the efficiency of embargoes: the enemy on which they areimposed will be encouraged to modify a part of its productions and, allthings considered, won’t suffer much from these measures, because all prod-ucts will be exchanged for other products within the country. In otherwords, even if autarky is not desirable, Say’s law makes it tolerable.

• Join an international strategic alliance: this was an original idea for thetime. Say’s argumentation focuses on the necessary replacement of anoffensive defence policy by a defensive one, thus limiting waste. Say con-siders this evolution as ineluctable, given that a modern State, whichintends not to hinder economic prosperity, won’t have the means to ensureits own defence any more.

Say’s precepts on defence policies correspond to a radical change in the eco-nomic debate on defence, war and peace at the beginning of the nineteenth


century: economic issues are henceforth in the centre of social organization andhuman mentalities; the policy of defence is not an exception to this evolution.

The development of political economy and its contribution to world peace

Say underlines the fact that, if governments didn’t benefit from the support ofpublic opinion, they could never undertake military expeditions. This is whyeconomists must first and foremost enlighten the population, those who governthem being forced to follow the general will, in the case of a representativepolitical system (1828–1830: 162). Therefore, economists have a fundamentalrole in society; by deducing from the advances of their science the real laws gov-erning economy, and by enlightening public opinion on its real interest, theycontribute to the progress of humanity. Yet, one of the fundamental truthsrevealed by political economy is the uselessness of wars and their negative effecton society’s general prosperity. The progress of the population’s knowledge ofpolitical economy will necessarily be very slow. But some great truths, somesimple principles, will nevertheless succeed in being rather quickly accepted,like all great scientific discoveries.

We must none-the-less be discouraged since in political economy, as ineverything, it is the elementary knowledge which is the most useful in prac-tice. The theories of heat, of the lever, of the inclined plane have put theentire nature at the disposal of man. The theory of trade and of outlets willchange the world policy. We must thus ensure the spread of establishednotions rather than pursue their last consequences, and try to enlarge thebasis of sciences rather than raise their summit.

(1803: 43)

In a rather original way, Say is explicitly in opposition with the theoristsof political economy who give an essential role to theoretical abstractions.In this respect, he inaugurates the ‘French economic tradition’ of an economicanalysis at a low level of abstraction, refusing State intervention (that hisliberal followers will condemn even more). In contrast, English economistsare more ‘abstract’ and, what may appear at first sight paradoxical, they don’talways disapprove of state intervention and are less and less concerned withthe implementation of their principles. By exalting the essential role of econo-mists as guides of institutional and social evolution, and by considering inter-national peace as humanity’s ultimate objective, Say develops an idea, laterpursued by Léon Walras. Finally, Say is also one of the first economists to havedeveloped concepts known today as the arms race, alliances and peace divi-dends.

As an enthusiastic apologist for the pacifying virtues of the market economy,Say not only gave some advice to governments for the present, but he alsoexpounded his view of a prosperous and peaceful society which could surely beachieved if economic laws were respected. In this way, he pursued, and even


emphasized, Smith’s optimism, and he initiated such an optimistic liberalcurrent of thought that it was, in the style of his time, almost ‘Utopian’.

An industrialist pacifism

In his description of humanity’s evolution, Say shows that industrial progressremoved the possibility of wars of aggression waged ‘to plunder and destroy thesources of wealth’ or ‘to occupy and maintain a large number of inactive cit-izens’ (1803: 386). With the development of industry and trade and the aware-ness of their benefits, the causes of wars were transformed, and becameeconomic. The civilized countries started to fight for colonies or specific tradeactivities. The risk of invasion by non-industrialized countries, which don’tpossess advanced military technologies, definitively disappeared. Humanity isabout to reach another stage: the continual increase of the domination ofsociety by ‘producers’ will gradually tend to remove the eventuality of conflictsmotivated by alleged economic interests; it is ‘in the nature of things’.

A last progress remains to be made, and it will be due to a more generallywidespread knowledge of the political economy’s principles. We shall admitthat when battles are waged in order to keep a colony or a monopoly, weare trying to gain an advantage that is always too costly; we shall realizethat foreign products, even those of subject colonies, are always boughtwith domestic products; that subsequently we must be most of all con-cerned with domestic production; and that this production is never morefavoured than by the most general peace, the most gentle laws, the easiestcommunications. From now on, the nations’ fate won’t depend on a uncer-tain and always precarious preponderance, but on their lights. The govern-ments, which can only subsist with the producers’ help, will become moreand more dependant [. . .]

(1803: 388)

The term ‘producers’ has a rather general sense: it includes the ‘industrious’, i.e.entrepreneurs, workers and scientists, and the ‘passive producers’, i.e. capitalistsand property owners. The industrious play a far more essential part in economythan passive producers. They will tend to federate themselves and have a stronginfluence on governmental decisions. As the progress of economics willenlighten humanity on the benefits of free trade and the necessity of peace, warswill naturally tend to disappear among industrial nations. Besides, these ideaswill be pursued by the Utopian socialists, notably by the Saint-Simonians.

Obviously, the future did not confirm this forecast. The ‘producers’ (workers,businessmen) didn’t unite in a homogeneous group. Some entrepreneurs canhave an interest in war, even when it goes against the general interest. Notably,military industries became more and more important in national economies,while international trade was expanding. Yet, the interests of powerful militaryand industrial pressure groups often lie in the maintenance of a threat of inter-


national war which originates an arms race. Both World Wars showed thatthere could be a correlation between ‘the industrial spirit’ and ‘the warmonger-ing spirit’. Say would have explained this evolution by a misunderstanding ofthe national economic interest and the sacrifice of the general interest to thebenefit of individual interests. Nevertheless his optimistic opinion on theinevitable pacification of the world through industrialization was seriouslyrefuted, first by the war of 1870, and then by the two World Wars.

But on other issues, Say appeared to be a better analyst than his contempor-aries. By emphasizing on the leading role played by the entrepreneur in eco-nomic development, he was more modern than the English classical authors,who gave a central role to the property owner in the economy. Besides, theargument that industrial development always corresponds to the developmentof a pacific mentality was pursued by several economists, in particular by theSaint-Simonians, who, as we shall see later, envisaged a future world federatedand pacified by the interests of the industrious. In the twentieth century, JosephSchumpeter opposed, in Capitalism, Socialism and Democracy (1942), the paci-fism of the capitalist bourgeoisie to the warlike spirit of the feudal system ofgovernment.

Was Jean-Baptist Say too optimistic regarding the disappearance of war? Wecan’t answer in the affirmative if we consider that his comments on this subjectlook like a pious hope. On the other hand, he opened the way to an ‘optimistic’liberal current of thought, which was strongly opposed to all kind of state inter-ventionism, and refused to envisage the eventuality of an international conflictuntil the eve of the First World War. Keynes blamed them for having inducedEuropean governments, faced with the fascist danger, to adopt incorrect meas-ures of foreign policy. But Say’s followers were more dogmatic than their leaderas to the economic and political benefits of free trade.

Say’s contribution to the economic analysis of defence and peace is funda-mental. First because he considers that the economist’s mission is to enlightengovernments and peoples on the waste generated by wars and by a high level ofmilitary expenditures. Second because he suggests original measures of defencepolicy, such as the renunciation of all restrictive trade measures (includingreprisals), the decrease of military expenditures and the establishment of anexclusively defensive (instead of offensive) system, notably owing to a system ofmilitary alliances. Clearly anticipating the dangers of an arms race, he con-sidered that the implementation of a peaceful policy lowers the risk of invasion.Numerous criticisms certainly arose against the simplicity of his theory and hisresolute optimism; Karl Marx notably considered him as ‘insipid’. However, Sayfounded an important current of economic thought, strongly marked by paci-fism, among the liberals as well as among the Saint-Simonian interventionists.His thinking on defence and peace is thus of considerable importance in thehistory of economic thought.

Adam Smith and J.B. Say’s contributions imposed the principle of an ‘apolit-ical’ economic analysis of war, which is considered as expensive, not onlybecause of the direct spending and destruction, but also because of the loss it


entails, compared to a situation of international peace. This analysis pursues theplea in favour of non-interventionism and free trade. Military expendituresmust be cut down to the minimum necessary to guarantee a dissuasive potential;aggressive trade measures, which often lead to armed conflicts, have a negativeeconomic impact and result from a dysfunction of the State.

The triumph of economics as a factor of peace

The economists who defended laissez-faire principles during the nineteenthcentury were divided into two main tendencies:

• a liberal current, mainly in France, partially following J.B. Say’s analyses,strongly reasserted the idea of peace through a free-market economy.

• marginalism, which founds the neo-classical school, develops a ‘pure’ eco-nomic analysis, outside the historical context. Its authors aspire to build atheoretical ‘scientific’ system which would definitively guarantee the happi-ness of humanity. They suggest microeconomic methods of reasoning withlittle relevance to the analysis of wars and conflicts.

The nuances of the ‘normative’ French liberals as to the advent of alasting international peace

Say aimed to demonstrate that economic progress is unlimited, owing to ‘Say’slaw’. He in fact initiated a real ‘French economic tradition’, for which concreteeconomic policy issues were of more importance than an abstract theoreticalreasoning.

War and peace issues are often mentioned in the works of these Frenchliberal economists. Whereas in England, with John Stuart Mill, economics grad-ually abandoned these considerations to the political sphere, French economistsmaintained a kind of truly political economic tradition. They wished toenlighten governments of their real interest, regarding trade and foreign policy,in order to ensure universal peace. Other developments are also presented, suchas the idea of international institutions to guarantee international peace. Theworks of these French economists, regarding the existence of a pre-establishedeconomic order, have sometimes been influenced by the Utopian socialists, andparticularly of the Saint-Simonians, as well as by the physiocrats.

The economic arguments to promote peace

Two basic conjoined ideas can be found in the works of the French liberal econ-omists of the end of the nineteenth century.

• First, peace is a condition of economic development, through enabling theestablishment of free trade; the cost of war is far more important than itspotential profits.


• Second, the evolution of the economy towards an increased liberalismguarantees the advent of a lasting international peace.

The economists of this movement rather widely shared the first idea, but theirviews differed with regards to the second proposition.

THE UNANIMOUS AGREEMENT ON THE COST OF WAR AND THE ECONOMIC

NECESSITY OF PEACE

The liberal economists condemn the too high-level of military budgets, leadingnational income away from productive work, which is ‘lost for ever’ in Bastiat’sown words (1864: 584). Chevalier (1858: 341) also considers military expendi-tures to be too important, slowing capital progress and, reducing in returnnational security.

French economists also unanimously denounce the excessive cost of wars,which may have had an economic interest in the past, but not at their time.The argument of the ‘greatness and decline of war’ was best developed byGustave de Molinari (1898). Past wars may have been useful and even produc-tive (and thus ‘moral’), notably by ensuring food resources, by defending theterritory against foreign covetousness, by enabling a nation to benefit fromforeign wealth or by accelerating civil and military progress. But with economicprogress, the causes of war, which have always been economic (including reli-gious wars), have gradually disappeared. Technical progress (generally acceler-ated by wars) has ensured the security of civilized nations; with the growth ofinternational trade, armed conflicts have been replaced by international eco-nomic competition. Moreover, war damages are not local but general, notablybecause of production internationalization. Therefore, war is not lucrative but,on the contrary, very costly (1898: 164).

Concerning the profitability of war, Silberner (1957), in an interestingcomment on Yves Guyot, considers this author to have pursued Molinari’s argu-ments. In his book, Jalousie commerciale, Guyot asserts that war is no longerprofitable, because conquerors have to respect private property. Silberner com-ments: ‘the idea of a future war where the conqueror would not respect neitherthe property nor the personal freedom of the defeated does not seem to come toGuyot’s mind’ (1957: 95).

Without making an exhaustive presentation of the various argumentsadvanced by French economists to denounce the cost of war, we can enumeratethe main points:

• cost in human lives;• enormous sums spent on conflicts;• numerous disruptions in trade;• important material destruction.

In this respect, Bastiat (1864: 586) blames wars for most of the miseries fromwhich the people suffer. Indeed, war generates losses in personnel and destroys


capital, thus causing a ‘loss of work’. Later, Leroy-Beaulieu criticized John StuartMill’s argument, according to which national capital could quickly be rebuiltafter war (1896: 259). He also disagrees with Henri George when he states thatworkers are not maintained by the capital but by their work, which would implythat capital doesn’t hinder industrial development. For Leroy-Beaulieu, eco-nomic recovery will be all the more slow as capital destruction is important.The return of peace is often characterized by an important economic crisis,because of national indebtedness, trade disruption, the needs for reconstructionand capital and stocks destruction. A country ‘of ancient wealth’ could certainlyrepatriate its foreign credits, to finance the economic renewal; but in the end,‘the country finds itself with more loans, pays more taxes and loses the incomeof the foreign securities it has sold’ (1896: 447).

A few years before, Chevalier (1853: 210) (a former Saint-Simonian) hadunderlined that peace was a condition of international trade development andrecommended free trade. Militarism impedes the development of trade relationsand only benefits a limited part of the population. However, free trade is not asufficient condition for international peace. Even if free trade is a necessary con-dition for international peace, it is not a sufficient one. This last argumentationdistinguishes the liberals, who are optimistic of the advent of a lasting worldpeace, from the sceptic economists.

One of the fundamental principles of French liberalism of the time is theidea that free trade would create peaceful tendencies within societies, notablyby educating public opinion. In this way, Michel Chevalier (1853: 211)approves of England’s free-trade policy, which should be an example to the restof the world. As for Frédéric Passy, increasing international economic interde-pendencies will make governments aware of the uselessness of wars: ‘One day,all barriers will fall; one day the human race, continually united by ceaselesstransactions, will constitute a single workshop, a single market, a single family’(1896: 114).

Frédéric Passy particularly contributed to the development of the peacemovement in France, by founding the Ligue internationale de la paix (InternationalLeague for Peace) in 1867 and the Société pour l’arbitrage entre les nations (Societyfor Arbitration Between Nations) in 1870. He received the Nobel Peace Prize in1901, together with Henri Dunant. Passy (1904: 9–24) defends the project of agreat European customs union, but disapproves of the idea of defensive tariffs tocounter American and Japanese competition. In order to improve its competi-tiveness, Europe should undertake a significant disarmament, which will releaseresources for productive activities and pacify relations among European coun-tries. Indeed, the cost of an armed peace is important and the idea of a militarysector, the technological innovations of which benefit industry, is unjustified.Passy states that ‘the association, always wider and closer, is the law of history’.Passy particularly insists on the necessity to expand ‘the pacific education’, in aperpetual action to make world public opinion progressively agree on the neces-sity of peace (1904: 97–115). As for Baudrillart (1872: 336), peace and thefreedom of trade are closely related, owing to economic interdependencies.


Several other French economists confirm these ideas. Nevertheless, the oldmercantilist rules are still debated: for example, Leroy-Beaulieu (1896: 281)criticizes the trade balance theory and the idea that governments should keep asmuch gold as possible within the national territory, because it represents a safeinvestment in wartime. He states that governments should be more preoccupiedwith their balance of payments than with their balance of trade, because whenpeace returns international debts could be cancelled by means of clearing.

Of all the French liberal economists having succeeded Say, Bastiat is cer-tainly the most famous. In his opinion, wars have always started because a Stateacted beyond its prerogatives, namely the maintenance of public order, securityand justice (1862: 194). Governmental foreign policies are not in line with thegeneral interest and are only possible because they are financed by taxes, whichoverburden peoples and prevent the realization of a ‘universal harmony’. Inactual fact, outlets cannot be conquered through trade reprisals and colonialconquests. Bastiat considers that the error of political economy has been to paymore attention to production than consumption:

Superficial minds accused Competition of introducing antagonism amongmen. This is true and inevitable as long as one considers them only as pro-ducers; but if one takes the consumption point of view, then Competitionitself will bring together individuals, families, classes, nations and races,united by universal brotherhood relations [. . .]

(1864: 385)

For Bastiat, the economist’s role is to accelerate the awareness of public opinionto uselessness of wars. The progress of sciences, industry and fine arts increasethe feeling among peoples that peace has beneficial effects. The development ofinternational trade and communication guarantees a widely spread feeling ofcommunity. Europe and the United States lead the world towards the generaladoption of a representative system, which is by definition favourable to peace,because decisions to wage wars can only result from a ‘long, solemn, thoughtfulconsideration, in State councils where the main interests of the country areheard’. Besides, the bankers and traders’ support is essential in the financing ofwar; yet, they are often hostile to war (1858: 239).

WAR: INHERENT TO HUMAN NATURE

Bastiat and Chevalier present war as inherent to human nature. However, botheconomists draw different conclusions as to the future of international peace. Inspite of his belief in the peaceful nature of free trade, Chevalier (1858: 255)doesn’t consider that world peace will ever be definitively established. Hequotes several examples of political leaders who, after having asserted theirpeaceful convictions, have nevertheless led their country in merciless wars, likeNapoleon Bonaparte or Pitt. Thus, one mustn’t forget the reality of humannature. Some political projects (the Holy Alliance, the London Conference in


1830) certainly contributed to the establishment of a lasting peace in Europe,but nothing is ever guaranteed; furthermore, this doesn’t mean the rest of theworld will be pacified. Chevalier doesn’t believe in a transformation of thedefence policy; he presented a project to reform the army, so that it becomes aninstrument of defence rather than aggression (as we shall see later, p. 109).

Bastiat devoted a chapter of Harmonies économiques (Economic Harmonies)(1864) to the question of war. However, this unfinished chapter gives littleexplanation as to a possible future pacification of international relations. But herecognizes that the principle of interest could just as well lead a country to takepossession of a neighbour’s wealth by force, or to develop its own wealththrough production. This is what distinguishes ‘despoilment’ from ‘production’,and ‘peoples of despoilers’ from ‘peoples of workers’. The tendency to despoil-ment is inherent to human nature, therefore war is a permanent feature in thehistory of humanity. But Bastiat was convinced that perpetual peace was notimaginary. He left unfinished the passage entitled ‘How war finishes’, whichends with the following sentence:

Despoilment, like Production, having its source in human heart, the laws ofthe social world would not be harmonious, even in the limited sense whichI gave, if this one should not, in the long run, dethrone that one. . .

(1864: 581)

Bastiat’s belief in the existence of a divine law establishing a universal harmonywas previously evoked. He considers the realization of international peace andthe development of free trade as very close objectives, and he even appeals tothe French government to start a procedure of total disarmament. His firmbelief in human nature’s perfectibility distinguishes his analysis from Cheva-lier’s, who considers war as inherent to human nature.

As for Leroy-Beaulieu, the establishment of free trade is irreversible: it couldat any time be challenged by great economic crises, which entail protectionism.Thus, at the end of the nineteenth century, the belief in ‘economic harmonies’seems to be slightly altered, and the liberal principles give more importance toState intervention and social protection.

The various kinds of pacifism of French liberal economists of the end of thenineteenth century

Like the Utopian socialists, the French liberal economists of the mid-nine-teenth century provide numerous projects on the social changes. With regard toour subject, economists made many original proposals on the French defencepolicy or institutions in order to ensure a peaceful settlement of conflicts. Butnot all liberal economists were ready to abandon the concept of nation ornational defence for an illusory belief in the advent of a world peace throughfree trade.


THE FUTURE PRESERVATION OF NATIONAL DEFENCE PREROGATIVES AND

ITS ECONOMIC IMPLICATIONS

In a century marked by the idea of ‘nation’, several economists contest theaccusation of ‘cosmopolitanism’ formulated against the liberal theory. Thisconcern seems all the more important as the nineteenth century is marked bynationalisms. Baudrillart (1872: 312) therefore considers that, in fact, thedefenders of prohibitions are the ones who deny differences in characterbetween various peoples: they don’t take into account ‘the differences that cli-mates, races and institutions have established among men’, which demonstratethe advantages of the international division rather than those of self-sufficiency.Providence ‘founds the alliance of peoples on differences of characters and fac-ulties’. The only concession that Baudrillart made to protectionism is on‘weapons and ammunitions’. Also defending the idea of nation, Rossi (1841:282) criticizes the perspective of a worldwide political unification and its trans-formation into a ‘single and big workshop’. Like Baudrillart, he is favourable tothe protection of French armament industries but also of other strategic prod-ucts. Therefore, by lauding the defence of strategic industries for nationaldefence, these economists implicitly show that they remain sceptic as to therealization of peace.

We previously mentioned that Michel Chevalier does not believe in theadvent of a universal peace. However, he considers that, since the Frenchrevolution, peaceful interests have become more influent than the interests ofthe military aristocracy, notably because of the remembrance of the wars of1792 and 1815. He is therefore concerned with the army’s future; he suggeststhe development of its defensive (instead of offensive) character, and the reduc-tion of the military service duration. But his most original proposition(although inspired by Saint Simon and Fourier, himself being a former Saint-Simonian) is to assign to the army an active role in national production, byemploying it for civil works in peacetime:

In such a situation, it was natural to wonder if these immense forces whichwar sets in motion, if these corps powerfully organized, full of ardour, andwhich, when it is needed, work wonders, could not be given to a certainextent a peaceful purpose.

(1858: 182)

To illustrate his comment, Chevalier unreservedly praises the militarization ofthe Prussian society (1858: 293–314). His idea is to keep a minimal permanentarmy, with a population constituted of a large number of brave soldiers whoparticipate in productive works in peacetime and can be placed in the service ofthe country at the first alert. Finally, Chevalier evokes ‘the possibility to intro-duce into industry the elements of the army’s organization’, even if free enter-prise must be maintained. Michel Chevalier does not mention the role themilitary sector has in technical progress, an issue which will give rise to an


important debate in the twentieth century. His reform proposal for the army isoriginal and combines liberal and Saint-Simonian influences, which is veryrepresentative of the time.

Other liberals were far more radical and totally refuted State intervention inthe economy. Armies, which exhaust public finance, must be dismantled ratherthan reformed.

THE LIBERAL ECONOMISTS’ APPEAL FOR RADICAL PEACEFUL SOLUTIONS

Two economists do not hesitate to propose real institutional revolutions inorder to make the establishment of international peace possible. Bastiatappealed for a total and immediate disarmament. Gustave de Molinari suggeststhe establishment of an international peace organization.

Bastiat (1862: 197) recommends the disarmament of European countries,and bases his argumentation on two points: first, a decrease of military expendi-ture would allow a reduction in taxes, then, it would entail a general movementof world pacification. Free trade is far more profitable economically than protec-tionism and colonialism. The aggressive military policy must be replaced by adefensive strategy, with a decrease in military expenditures (and thus in fiscalpressure) and the constitution of militias. A country which proceeds simultan-eously in a reduction of military expenditures and of taxes, would thus achievetwo aims:

• a lower risk of invasion, because the other peoples should feel less threatenedand should therefore follow the examples of justice and peace. Bastiat evendares to predict that England, which has adopted free trade, will reduce byhalf its naval forces within seven years. At the end of the third volume ofBastiat’s Works (1864: 518), Cobden and the League, the editor admits thatthe European war which occurred after the author’s death has preventedthis prediction from coming true.

• a higher national defensive potential, owing to the support of the entirepopulation; a decrease in taxes is the best way to guarantee this support andthus to limit internal disputes.

Bastiat denounces the governments’ erroneous reasoning regarding the necessityof military expenditures to maintain internal peace: ‘Let’s overburden the tax-payer to have a big army, then let’s have a big army to contain the taxpayer’(1863: 458).

For Bastiat, the defenders of a high level of armament (and thus, indirectly,of armed conflicts) are those who benefit from monopolies and who use theargument of national security to justify the protection of their activities (1862:204). In Paix et liberté ou le budget républicain (Peace and Freedom or The Republi-can Budget) (1863: 454), Bastiat proposes a programme of total and immediatedisarmament of France. He considers that the country would then take the leadof a real revolution, while contributing to the spread of the idea of democracy


throughout the world; moreover, taxes should decrease and mass consumptionshould increase. He doesn’t believe there is a real danger of invasion, nor doeshe consider disarmament would threaten external security. In a famous passageof his work, his style of argumentation reminds one of the Utopian economistsof the nineteenth century.

I believe that the moment has come when France has to resolutely declarethat she considers that the Solidarity of peoples lies in the linking of theirinterests and the communication of their ideas, and not in the interpositionof the brute force. And to give to this statement an irresistible weight –Because what is a manifesto, whether eloquent or not? – I believe that themoment has come for her to dissolve this brute force itself. [. . .] Personally,I shall not hesitate to vote for disarmament, because I do not believe ininvasions. Where would they come from? From Spain? From Italy? FromPrussia? From Austria? It is impossible. Which leaves only England andRussia. England! She has already experienced it and a twenty two billiondebt, of which the workers still pay the interest, is a lesson which cannot beforgotten. Russia! But it is a chimera. Contacts with France are not whatshe seeks, but what she avoids. And if the emperor Nicolas dared send ustwo hundred thousand Muscovites, I sincerely believe the best we wouldhave to do, would be to give them a warm welcome, to make them taste thesweetness of our wines, to show them our streets, our shops, our museums,the people’s happiness, the gentleness and the equality of our penal laws,after that we would tell them: Go back to your Steppes as soon as possibleand tell your brothers what you have seen.

(1863: 456)

According to Bastiat (1862: 153), the real interest of workers lies in freetrade, which guarantees peace better than any political initiative. He is notfavourable to great international projects in favour of peace (too ‘artificial’) butonly to a free-market economy, which ensures ‘the interlacement of interests’and ‘the worker’s emancipation and rehabilitation’.

Unlike Bastiat, Gustave de Molinari (1898: 196) recommended the constitu-tion of a political organization at the international level, in favour of peace.Molinari considers that war always has economic causes, whether direct – toconquer markets or take possession of the conquered territories’ wealth – orindirect – ensuing from the influence groups interested in war (weapon produc-ers, members of the military hierarchy or others) have on governmental pol-icies. These pro-militaristic interests are still arguments of great weight, even incountries such as the UK or the United States, because of the political system,which prevents the pacifist opinion of the majority of capitalists from prevail-ing. These same interests urge governments to lead aggressive commercial pol-icies in peacetime. State control and socialism are two other forms of the stateof war and they derive from the same causes: the will for enrichment of someproducers through protectionism and the enrichment of government members


through state control, the logic of which eventually leads to socialism. Thesevarious forms of the state of war disadvantage the interests of the ‘industriousclasses’ and only benefit a minority.

Molinari proposes the creation of a ‘collective organization to guarantee thenations’ security’. Its form is not defined, but would probably include the cre-ation of a league of neutral nations in Europe (the threat of coalition and inter-vention of which would serve to prevent an excessive expansion of a particularState); another possibility would be the founding of a collective court of con-flict resolution. The outcome of this process would be the general association ofcivilized countries, but it won’t occur for a long time. When States adhere to asystem of collective security, defence expenditure will be drastically cut,opening the way for a reform of political and fiscal institutions. Governmentalrights will be limited, so that private individuals won’t have to finance conflictsany more. In the same way, the subjection of the weak by the strong will disap-pear. However, the social class interested in war and in the development ofarmament and defence budgets still have too strong an influence compared tothe great majority of citizens, interested in peace, to hope to see these projectssucceed in a near future. Only the onset of a murderous war would lead publicopinion to put pressure on governments (1898: 199).

Gustave de Molinari’s conception can be compared to Paul Leroy-Beaulieu’sview (1896: 284–288), who considered the project inspired by Kant or theAbbé de Saint Pierre of a European court of conflict resolution as ‘a rather poorexpedient’, a utopia, because no government would ever consent to risk the lifeof its citizens and to invest large sums in order to defend an allied nation. ‘Actu-ally, the most effective guarantee of peace is the economic and democratic con-stitution of our modern societies’, because public opinion is predominantlypeaceful. He advocated a reduction of permanent armies, peace being mainlythreatened by an arms race.

The peaceful liberal movement continued until the eve of the First WorldWar, in France but also in other countries. In this respect, the British economistNorman Angell (1910) calls on governments to become aware that the time forwars is over, and to undertake a disarmament. Denouncing the internationalarms race, he states that the idea that ‘the prosperity of nations depends ontheir political power, from which ensues the necessity to protect itself againstthe aggression of other nations, wishing to weaken our power in their favour’ isa ‘stupid and dangerous mistake’, an ‘illusion’ (1910: XV). He is notablyopposed to the idea that a nation can grow rich owing to war, the war indem-nity itself being insufficient to cover all the costs of the conflict and its prepara-tion. He also wishes to demonstrate that Great Britain would not suffereconomically from the loss of its colonies and that foreign countries would takeno advantage from their conquest. Beyond economic matters, Angell suggeststhat civilization’s progress entails a gradual transfer of the human fighting spiritto the intellectual level. Therefore, intellectual strength should progressivelyreplace physical force, even in the army, whose efficiency depends more andmore on engineers and technicians. Psychological progress should also engender


an awareness of the necessity to abandon the use of physical force betweenStates, thus destroying the ‘homogeneous personality of States’.

Keynes will later accuse the liberal pacifist economists, in particular Angell,in their analyses previous to the First World War, of having disadvantaged theircountry’s interests by refusing to acknowledge the reality of a danger to nationalsecurity ensuing from the international situation and by maintaining theirappeal for peace on the eve of the world conflict.

The neo-classicals: an analysis with no conflict

Neo-classical economists, who wish to make economics into a science, and whodefend the free-market economy at the national and international level, do notintegrate defence and security issues into their analyses. However, some ideason peace (Walras) or protectionism (Pareto) are original. While the neo-classical theory appears to be relatively homogeneous, it is interesting to notethe heterogeneousness of the conclusions drawn by its authors on defence andsecurity matters.

Léon Walras: defence out of economic law

Léon Walras, like J.B. Say, considers that economists must reveal the real lawsgoverning the economy. Governments will gradually become aware that laissez-faire and free trade lead to the general economic equilibrium and to worldpeace, which represents the crowning achievement of economics.

Like the English classical authors of the eighteenth century, Walrasacknowledges that State intervention is justified in a few important areas wherethe law of supply and demand does not apply, notably in national defence. Hewas writing in a strained political context, with war between France andGermany, and in a theoretical context marked by the influence of the Germanhistorical school which seemed to justify the implementation of aggressiveforeign policies. Walras was already thinking of saving capitalism. He suggestsanother alternative to the one existing between individualism and communism,between liberalism and socialism. He wishes to implement a new economictheory, in three stages: first, a pure political economy must be elaborated, then asocial political economy and finally an applied political economy. Only once apure political economy, a social political economy and finally an applied polit-ical economy have been successively established will governments be able tofound their political action on the conclusions drawn by economists. Far fromwanting to settle a cold science against the unreliable assertions of the sup-porters of colonialism and protectionism, Walras aspires to scientifically create anew ideal and new dogmas, indispensable to ‘inspiration’, and thus to socialprogress. Yet, it is the search for universal peace that underlies his scientificproject.

We shall first present the Walrasian conception of defence but also of eco-nomic security which represents a central element of the author’s scientific


project. We shall then expound on Walras’ conception of pacifism; the univer-sal search for peace is, in fact, the determining argument of his demonstrationin favour of the State’s appropriation of lands, which should mark the end ofthe trade liberalization process.

DEFENCE AND ECONOMIC SECURITY: THE DOUBLE POINT OF VIEW OF

SCIENTIFIC REASON AND POLITICAL REASON

In the same way as Adam Smith, Léon Walras concedes that defence impera-tives can sometimes justify infringements of free trade. He also leaves theleading of the foreign economic policy to ‘politicians’ as this does not concerneconomists.

Walras (1896: 144) believes that the State is not simply a group of indi-viduals but that it has its own existence, that it guarantees freedom and thusthat the search for a greater economic freedom cannot be an argument in favourof its rejection. He claims scientific legitimacy for exceptions to laissez-faire,mainly concerning the production of public goods and monopolies. The armyand the police, guarantors for national independence and security, must bemaintained, as with all public utilities. In these sectors, a free-market economywon’t succeed in satisfying the demand, which is not individual but collective.Walras asserts that, in this case, as for monopolies, State intervention is a‘scientific rational fact, justified in terms of equity or utility’. He distinguishesState intervention ‘based on politics’ from the one ‘based on theory andscience’, which refers to the difference between ‘ideal and reality’ (1875: 220).Walras’ theory is to scientifically establish a new ideal of society. On thismatter, he declares: ‘From a scientific point of view, I am socialist’, because of arelative similarity of ‘inspiration’ (1896: 22). The society’s ideal (which variesaccording to historical periods) is what determines the nature of the relationsbetween the individual and the State. Furthermore, Walras defines the ideal ofa society by referring to two notions: equality and freedom (1896: 146).Whereas, in Antiquity, the individual was sacrificed to the State, the spiritualistideal of the Middle Ages inaugurated the sacrifice of the State to the individual,notably with the numerous wars led by the Lords. According to Walras,between these two extreme examples it is necessary to find ‘a new ideal foreseenby our fathers, which reconciles freedom and authority in order, equality andinequality in justice’ (1896: 147). Therefore, Walras thinks that the modern eramust give a new meaning to state intervention, with the revelation of the realscientific laws ruling economy, which would result in the establishment of anew ideal. Yet State intervention is not scientifically justified in the case ofcommercial treaties or protectionist measures, nor even when the economy’ssecurity is at stake. Walras hopes to definitively eliminate the liberal econo-mists’ ambiguity on this subject, like Adam Smith’s position on the Act of Nav-igation, for example. Historical examples certainly show that interventionismhas sometimes benefited national industry, like the Act of Navigation, Colbert’sprotectionist measures or the establishment of the Zollverein. However, this is


only a ‘political’ truth, and not an ‘economic truth’, i.e. a ‘scientific truth’(1892: 172). As stated by Walras, the law of supply and demand suggests that‘the best organization of the divided work is freedom’. Consequently, the historyof economic facts is not only deduced from the knowledge of the scientific lawsgoverning the economy. Customs and politics are decisive factors explainingthe industrial development of various societies in history. Nevertheless, there is,at all times and in all places, only one single scientific truth. The recognitionthat ‘the personal faculties of men are the natural object of individual property’(1892: 172) is one of them; slavery is thus always reprehensible, even if itrepresented an economic necessity for antique civilizations, Egyptian, Greekand Roman.

Yet a State which would implement political and commercial measures onlypragmatically, from the observation of concrete facts, without referring to eco-nomic principles, would run the risk of being weakened:

Applied to science as well as to politics, empiricism prevents revolutionsbut highly favours illegal seizures of power because it destroys the principlesand leaves a clear field to all the attempts capable of succeeding. In theabsence of principles, everything gives in to success.

(1892: 171)

Indeed, Walras condemns the German economists, who give no advice as topolitical economy but only describe economy. He also condemns the idea thateconomics can be national: considerations of economic policy concern politicsand not science. Walras thus declares:

The Germans’ national political economy is a confused hotchpotch ofpolitical economy and German policy; it is possible that politically such orsuch country in general and Germany in particular, has specific reasons forprotecting its industries; but the German policy is no concern of ours.

(1883/89: 607)

Walras admits that, in certain circumstances, such as ‘the intervention offoreign competition’, or ‘the introduction of machines’, the State can takemeasures in order ‘to ease subsequent temporary crises’ (1875: 221). In thesame way, it would be impossible to abolish the protecting system all at once,without having disastrous effects on several industries, with a sudden movementof production factors. Therefore, State intervention can sometimes be justifiedfor political reasons, but never for theoretical or scientific reasons. Walrasthus presents protectionism as a consequence of all past wars: each country,in wartime, establishes protections which favour an artificial developmentof industries. With the return of peace, the wish to keep on protecting these‘artificial’ industries prevents the removal of these restrictive measures(1883/89).

For the first time in the history of economic thought, the separation between


theory and practice, between economics and politics, is clearly established.Therefore, defence, which is not ruled by economic laws, should not be studiedby economists. This doesn’t mean Walras was not interested in contemporaryeconomic realities. On the contrary, once economists have solved all the theo-retical enigmas raised by economic facts, they will be able to provide govern-ments with the appropriate instruments to run the national economy and trade.In the same way as in physics, economic laws are valid at all times and in allplaces, and are irrefutable. But their discovery can only result from a perpetualcomparison between theory and practice.

WORLD PEACE AS THE ULTIMATE OUTCOME OF ECONOMICS: BETWEEN FREE

TRADE AND ‘SCIENTIFIC SOCIALISM’

Walras considers world peace in the long term as the crowning achievement ofeconomic science. He links this objective to the one of land collectivization.The subject of international peace is essential to understand Walras’ scientificambition: he gave considerable importance to his research on ‘applied eco-nomics’ throughout his work.

Walras uses the world peace argument to explain his two main purposes: theindividual property of personal faculties and the collective property of lands.

As regards the first purpose, Walras resorts to colonization. Economic theoryshould help in avoiding wars and massacres which have characterized all thecolonizing enterprises. He distinguishes two kinds of colonization: the colonialsystem of the eighteenth century, which was reprehensible economically as wellas morally; and modern colonization, such as the North American example,which has very positive economic results (even if the indigenous populationswere massacred) (1860/1: 164–175).

Regarding his second purpose, in a text entitled La paix par la justice sociale etle libre-échange (Peace Through Social Justice and Free Trade) (1907), Walrasdemonstrates the legitimacy of land collectivization, and considers that worldpeace will accompany the definitive outcome of research on the real scientificlaws of economy. The fact that Walras associates social justice with free tradeevokes the simultaneous search for equality and freedom, these two character-istics defining, as we previously mentioned, the ideal of society. By way of intro-duction to this work, Walras summarizes his project thus:

The following theory (individual property of personal faculties and collect-ive property of land) is a theory which has been acknowledged by majoreconomists, and also by a few socialists but none of them have rigorouslyestablished it on a scientific and philosophical basis. [. . .] During these lastthree years I have tried to give it all its scope and all its significance byshowing, in the complete abolition of taxes, which it is the only one toallow, the means to establish absolute free trade and, by this very fact, toensure universal peace.

(1907: 467)


Walras states that free trade will be quickly established worldwide when econo-mists have revealed the irrefutable scientific proofs of its superiority. Thismethod would be more effective than all commercial treaties and customsunions in favour of international trade liberalization. And, in fact, he aspires todemonstrate that the State can have incomes even without a fiscal system, andthat it is possible to give up protectionism without any economic damage. Hetherefore calls on governments to act in favour of the development of humansciences (which includes economics), by assigning the credits necessary for stateeducation, in particular for university education (1871: 375). These sciencesmust progress as much as natural sciences do, because they are essential to the‘humanitarian social question’ and because revealing economy’s real laws willenable democracies to avoid numerous wars or revolutions. Walras presentsworld peace as a conceivable objective for the generations to come, and not as avery long-term objective. He even foresees that only two European countries,Germany and Russia, will hinder the generalization of free trade and the aboli-tion of armies. Not only do Russian and German policies give too much import-ance to interventionism, but most of all they threaten the security of moderndemocracies with their projects of territorial annexation, conquests and militarysupremacy. While he foresees, for the democracies gradually won over tonational principles of economic freedom and free trade, the progressive aboli-tion of permanent armies and international agreement among national parlia-ments, with dispute settlement by arbitration, Walras worries about the factthat Germany and Russia could hinder such a project. He therefore hopes thatthey will soon adopt the constitutional system (of government):

Humanity will enter at that moment an era of work and wealth prepared bythe progress of physics and natural sciences as well as by the one of moraland political sciences. This is the socialists’ dream, and it is also ours.

(1879: 403)

Walras’ pacifism may appear a little original, with regard to the previous worksof the liberals on this subject since the eighteenth century. However, the factthat this search for world peace is strongly connected to the author’s project ofestablishing a real economic ‘science’, with results as spectacular as in naturalsciences. First, according to Walras, world peace, a condition and consequenceof the implementation of free trade, is conceivable in the immediate future, aslong as everybody agrees to submit to economic scientific laws. Second, becausethe ambiguity between humanity’s long-term interest to always and everywheredefend the principle of laissez-faire and the necessity to not compromisenational economic defence and security, by unilaterally abolishing hindrancesto free trade, is at last clarified: the scientific truth is absolute, it is the same atany time and everywhere and it recommends State non-intervention, except inthe main preserves, especially defence and state education. Political truth is rel-ative, it varies according to countries and to the national and internationalenvironment, and can justify protectionism. However this is only a ‘practical’


matter and doesn’t concern economic science: in this respect, economists mustleave these matters to the politicians.

The field of economics is therefore very much restricted, but it is entirely upto people to decide to make all their economic actions enter the scientificsphere: to achieve this objective, they must unanimously respect the principlesof the laissez-faire policy, with only a few exceptions.

Vilfredo Pareto: a hindrance to ophelimity – the wasting of the military sectorin a parliamentary system

Vilfredo Pareto repeatedly denounces the militaristic drifts of European govern-ments. Like all neo-classical economists, he does not include the study ofdefence in his system of theoretical analysis. Nevertheless, he wrote numeroustexts on this ‘economic policy’ issue. According to Pareto, theoretical researchin economy was only a part of social science. Indeed, he published a Treaty ofSociology in 1916.

The people’s despoilment by ruling classes is one of the main subjects ofPareto’s argumentation against the parliamentary system. He even subscribes tothe socialists’ criticism of capitalist societies, but he refutes their conclusions,being a resolute opponent of State economic intervention. Therefore, he thinksof the class war as a decisive principle in the way modern economies work,because the economic interests of the various classes are different, each of themonly seeking its own interest. The class struggle has a positive effect, whichleads society to the maximum of economic satisfaction, and a negative one,each class trying ‘to seize the government, so as to make it become a machine ofdespoilment’ (1896: 387).

The people’s despoliation by the governmental class has been a guiding prin-ciple of societies since Antiquity. Under the Roman Empire, the people werealready forced to get into debt to pay the tribute required by the government tolead reckless wars, which led the Roman civilization to its downfall. Pareto con-siders that the system has hardly changed since then, because taxpayers pay forconflicts, in the form of a national debt, whereas a few speculators (‘friends ofpoliticians’) will benefit from them. Thus, military expeditions result in a realinfringement of property rights, yet are considered as the basis of societies. Thisis also true for protectionist measures, monetary interventions and colonialexpeditions, which only benefit a very small majority (speculators, civil ser-vants) (1897: 128).

Pareto identifies two determining factors of military expenditures (Molinari1898: 277–295):

1 the megalomania of the ruling classes;2 the need for the government to maintain an external threat, in order to

ensure society’s cohesion and to divert the attention of the people from theembezzlements of the class in power. Therefore, the government and themilitary co-operate, the former in order to remain in power and the latter


to obtain additional specific advantages. The refusal of the parliamentarysystem is thus irrevocable. Pareto, towards the end of his life, politicallymoved towards fascism. Nevertheless, his economic works, though theycontain appeals for ‘reaction’, suggest no model of government. Securityremains however one of the attributes of the State, whose interventionmust remain limited.

Pareto does not reject Malthus’ idea that the population level should remainwithin the ‘natural limits’ aligned to the increase of the subsistence level. Agri-cultural progress can certainly temporarily invalidate this proposition. But inthe long run, the population is confronted with a lack of space. However,Pareto criticizes Malthus’ conclusions (1896: 121): only ‘moral constraint’ canput an end to the people’s misery, by initiating a decrease in population. The‘people’s suffering’ results mainly from government policy. The populationwould remain at the level of economic satisfaction if governments respected thenatural laws of economy. Therefore, economic conditions partially determinethe population’s evolution, and the formation of ‘personal capital’ correspondsto the ‘general law which makes savings go towards the production of the mostnecessary capital to obtain the maximum of ophelimity’. If other objectivesthan ophelimity were the aim (such as the maximum size of military forces andof expansion strength), the optimal level of population would be different. Thepopulation would be much more important if the people had access to eco-nomic welfare, but the waste of resources caused by a disastrous governmentalpolicy prevents the achievment of this objective. Therefore, history proved thatMalthus was wrong: in his time, an increase in population corresponded to anincrease in welfare, because the English people succeeded in making its interestprevail, by asking for the cessation of wars and of protectionist measuresunfavourable to the general interest (1896: 119). Pareto mentions that, forMalthus, the part played by war in the regulation of populations is no longervalid in industrialized countries. Thus, all legitimacy is denied to war. Adoptingan evolutionary point of view, Pareto presents war as an obsolete institution,even if it might have been useful in the past; on this matter, he evokes thetheory of Molinari. Repressive governmental policy, with increasing statecontrol, prevented wars from disappearing with the evolution of societies.

In some of his works, Pareto elaborates a determinist explanation (withregard to race and climate) of the history of societies, of which war is a centralelement. Indeed, this determinism is revealed by the level of a society’s abilityto lead conquests, or to resist enemy attacks. Besides, social selection througheconomic conditions strengthens the defensive capacity of a people, whichwould be reduced, without this selection, to decline and submission to otherpeoples, as was the case for India dominated by England owing to its system ofcastes. In the long term, societies which had a higher level of civilizationdominated the ‘inferior’ ones.

Isolating ‘political’ issues from his theoretical analysis, Pareto presents atheory of war which is more sociological than economic, notably because of its


emphasis on the evolutionary law of selection of ‘superior’ societies. UnlikeWalras who admitted that the State could have ‘political’ reasons for interven-ing, which did not concern the economist, Pareto violently rejects all form ofinterventionism and holds the parliamentary system responsible for the mili-taristic drift of developed societies. Military expenditures are a waste, and theyare one of the main reasons hindering the achievement of an optimal economicsituation. No allusion is made on peace as economics’ ultimate end; a principlewhich had been expressed by Jean-Baptist Say and enthusiastically pursued byLéon Walras.

The incursions of Alfred Marshall and Francis Edgeworth into thefield of defence

The great majority of neo-classical economists don’t pay much attention to warand defence issues, apart from two notable exceptions, Walras and Pareto; theyboth excluded these matters from the field of pure economy, because theyintended to reconstruct a complete social science, in which economic theorywould only represent a particular field, and questions of economic policy orapplied politics another field, as important as the previous one. Even if he didnot share the same ambition with regard to the rebuilding of social science,Alfred Marshall nevertheless showed in some of his works that he felt con-cerned with defence and security issues. Francis Edgeworth recognized that, forhim, microeconomic instruments could be used to analyse internationalconflicts.

Marshall’s influence in England at the end of the nineteenth centuryeclipsed that of the well-known English historical school economists, likeRogers, Cunnigham, Leslie, Ashley, etc., who refused to resort to mathematicsand abstract concepts, and recommended a return to only the observation ofeconomic and social realities. Marshall defended the free-trade policy; however,on the question of tariffs, he admitted that Germany and the United States hadbecome economic powers in spite of their protectionist system. In 1904, heeven states in a note that protection is the simplest, if not the best method forCanada, faced with the dumping of American industries (quoted in Reisman1990: 250). However, he remains convinced of the private initiative’s superior-ity, and of bureaucracy’s negative effects on industrial and trade development.In his work on Marshall, Reisman (1990) mentions that in 1900, this econo-mist, who admired the American economic performances, pleaded for an eco-nomic agreement on trade liberalization between Great Britain and the UnitedStates. Another passage of Marshall’s work shows that he was aware of the stra-tegic aspect of the economy, considering that the military responsibilities ofEngland required that it maintains a strong economic position with regard tothe other nations. Reisman (1990: 260) publishes a letter from Marshall toKeynes, revealing he was concerned with ‘the German obsession’ with territor-ial expansion, and in which he predicts the Second World War.

Apart from these sentences, Marshall wasn’t very much concerned with war


and defence issues in his work. It is, however, interesting to note that, in hisPrinciples of Economics, he considered that the German historical school playeda very important part in the development of economics (1920: 634). Accordingto him, the emphasis of these economists on nationalism ensues from theparticular political situation of Germany at that time. But basically, this schoolconsiders international economy in general, notably in its ‘comparative’ studiesof past economic facts. Marshall concludes that the historical School has con-tributed to the advance of economics. In this way, he implicitly acknowledgesthe legitimacy of their historical conception of war and defence. He also implic-itly admits that national power issues play an important part in the evolution ofinternational economic relations. However, he moderates this praise by blamingGerman economists for not having been sufficiently interested in the rigorousreasoning, and for having given rise to criticisms as to the lack of scientificrigour of their works. (1920: 635)

In Mathematical Psychics (1881), Edgeworth expounds on his ideas of war, inconnection with the economy of private contracts. He considers that mathe-matics should be used to better understand human relations. He compares theanalysis of the market’s economic situations with the strategic interactions ininternational relations, thus opening the way to Richardson, who will elaboratethe first arms race model (Schmidt 1991). Edgeworth describes the concept of‘economic calculation’ as being the study of the equilibrium of a system ofhedonistic forces, where everyone aims at a maximum individual utility, and hesuggests that it could be applied beyond its normal use, notably to the politicalstruggle for power as well as to the trade struggle for wealth. However, one mustdistinguish the economic calculation devoted to the system of trade transac-tions from the one applied to political relations. Indeed, the stakes are different:wealth in the first case, power in the second. In his study of Edgeworth’s analysisof war, Christian Schmidt (1991: 148) shows that the main problem was to stillconsider power as an economic good. Relations between two belligerent nationscan certainly be analysed as interpersonal relations. They share the same rulesof competition (i.e. selfish economic calculation). However, two differencesremain regarding the definition of preferences and the criterion which rules thecalculation. According to Schmidt, ‘these observations suggest that the idea toestablish a theory of war, by trying to generalize the model of wars between firmsoutlined by Edgeworth, leads to an impasse’ (Schmidt 1991: 148).

It should be noticed here that Edgeworth (1915: 75) later acknowledged thistheoretical impossibility in a work in which he considers that economists mustexplain that nations have nothing to gain from a conflict, in order to dissuadethem from undertaking one. In an armed conflict between two nations, as wellas in industrial conflicts between firms, the issue is always the maximization ofutility, and thus the comparison between the costs and advantages of a conflict.However, Edgeworth recognizes that the difficulty in the economic analysis ofinternational conflicts lies in the fact that the nations’ costs and advantages arenot necessarily economic (the search for prestige or for national honour mayalso be taken into account), and thus not easily quantifiable (1915: 31).


During the nineteenth century, liberal thought was thus divided betweentwo different analyses. A movement of ‘political economy’, mainly developed inFrance, reasserts the ‘classical’ arguments of war’s uselessness and of the exces-sive level of military expenditures; a ‘scientific’ movement aspires to build apure economic theory and therefore does not include political issues in its fieldof work.


3 The hesitations and internaldifferences within each economicperspective as a factor of war andpeace

The dichotomy between economic conceptions of war and power issues –namely the economy as a peace factor or the economy serving power – is notalways so clear. Indeed, internal nuances and divergences exist in both concep-tions. Thus, mercantilist authors are not all warmongering and favourable toeconomic war; several authors of the historical school praise the virtues of tradeand international peace. As for the classical authors, two of their most illustri-ous representatives, Malthus and Ricardo, remain very cautious on the questionof the pacifying character of trade. These internal differences also show the dif-ficulty in expounding definitive economic principles on issues that don’t exclus-ively depend on economic parameters.

The inopportune war

Mercantilist authors didn’t unanimously defend warlike precepts to increase thenational power, nor will the authors of the historical school. Indeed, some mer-cantilist texts showed that this doctrine included an old tradition of hostility towar, which was directly linked to the tax system. For their part, while theyacknowledged the historical importance of war, several economists of thehistorical school developed arguments close to those of the classical school,with regard to the pacification of international relations through growing eco-nomic interdependencies.

Optimistic mercantilism

English mercantilists recommended the implementation of trade policymeasures favouring a trade balance surplus. This would enable England toincrease its precious metals inflows in the long run. However, objections gradu-ally grew regarding the essential character of the accumulation of coins, evenfor warfare. Trade and goods were also considered as strategically important.The theoretical foundations of mercantilism were challenged within the doc-trine itself, outlining a new conception of the economic bases of power, notablyby giving more importance to goods rather than to precious metals or toconsideration of the people’s welfare. The analysis of economic phenomena


gradually evolved, foreshadowing a change in the status of power issues withineconomic thought.

Following this point of view, we shall present three essential ideas developedby certain mercantilists:

• without trade, the Treasury is not wealth;• without production, the Treasury is not a factor of power;• wealth and power are two fundamental interdependent objectives.

Trade as a factor of wealth

The ‘orthodox’ balance of trade theory gave rise to numerous controversiesamong mercantilists. The main debate was about the deterioration of the termsof trade between England and the rest of the world in the 1620s. According toEnglish mercantilists, this evolution was due to precious metals inflows fromAmerica, which would have entailed a deterioration of foreign currencies.

Malynes (Spiegel 1991: 101) was against the devaluation of the English cur-rency as a solution. However, he strongly disapproved of capital outflows fromGreat Britain, and blamed bankers’ speculations for it, without admitting thatthe fall of British exports was the main cause, and even the only one.

On the other hand, Misselden (Spiegel 1991: 102) considered that Englandhad to promote its exports and restrict its imports. According to him, England’sunfavourable trade balance was the true explanation for species outflows. Healso accused the East Indies company of being responsible, because of its trade,for the significant quantity of precious metals outflows.

However, Mun (1621: 49–80) defended the East Indies company. He con-sidered that, owing to its activities, England could substitute colonial trade fortraditional imports and acquire goods such as spices or raw materials. The pro-cessing of these materials provided jobs for a great number of English workers.He also thought it was necessary for England to maintain its monopoly in India,an essential strategic objective in the context of a fierce commercial competi-tion with Holland, which could develop into an open conflict at any time.

The Hollanders, at this time, are very powerful in India; [. . .] it is undoubt-edly in their power, to engross the rich traffic wholly to themselves, and toexpel us for ever from those countries. [. . .] But suppose they should driveus from thence by force of arms, or that we should quit the trade to themthrough negligence and folly, it will be worth while to consider, what addi-tion of wealth and strength an entire monopoly of East-India goods mayprove to that commonwealth.

(1621: 56)

This trade would later create a surplus for England’s manufactured goodsexports. As stated by Mun, the main factors responsible for the economic crisiswere the external devaluation of the English currency and the abuse of trade


unfavourable to England (with the modern idea of the deterioration of theterms of trade) and generating precious metals outflows. Later, he confirmed thenecessity for England of an export surplus, in accordance with the balance oftrade doctrine (1664: 85). To achieve this end, agriculture had to be encour-aged and imports reduced and even restricted. Mun was one of the first toexpress the ‘import-substitution’ theory. The principle of a nation considered asan indivisible whole is put forward by the protection of domestic industries. TheState has to guide economic activities in order to maximize national wealth,notably in favour of productions linked to the power policy. The stimulation ofdomestic demand was not recommended. Goods were kept for exports, in orderto increase the British Treasury. Exports of manufactured goods and services(which indicates a certain modernity of the argument) were particularly encour-aged, because the factories’ development was expected to increase and diversifynational employment. Although he defended the balance of trade theory, Munhad nothing against money outflows initiated by trade expansion. Unlike othermercantilists, he didn’t consider the accumulation of money as essential tonational economic development. On the contrary, if money remains unem-ployed, kept within the national territory, then prices increase and exports fall.Currency should be used for the production of goods, which generates addi-tional money in the long run. Here the idea of money’s power is expressed. Thesize of the national Treasury depended on the situation of the trade balance.

Production as a factor of power

The admitted reason for trade and colonial wars was the increase of thenational stock of precious metals. However, several authors noticed that owningtangible assets was strategically as important as possessing precious metals.According to Mun (1664), the Prince should not only have an important warchest available, but also goods he could buy if necessary. Thus, he disapprovedof the future Say’s law, by wondering what correspondence there could be,during a specific period, between the supply and the demand originated by theconstitution of a war chest. In a certain way, he also foreshadowed the Keyne-sian analysis:

so that we may account that Prince as poor who can have no wares to buyat his need, as he that hath no money to buy wares; for although Treasure issaid to be the sinews of the War, yet this is so because it doth provide, unite& move the power of men, victuals, and munition where and when thecause doth require; but if these things be wanting in due time, what shallwe then do with our money?

(1664: 132)

But English mercantilists were less concerned with accumulating preciousmetals than with developing trade. To succeed in war, a Prince mainly neededmaterial goods. As a last resort, goods and products necessary for warfare should


be available in the national territory. The State had to ensure the possession ofa significant war treasure, but also encourage arms production. Therefore, Mun(1621: 64) considered that, in peacetime, a part of the Treasury should beemployed to strengthen the military fleet and the fortifications, to maintain thearmed forces or to store weapons and powder. This Treasure did not only repre-sent the precious metals stocks, but also the availability of goods and techniquesof production useful to defence. Power was not directly based on gold, but onweapons. The Treasure also provided the means to prepare for war, but also pre-vented the risk of starvation, notably by storing grain and other supplies. Thus,the economy was mainly of benefit to the national military power.

For Charles Davenant, the only way to determine the global balance of foreigntrade was to measure the evolution of national wealth, the mere observation of theprecious metals stock being irrelevant. Aiming at industrial development was moreimportant than the accumulation of precious metals, because industrial productscould be exported, and thus contribute to national economic development.However, given that manufactured goods were primarily devoted to exports,domestic consumption had to be maintained at a low level. This analysis foreshad-ows the theory of development through exports. Josiah Child underscores that theconcrete difficulties in measuring the trade balance made this theory ineffective.According to him, trade should be regulated in a way that favours national facto-ries and employment. In the same way, Nicholas Barbon considered that preciousmetals had no intrinsic value, thus rejecting the balance of trade theory.

Two interdependent objectives: wealth and power

Mercantilism was more a doctrine favourable to trade, notably in England,rather than a doctrine of industrial protectionism. Furthermore, as this doctrinedeveloped, priority was given to the growth of exports rather than to the accu-mulation of precious metals. In this way, Mun exalted the role of trade:

Behold then, the true form and work of foreign Trade, which is, The greatRevenue of the King, the honour of the Kingdom, The Noble profession ofthe Merchant, The school of our Arts, The supply of our wants, Theemployment of our poor, The improvement of our Lands, The Nursery ofour Mariners, The walls [ships] of our Kingdom, The means of our Treasure,The Sinews of our Wars, The terror of our Enemies. For all which great andweighty reasons, do so many well governed States highly countenance theprofession, and carefully cherish the action, not only with Policy toincrease it, but also with power to protect it from all foreign injuries:because they know it is a Principle in Reason of State to maintain anddefend that which doth Support them and their estates.

(1664: 95)

Here are expressions of the ideas that trade must expand and be defended, andthat it has beneficial effects on the State’s power as well as on improvements for


the welfare of the population. Some English economists, like Nicholas Barbon,believed that trade generated important profits, by originating an increase inwages and in the State’s income. Trade also had civilizing effects, and lednations towards peace. This remark already anticipates the conception of thegreat English classical economists of the beginning of the twentieth century. InFrance, Jean Bodin (1568) was also in favour of trade expansion, for liberalrather than mercantilist reasons: trade is beneficial because it enables a desirablefriendship among peoples to be maintained. Therefore, the author considersthat France should develop commercial relations with her neighbours ratherthan wage war on them.

The mercantilist theory made ‘bellicosity’ and an old tradition of hostilitytowards war (which was directly linked to the refusal of the tax system) compat-ible. This tradition would certainly become necessary to ensure nationaldefence in case of conflict, but the preservation of peace was more desirable.Bodin (1568) and Mun (1664) also shared this point of view.

Mun (1664) concludes his remarks by condemning wars led by the Sovereignfor unjustified reasons. Here there appears a shift towards a conception of anational power as useful for defence purposes rather than to conquests. In awork published in 1670, Roger Coke goes even further by praising peacethrough trade, rather than wars of conquest. Thus, trade extends national influ-ence by peaceful means; power, which is ensured by wealth, is mainly used todefend the country against possible attacks. This point of view is close to that ofthe English classical economists of the eighteenth century. Another factor fore-shadowing liberalism is the acknowledgement of the fact that trade is always ofbenefit to the country, whatever its effects on individual traders.

The defence of trade by certain mercantilists of the end of the seventeenthcentury foreshadowed English liberal theory of the end of the eighteenthcentury, even if most of the time, mercantilists’ calls for free trade and harmonyof interests among nations masked the defence of specific interests. And, in fact,classical economists were simultaneously concerned with trade expansion andnational defence. The mercantilist theory is generally considered as warmonger-ing because it glorifies the beneficial effects of the economy on political power.On the contrary, the theories that followed were pacific, especially classicaltheory, which favoured national enrichment through trade, without State inter-vention in foreign policy. Nevertheless, both mercantilist and classical econo-mists sought enrichment and power. The policy implemented by the Englishliberal State during the eighteenth century was a policy of power. Instead of astatic conception of trade (one only wins what the other one loses), classicaleconomists had a dynamic conception (trade generates a net growth of worldwealth). The means are for the mercantilists what the end is for liberalism, andvice versa. According to the mercantilist theory, national power prevailed overnational wealth, whereas liberal theory gave more importance to the latter.

But the mercantilist theory was above all heterogeneous. Some authorsstated original principles. For example, Sully defended the traditional preceptsof bullionism and of state control, but he also considered that economic policy


should aim at getting France to specialize in the production and export of agri-cultural goods. His main concern was to achieve food self-sufficiency.

In conclusion, there are two interpretations of mercantilism:

• mercantilism marks a progressive transition of economic thought towardsliberalism, i.e. a new conception of economy, dissociated from politicalconcerns. This interpretation is based on the particular attention paid totrade expansion.

• mercantilism presents a specific conception of the links between war andeconomy, which created the modern concepts of economic war and indus-trial protectionism.

There are two main differences that separate mercantilism from liberalism:

• the mercantilist conception of international economic relations is static,i.e. trade can’t enable all nations to grow rich.

• mercantilists’ main concern is the Prince’s power, not the welfare of thepeople. Therefore, peace is not a factor of development.

The original feature of mercantilism in relation to previous conceptions ofsociety was to assert that national wealth was a decisive objective, for the Stateas well as for traders (it was an acknowledged fact that, for humanity, wealthwas an end in itself). It was difficult to differentiate military power from eco-nomic power; economic and political spheres were no longer dissociated. Thus,economic analysis gave a new status to defence: instead of being only of benefitto the political order, it favoured both the economy and politics, two highlyinterdependent fields. Gradually, public affairs were dissociated from those ofthe Prince and the trader became the individual agent of the State’s prosperity.Mercantilists insisted on the important role played by calculation in the art ofgoverning. For Davenant, the science of calculation makes skilful ministers;whereas the lack of it makes it impossible to deal with matters of war or peace.William Petty underlined the importance of strategic information as an instru-ment of power.

When English classical economists elaborated their theory, they had toexclude defence issues from their field of work, given that only free tradeallowed the realization of the great universal design, i.e. the enrichment of allnations, with peace and happiness for the peoples. Because of the way relationsbetween defence and economy were considered to be radically changed, theeconomy was becoming a specific field of work. But the theoretical breakingpoint had occurred before the development of the English classical school. Thephysiocrats were the first to revolutionize the idea of social order, by assertingthe superiority of economic ‘natural laws’.


The vague idea of war’s historical permanence

On several occasions, the two main representatives of the German historicalschool (Roscher for the ‘old school’ and Schmoller for the ‘new school’) insistedon the pacifying effects of economic interdependence between nations.However, they don’t generalize this principle, and their theory is never ‘predic-tive’; it above all explains past events.

The German historical school and the refusal of an unnecessary bellicosity

According to Schmoller, the struggles between selfish interests within a societyare part of human nature, but their characteristics change with the course ofhistory and their effects are moderated by the moral civilization’s progress. Asimilar evolution is observable in international relations.

Many theorists of the historical school (notably Roscher and Knies) under-line the high economic cost of war. However, Roscher (1918) considers thatthe recollection of the cost of past wars has never dissuaded peoples from begin-ning new ones. In the same way, even if they defend the use of protectionism topromote national economic development, the upholders of the historical schoolwarn that these measures might have pernicious effects and miss their aim. Asstated by Roscher (1918: 420), following List’s example, free trade is preferablein the case of England, where the trade capital dominates, whereas in othercountries protectionism may have beneficial effects. More precisely, a well-understood protectionism can play an educational role in national industry.The growth of national industry affects the ‘conditions of class’, decreasing thepowers of nobility and agriculture, therefore inducing a social equilibriumwhich once again favours industrial development. But protectionism should beconceived of as a means of free trade, which should remain the ultimate objec-tive of a nation. Only free trade enables a nation to take advantage of its pecu-liarities, and is in fact in opposition with the universality principle. As forprotectionism used as a reprisal (the ‘customs of fight’, against foreign measurespenalizing domestic exports), Roscher does not recommend it if national eco-nomic and political power is lower than those of the opponents. Their onlyeffect would then be to weaken national industries even more. Trade reprisalscan only have a deterring effect between opponents with a similar level ofpower (1918: 461). Thus Roscher is not an inveterate supporter of ‘economicwar’. We can consider this view as representative of the whole historical school,which therefore clearly distinguishes itself from the mercantilist doctrine.

Roscher (1872) considers that contemporary economists are wrong toneglect the lessons from the philosophers of Antiquity, who recognized theimportance of public finance and State intervention in trade and in nationaldefence:

A fact which is related to the most important difference between antiquityand modern times, [. . .] is the relatively much more considerable role that


the incomes of war played in the Ancients’ political economy, and generallythe one war played in their existence.

(1872: 40)

However, Roscher refuses to consider that humanity may progress towards astate of world peace. This idea regularly reappears in peacetime, but is everytime contradicted by the facts. The diffusion of economic knowledge certainlymakes wars rarer and shorter, since peaceful trade development is recognized asbeing more profitable than a state of permanent war. Nevertheless, Roscherdoes not justify the liberal cosmopolitanism. On the contrary, using a historicalretrospective, he underlines the dangers of pacifism. Indeed, he considers thatthe wars of Antiquity contributed to national cohesion. Therefore, when theGreeks stopped fighting and searched for peace, under the influence of ‘the Epi-cureans’ systematic anti-patriotism’ and the ‘Stoics’ cosmopolitanism’, for theeconomic reasons previously mentioned, their civilization was subsequentlyannihilated by the Macedonian conquests (Roscher 1872: 40–43). These ideasof pacifism also opened the way to the Roman empire’s expansion. Moreover,warfare had beneficial affects on the defence of Greek society, because itencouraged geographical groupings of populations and was the basis of theslavery system, essential to their economic organization. If Roscher asserts thatpeace is an ultimate objective that society must achieve, he also considers thatits conditions might often be ensured only by a short war or the threat of war(Silberner 1957: 140). In fact, unlike List, Roscher developed no specific theoryof the international relations long-term evolution. If he believed in the pacify-ing virtues of trade, he did not envisage a state of peace without deterrence.

In spite of its numerous references to wars and economic conflicts, as well asto concepts of economic and political power, the diagnosis on the historicalschool’s ‘bellicosity’ must be qualified. In fact, the most famous representative ofthe old school, Roscher, only developed a few warmongering comments. As forthe new school, Schmoller had a conception of international relations whosebellicosity may have been exaggerated in the presentation made by Silberner.According to the latter (1957: 150), Schmoller considers that the ideal of inter-national peace is imaginary. The government system does not even guaranteeits pacifism or its bellicosity, as shown by English or American imperialist pol-icies. Silberner reminds us that Schmoller was above all interested in the devel-opment of the German economic power, through its foreign trade and colonialempire, notably owing to the development of its naval strength, which was incontradiction with the other powers’ interests. But he does not sufficientlyunderline the ‘historical’ character of Schmoller’s analysis, who admitted thereality of international relations’ pacification through trade, as shown in thisquotation:

The progress of the ninetheenth century beyond the mercantilist policy ofthe eighteenth depends, – keeping to this thought of a succession of everlarger social communities, – on the creation of leagues of states, on


alliances in the matter of customs and trade, on the moral and legalcommunity of all civilised states, such as modern international law is moreand more bringing into existence by means of a network of internationaltreaties. [. . .] The struggle of social bodies with one another, which is attimes military, at other times merely economic, has a tendency, with theprogress of civilisation, to assume a higher character and to abandon itscoarsest and most brutal weapons. The instinct becomes stronger of acertain solidarity of interests, of a beneficent interaction, of an exchange ofgoods from which both rivals gain. [. . .] So the eighteenth-century ideas ofa humane cosmopolitanism began to instil into men the thought of achange of policy in the economic struggles of European states at the verytime when the international rivalry had reached its highest point. [. . .]Undoubtedly we must regard this movement, [. . .], as one of the greatadvances made by mankind.

(1857: 78–79)

Moreover, in a work published in 1902, Schmoller evokes the possibility of aterritorial insufficiency to face the population growth. Rather than advocatingthe conquest of supplementary territories by military means, he recommendsemigration across the Atlantic, which will contribute to the spread of civil-ization throughout the world ‘in a constant and smooth way’ (1902: 145). ButSchmoller, following List’s example, does not give up the conception of an eco-nomic world governed by the confrontation of national economic interests, andhe doesn’t mention the eventual ending of international conflicts in the verylong term.

The historical character of this school, whose first objective was to presentthe past evolution of economic and social organizations, partially explains thelack of a real ‘scientific’ theory of the societies’ long-term evolution. Neverthe-less, the defence of protectionism, in favour of nations still unable to supporttrade competition with the most developed countries, is a key rule for thehistorical school proponents. Yet, this could contain the seeds of internationalconflicts.

The pacifism of the English historical school

The historical method was also applied in England. It is impossible for us toprovide an exhaustive presentation of all these analyses, which have further-more already been widely expounded by Silberner (1957) and Whitaker (1991).Only a few essential points of this thought on peace, war and defence will bereported here. Some of the arguments mentioned by the English and theGerman historical schools are similar. However, apart from Ashley (1904) andCunningham (1892), the English economists gave more importance to liberal-ism. And, in actual fact, by insisting much more on the need to pacify inter-national relations than their German homologues, they conferred a certainoriginality to their school.


The preference for a Prussian-type permanent national army was shared bymany European economists, including liberals like Leslie and Cairnes. John K.Whitaker (1991) has expanded the ideas of these authors on the issue ofdefence. Leslie and Cairnes advanced the argument according to which thiskind of defence was the best way to guarantee the population’s peacefultendencies, even if its economic cost was significant and if, during their service,soldiers had no productive activity. When giving consideration to cost, Leslieand Cairnes suggest a military service that would be short- or long-term,depending on whether it takes place in the national territory or abroad. Thisorganization of the army can prevent the development of a military ‘caste’,which too often encourages the country to wage wars. Several economists of theEnglish historical school denounced, in the same way as the liberals did, notonly the cost of war but also the cost of an excessively high level of nationaldefence, while the sums assigned to the military sector by Great Britain contin-uously rose during the nineteenth century. Bagehot describes the phenomenon,which will later be called an ‘arms race’. He considers that British militaryexpenditure tends to increase in a disproportionate way for two main reasons(Whitaker 1991: 42):

• members of government do not have the necessary knowledge to assess thelegitimacy of the budget requirements of military experts, who always leadthe country into greater expenditures, reason using the increasing sophisti-cation of military technologies as a reason.

• public opinion also lacks the necessary knowledge to require a decrease inmilitary expenditures.

Yet this rise in British military expenditure tends to maintain an arms race inEurope, which is costly for all countries. According to Bagehot, the only wayout for England is to give up its leading role in world competition on militarytechnologies, and to renew its armament only in response to other countries’policies. The preservation of England’s world naval supremacy is considered as apriority objective, notably in order to reduce the risk of embargo (Bagehot,Giffen), but it then becomes a matter of maintaining an ability to deter and notto attack. Globally, the rule is to possess a defensive force strong enough torepel a possible attack by a coalition of leading powers.

Like their colleagues of the German historical school, English economists(including Leslie) consider that the multiplicity of national economic interde-pendencies favours, but is not a sufficient condition for, peace. They payparticular attention to the food self-sufficiency issue, essential to England. Cun-ningham (Cunningham and McArthur 1895: 245) and Ashley (1904: 36–39)recommend that England leads a protectionist policy in this sector, so as to beself-sufficient in case of war. However, Cunningham predicts that trade devel-opment will contribute to the ending of national rivalries. According to him,signs of the constitution of an international economic organization (i.e. aninternational conduct of economic relations) are already visible, notably with


the setting up of an international postal system; an international agreement onthe monetary system might also be reached in the long term. All these signsseem to indicate that the nation, as a social body for economic purposes, is des-tined to disappear (Cunningham 1892: 682). To liberal ‘cosmopolitanism’,Cunningham prefers an ‘internationalism’ based on the peaceful coexistence ofstrong and independent nations, able to cultivate the peculiarities which makesthem stronger; this is the only way to reach a long-term international peace.Indeed, he does not believe in a federation of various states for economicmotives (but perhaps for religious reasons). Leslie (Silberner 1957: 161) devel-ops quite similar arguments, notably about the advent of international peaceowing to the increase of economic interdependencies. He especially insists onthe necessary evolution of political institutions in this process: in this respect,war will end when all political systems become free, when permanent armieshave been replaced by militias and when an international law and an inter-national court have been established. As for Rogers (Silberner 1957: 163), hethinks that, in the long run, nations will abandon their armies to the benefit ofan international arbitration, the respect of its resolutions being guaranteed bythe pressure of public opinion. The metropolitan countries and their coloniesshould join in a ‘system of national councils’ (which corresponds to a political,economic, monetary and trade unification).

This brief outline of the English historical economists’ conception showsthat the idea that peace could be achieved through the development of inter-national economic interdependencies was rather widely shared. However,unlike the liberals, these economists presented national interest as a ‘moral’value, and preferred it to individual interest. They did not appeal for disarma-ment, as war could still occur. They preferred a progressive decrease in militaryexpenditures, within the limits imposed by the necessary preservation of adeterrence capacity.

Conclusion

The accumulation of wealth is a central objective in mercantilist thought (evenif it often masks the defence of private interests), and several authors have con-sidered that it is more likely to be reached by trade development than by con-flicts with neighbouring countries. In relation to the historical school, showingthe importance of past wars didn’t prevent some of its members from sharingone of the great ideas of their time: that of the pacification of international rela-tions through the development of economic interdependencies.

The avaricious peace: the pessimistic classical school

Not all classical economists ventured to forecast the disappearance of warsbecause of the development of international trade. The silence of several greatauthors of this movement on this issue shows their reservations. The idea of afuture stationary economic state explains that Ricardo, Malthus or J.S. Mill


have been less categorical than Smith or Say when criticizing military expendi-tures and wars.

The market economy: a necessary but insufficient condition forpeace in Malthus’ work

What one remembers the most of the famous Malthusian theory of war is thatconflicts between nations are due to overpopulation, but they also regulate thisby eliminating large numbers of people. But, according to Malthus, such a ruleonly applies to the first stages of human evolution. In modern societies, war isless and less useful to regulate populations. This is why his interest for inter-national conflicts issues grew, as is shown by the increasing frequency of hisanalyses on this subject in the successive editions of the Principle of Population.The economic factors are expounded, notably with the implementation of theeffective demand principle. Discussion on the causes of war also discouraged theoptimistic idealists who considered humanity’s evolution as a continuousprogress towards economic prosperity and thus towards peace. In Malthus’opinion, progress is not desirable at all costs and free trade does not guaranteeworld peace. However, he remains an ardent supporter of the market economyand private property.

Either considered as a reactionary, or as a precursor, Malthus’ ideas on warwere particularly original for his time. His system, more ‘concrete’ thanRicardo’s, is essential in the historical analysis of the defence economy.Through various means, he initiated a reflection on national security issueswhich would be pursued by Keynes during the inter-war period. His hesitationto accredit social reforms which could curb the people’s misery, as well as hispresentation of individual moral constraint as the only chance for humanity toprosper, don’t express a very ‘orthodox’ conception of human and internationalrelations.

The Principle of Population (1798) and the Principles of Political Economy(1836b) both mention war issues.

War as a consequence of overpopulation

In the first part of the Principle of Population, Malthus presents war as one of thedestructive hindrances to the growth of population beyond the means of subsis-tence (1798: 177). He distinguishes them from privative hindrances, whichdepend on the individual will, i.e. in this context, on the ‘moral constraint’.However, according to Malthus, while a country develops, the privative hin-drances will tend to replace the destructive ones in the regulation of the popu-lation. War as a palliative to overpopulation is a characteristic of savage orprimitive peoples. On the other hand, modern European wars are less frequentand less destructive in the long run.

The Principle of Population ends with an Appendix. Malthus assesses his mainideas on the relations between the population and the strength of the State.


Noting that France is densely populated which enables her to raise importantarmies at a low cost, he minimizes this national advantage: if the population isnot proportionate to the means of subsistence, it will get younger, an undesir-able evolution with regard to national power. Besides, the deaths caused byarmed conflicts also induce, more directly, a modification in the populationpyramid unfavourable to the preservation of the national force, even if waralways generates an increase in births which compensates for the human lossesincurred. Therefore, the population’s participation in war should not exceed acertain limit, according to the composition of the population (1798: 341).Unfavourable economic conditions facilitate the implementation of militaryoperations by political leaders by providing a population which can easily bemobilized at a low cost. Moreover, they are the underlying motivations of con-flicts. Only the maintenance of the population at the level of subsistence wouldremove the main economic reasons for war: the search for space and food.Besides, when there are economic difficulties, tyrannical and despotic leaders,inclined to bellicosity, are more likely to govern. Nevertheless, according toMalthus, permanent armies limit the risk of war (the concept of deterrence)(1798: 250). Moreover, economic development is the best way to guarantee thepopulation’s collaboration in case of national necessity. The citizens’ wish toprotect economic prosperity is the first safeguard of a State’s warmongeringtendencies. Thus, the limitation of the population level would eliminate themain causes and means of offensive wars. Modern societies should only be con-cerned with the defence of their own territory (1798: 213).

Though he considers that offensive military policies often find their originand their support in economic difficulties and in poverty, Malthus is radicallyopposed to the reformers’ point of view, according to which social institutionsare the reasons for conflicts. War results from human passions and natural laws.He describes war as a just and divine punishment for the human tendency tovice (i.e. the non-respect for moral principles) (1798: 215).

Therefore, Malthus considers war in two different ways:

• the insufficiency of outlets and territories, due to the increase in popu-lation, generates war;

• the population’s ‘vice’, which entails its continual increase, causes war.

These two reasons for war are strictly interdependent: the growth of the popu-lation originates an insufficiency of resources. By insisting on the moral causesof war, Malthus adopts an original point of view.

Given that workers are responsible for their misfortune, Malthus condemnsgovernment measures which could improve the living conditions of the poorest,such as the poor laws (1798: 22). On the contrary, by encouraging the popu-lation growth, these reforms can only accelerate the advent of famines andincrease the risks of riots. Only moral constraint, which enables a nation tolimit its population at the level of available food, can improve economic devel-opment. When all countries will have succeeded in limiting the level of their


population, international peace will be assured (1798: 213). The limitation ofthe population at the level of subsistence must therefore be the supreme objec-tive of humanity: world peace should naturally follow. Even if war and all the‘causes of vice and misfortune’ were eradicated, humanity’s welfare would not beguaranteed, because it exclusively depends on the ‘population–quantity of foodratio’ (and later on the distribution of food or on the quantity of food a workercan buy with his or her salary) (1798: 447)

The law of population has thus been used by Malthus to analyse war andpeace issues. The main purposes of wars are the conquest of outlets and territo-ries; offensive wars are reprehensible. The state must only aim at defence anddeterrence which would be all the more efficient as the population will be pros-perous and thus motivated to defend the territory. With regard to Smith or Say,who had already evoked similar ideas, Malthus’ originality is to underline thatindividual moral responsibility, and not only political responsibility, is a centralelement of a lasting peace, because, all things considered, demographic controlis its only guarantee. Malthus’ pessimism results from a religious conception of ahumanity irremediably marked by original sin. Individuals are primarily motiv-ated by the wish to satisfy their sexual desires, rather than the search for profit,as stated in Adam Smith’s utilitarian thought: and these particular motivationsare against the general interest. This Malthusian conception of society castsdoubt on the possibility of entirely pacified international relations, especiallysince Malthus, unlike Say, does not believe in capitalism’s infinite potential foreconomic growth, natural resources being limited.

A new interest for the economic management of security issues

In Principles of Political Economy, Malthus underscores the likelihood that effect-ive demand becomes insufficient to continue to ensure economic growth. As anexample, he analyses the consequences of war on effective demand, and thus onthe national economic situation. In his opinion, an increase in births com-pensated for deaths due to war in countries which have reached a certainlevel of development (1798: 331). Therefore, modern wars don’t entail thedepopulation of a country, as long as they don’t affect the national productivepotential.

In Principles of Political Economy (1836), Malthus examines the matter of dis-parities in economic development among countries that have similar resourcesand histories. He considers two main factors which could increase nationalwealth: an increase in population (but only within the limits of subsistencemeans) and the accumulation (or savings) which add to capital. He shows thatan increase in effective demand is necessary for a nation to become wealthier.Yet the destruction of capital during a war is precisely what makes this increasepossible. Just as the population soon regains its previous level after a war (whichstimulates births), the destroyed capital will quickly be replaced, provided thatwar does not interrupt trade (1836: 264). But Malthus put forward many otherarguments to condemn war.


In Principle of Population (1798), Malthus already recognized that the lack ofoutlets for products could hinder national economic development. During acertain period of time, the opening of new markets (notably in colonies) andnew inventions (notably in the agricultural sector) could continue to create anincrease in capital and encourage population growth. But these two factors arenot unlimited and, in the long term, the levels of employment and foodresources may prove to be insufficient compared to the population level. Itwould then be desirable to stimulate effective demand, but Malthus rejectsState intervention (a strong taxation would have disastrous economic effects) aswell as the resort to war as a solution: a conflict would only make the economiccrisis worse (1836: 265). Malthus considers that the governmental policy duringthe ‘last war’ was erroneous: indeed, the poor laws encouraged populationgrowth and State expenditures were too important. Misery appeared with thereturn to peace and the suppression of measures favouring overpopulation(1798: 250).

Therefore, even if he recognizes that war expenditures can have short-termstimulating effects, Malthus underlines their negative consequences in the long-run. In this respect, he establishes a relation between war and economic crisis.Later Keynes, who admired Malthus, also studied the economic consequences ofwar. He pursued, although in a different way, the concept of effective demand.The conclusions of both economists on the possible emergence of economiccrises, which generate international tensions, can be compared. Besides,Malthus, like the Keynesians, is primarily concerned with short- rather thanlong-term economic problems. Whereas the ‘optimistic’ liberals, like Smith andSay, consider international trade to have pacifying virtues, Malthus rejects thispoint of view, because of his doubts as to the capacities of infinite national eco-nomic growth. The best way to avoid national antagonisms is to favourdomestic agriculture rather than industry or trade.

Malthus considers the food security issue of great importance. While Smithinsisted on the essential part played by technical progress (and the division oflabour) in sustaining economic growth, Malthus states that nothing can stopthe progressive exhaustion of soils, and thus prevent the nation from itsinevitable progress towards a stationary state. He does not consider the possibil-ity of expanding the national territory through colonization, as such policiesgenerate wars. The solutions to prevent the check of economic developmentmust be found within national borders. Human actions can sometimes beimposed by passion, without any economic rationality. This is why ensuringnational security (one of the most fundamental human interests) is so import-ant, even if it disadvantages free trade and thus wealth. Malthus is especiallyconcerned with guaranteeing food security. In 1836, he published The CornLaws; here he states that there is a low risk of disruption in foreign cereal sup-plies in peacetime, because producing countries need to sell their products andthere are multiple sources of supplies. On the other hand, in wartime, economicinterests do not always prevail (because conflicts often have an extra-economiccharacter) and there is a real risk of disruption in cereal supplies.


At the same time it should be observed that we have latterly seen the moststriking instances in all quarters, of governments acting from passion ratherthan interest. Though the danger therefore may not be great of dependingfor a considerable portion of our subsistence upon foreign countries, yet itmust be acknowledged that nothing like an experiment has yet been madeof the distress that might be produced, during a widely extended war, by theunited operation, of a great difficulty in finding a market for our manufac-tures, accompanied by the absolute necessity of supplying ourselves with avery large quantity of corn.

(1836: 101)

Other arguments in favour of agricultural protectionism are also advanced byMalthus. Such a policy would notably induce a rise in both nominal labourprices and grain prices, which is favourable to the employees’ situation.Another assertion seems particularly original: referring to the idea that a freecereal trade creates a reduction in agricultural employment and a rise in indus-trial employment, Malthus warns against the consequences of such an evolu-tion. Indeed, industrial development considerably increases the risks of pricefluctuations, and thus of discontent; besides, Malthus considers that the situ-ation and the employment of a manufacturer and his family are unfavourable tohealth and virtue. And he concludes:

[I]t may be said, that an excessive proportion of manufacturing populationdoes not seem favourable to national quiet and happiness. Wealth, popu-lation and power are, after all, only valuable, as they tend to improve,increase, and secure the mass of human virtues and happiness.

(1836: 101)

Therefore, Malthus’ work represents a profound change from the mercantilistproposals, although he defended cereal trade restrictions: from his point of view,national power and wealth are not the aims of political economy. He evenasserts that foreign wheat import restrictions would disadvantage the country ininternational trade and slow the development of the other national industrialactivities; however, these measures are necessary for the country to becomeindependent with regard to wheat supplies (1836a: 105). Malthus thus favourssecurity and domestic stability rather than economic power over foreignmarkets. Social reforms would, at best, only delay the stationary state. Societymust be self-sufficient with regard to food and defence. This theory can be inter-preted as a defence of property owners. Ricardo, who also had doubts as to thephysical possibility of a long-term economic growth, has a very differentopinion on the matter of food security. But Malthus’ conception is, above all,dominated by the conviction that humanity is responsible for its own misfor-tunes. War, even if it is more spectacular, is only one proof among others of thisinconsequence of human nature. He believes that the possibility of changinghuman nature, by convincing the population of the necessity of abstinence, is


limited. Nevertheless, we can assume he considered that, with the gradualprogress of society towards moralization and civilization, the moral constraintwould be of more importance. Even though human welfare will still be threat-ened by the fact that natural resources are limited. Therefore, world peace isn’tan obvious objective.

Ricardo: a polymorphic and partial analysis of war and peace in afree-market economy

The British classical school is commonly associated to the paradigm of peacethrough free trade. David Ricardo is often presented as having defined its broadoutlines. His theory of comparative advantages demonstrates that trade favourspeace, as it harmonizes the interests of consumers and subsequently of nations.However, the Ricardian theory is also fundamentally pessimistic: in the longrun, the economy should reach a ‘stationary state’, international trade onlybeing a palliative, effective in the short and medium term, to an inevitabledecrease in profit rate. Ricardo is, in fact, one of the classical economists whohas made the least general predictions as to the future evolution of inter-national relations. In actual fact, he pays little attention to the pacifying virtuesof free trade in his works, and almost never mentions them in a direct way. Thismay seem all the more surprising as Ricardo analysed numerous economic prob-lems related to war and national security. In fact, Ricardo’s work is at the cuspof two currents of economic analysis – one considering power and defenceissues, and the other one not. Leading economics towards abstraction and anapolitical analysis, scientifically demonstrating the economic advantages ofinternational trade, he disregards the subject of the reasons for wars. Only theireconomic consequences are studied and considered as particular cases used tounderline the general principles governing the economy. Thus, Ricardo initi-ates a specific tradition in the economic analysis of defence and peace. At thesame time, he pursues some aspects of Malthus’ thought on these issues, and heshows himself to be fundamentally pessimistic as to the possibilities of an indefi-nite and sustained economic growth. Thus, Ricardo has a two-point analysis ofdefence and peace:

• empirical studies on the management of concrete economic problems stem-ming from war and post-war periods;

• a partial theoretical analysis based on his conclusions regarding the futureevolution of international relations, in a market economy.

The economic management of war and its consequences

The first phenomenon which awakened Ricardo’s interest in economic prob-lems was inflation in England, during war against France. He showed that thegold price increase had been generated by excessive issues of English banknotes,favouring a monetary depreciation. Other matters connected to war held his


attention, notably agricultural protectionism in a situation of conflict. Ricardoaimed at showing that his liberal conclusions weren’t opposed to the nationalsecurity objective.

Ricardo mentioned matters related to war, peace and defence in On the Prin-ciples of Political Economy and Taxation (1815), and also in other works, notablyEssay on the Influence of a Low Price of Corn on the Profits of Stock (1815), OnProtection to Agriculture (1822) and Essay on the System of Consolidated Debts andAmortization (1847). Among other matters, he dealt with food security, warfinancing, capital flows between economic sectors during conflicts and the con-sequences of war on employment.

Ricardo, unlike Smith, makes no concession to industrial protectionism,even in the case of strategic manufactured goods. This can be explained by thecontext of his time, characterized by England’s uncontested industrial and com-mercial supremacy; on the other hand, England represented an importantmarket for the continental wheat production, and in fact Ricardo paid particu-lar attention to the food security issue. He asserts that, even in the event ofconflict, wheat-producing countries would need to sell their wheat to GreatBritain and, thus, that there is a low risk of disruption in supplies. Furthermore,other producing countries could circumvent an embargo, giving time forEnglish growers to increase their own production (all the more so if the countryhas been preparing for a conflict for a long time). In this respect, Ricardostrongly defends the cause of free trade, even in wartime, which is noteworthyin the context of Napoleonic blockade (1814). However, his main postulate,i.e. the preservation of trade relations between enemies at war, is much lessacceptable today than it was at the time. The Napoleonic wars have preciselyinaugurated the ‘total war’, characterized by the disruption of the wholenational economy and of all trade relations between the belligerents. War asRicardo conceived it is hardly ‘industrialized’, and therefore his analysis, alreadydebatable at the time, is difficult to accept nowadays.

In that time, the cost of a ‘consolidated debt’, due to the numerous conflictsin which England was involved, weighed heavily on public finance. Ricardotries to determine the best way to finance wars (1847). He considers it necessaryto prevent the accumulation of a disproportionate national debt; otherwise,after a conflict, the nation would have to face important expenditures andlevies, maintain numerous tax inspectors and establish a complex system ofcustoms and indirect levies. Of all possible solutions, Ricardo prefers a new taxwhich would disappear with the return of peace. He considers this to be the bestway to make public opinion aware of the massive expenditures required by war,and thus to dissuade it from supporting unnecessary conflicts. The war taxwould mainly apply to capital owners and property owners, but also toemployees who earn more than the minimum necessary for their subsistence. Byencouraging the use of private savings to finance war expenditures, this systemwould prevent a deterioration of national capital. This would, on the contrary,happen if the government resorted to loans, because private individuals wouldthen be encouraged to save only the interests of these loans (1847: 738). The


advantage of a tax is to only momentarily disturb economic activity. Whenpeace returns, no other tax will be necessary, because a conflict financed by awar tax, unlike a loan, doesn’t put the nation into debt. The establishment ofan amortization fund would certainly have succeeded just as well in extinguish-ing the debt, but Ricardo disapproved of this solution; indeed, the amortizationfund is more often used to finance aggressive government policies than to extin-guish war debts and ensure national defence, its initial purposes.

In On the Principles of Political Economy and Taxation, Ricardo mentionsseveral times the example of an economy just after a war to illustrate his theo-retical argumentation. In this respect, he makes a new and interesting analysisof the economic consequences of war, particularly relating to the issues ofemployment or of the reorientation of capital flows from war activities towardspeace activities.

In Chapter XXI of The Principles, Ricardo is concerned with the way the netincome of the country is spent. Luxury goods expenditures create fewer newjobs than the maintenance of domestics, this last expenditure being thus relat-ively more favourable to the improvement of employee conditions. Indeed, anincrease in labour demand is accompanied by a salary rise. In support of hisremarks on the importance of the nature of employment to which net income isallocated, Ricardo uses the example of the allocation of a part of the incomeslevied by exceptional taxation to the needs generated by war, instead of theusual ‘comfort and pleasure’ activities, notably furniture, clothes, books, etc.War generates an increase in job applications in the armed forces; it thus natu-rally initiates an improvement in the living conditions of some workers, whicheventually leads to a population growth. After war, the sums which had beenexceptionally levied will again be allocated to luxury expenditures which createfewer jobs, causing unemployment and thus salary cuts, with a deterioration ofworking classes living conditions. Therefore, the positive effects of war onworkers’ living conditions will only be temporary (1821: 406–407). Moreover,this passage of Principles is only an example, and not a complete demonstrationof the economic consequences of war: other essential elements are not takeninto account, such as the increase in commodity prices in wartime, or humanlosses, which clearly underscores the contingent nature of this analysis of war.

In Chapter XIX of The Principles, Ricardo considers the problem of thenecessary reorientation of economic activities after a conflict. It is not a matterof reconversion of military industries, into civil industries, but of movements ofcapital from industry towards agriculture, once war has begun (1821: 283–285).

The more fixed capital has an important part compared to circulatingcapital, the more this reorientation is difficult and thus the more the economiccrisis ensued from war will be important. This is the case for industrializednations; their productive equipment is difficult to convert into other activities.

With regard to agriculture, the effect is the opposite. In wartime, because ofthe previously analysed mechanisms, the usually importing country attempts toincrease its agricultural production. But with the return of peace and of foreigncompetition on wheat, a crisis will occur.


There is thus a high risk of capital loss after war, which can discourage capitalreorientation towards agriculture in wartime, yet is necessary for national secur-ity. The solution advanced by Ricardo is to levy a tax on wheat imports for afew years after the end of war. The reorientation of capital towards industry willbe progressive and at a low cost for national producers. The increase in wheatprice would only be temporary and would be preferable to the one which wouldoccur in the absence of such a tax system; in this case producers would ask forcompensation and an exceptional insurance premium paid by the consumer.This import duty should only be used during post-war years and thus be excep-tional, free trade remaining the best policy in favour of national growth and‘common happiness’ (1821: 287–288). This measure should prevent the estab-lishment of permanent agricultural protectionism, recommended by Malthus. InRicardo’s opinion, permanent food self-sufficiency was not an essential strategicobjective. By demonstrating that a temporary protectionism would be sufficientto preserve national security, he in fact defended his argumentation in favour offree trade.

Power issues evaded by theoretical abstraction

With his partial analyses of war and post-war economic problems, Ricardomakes an original contribution to the economic theory of defence, although itis difficult to draw from his work his main views on this subject. He certainlyelaborated, more than his predecessors, a real theoretical system on the waymarket economy works and on the interdependence of national economic inter-ests. However, in spite of his belief in the superiority of free trade, he did notpresent a general view of the evolution of societies and of international rela-tions. This leaves several unanswered questions as to his thought on war andpeace.

When he expounds in The Principles the advantages that a country can gainfrom foreign trade, Ricardo underscores the convergence of various nations’interests:

Under a system of perfectly free commerce, each country naturally devotesits capital and labour to such employments as are most beneficial to each.This pursuit of individual advantage is admirably connected with the uni-versal good of the whole. By stimulating industry, by regarding ingenuity,and by using most efficaciously the peculiar powers bestowed by nature, itdistributes labour most effectively and most economically . . . while, byincreasing the general mass of productions, it diffuses general benefit, andbinds together by one common tie of interest and intercourse, the universalsociety of nations throughout the civilized world. It is this principle whichdetermines that wine shall be made in France and Portugal, that corn shallbe grown in America and Poland, and that hardware and other goods shallbe manufactured in England.

(1821: 153)


This passage established Ricardo’s reputation as a great defender of the free-trade ideology, especially of its pacifying and universal virtues. However, thisquotation is relatively isolated in this work and doesn’t even explicitly refer topeace, but rather to welfare. Compared to the assertions made by the classical‘optimists’ and the liberals on this subject, Ricardo’s analysis is very poor inapologies regarding the pacifying nature of free trade. His theory certainlydemonstrates the advantages of international specialization through trade;however, no explicit conclusion on the evolution of international political rela-tions can be drawn from his work. Other passages of The Principles show howthe high degree of abstraction of Ricardo’s system leaves unanswered questionsrelating to the future of war and peace, although his predecessors had con-sidered this issue as crucial.

In Chapter XXVI of The Principles, Ricardo considers that a country shouldn’taim at having a large number of employees. Additional workers often onlyincrease the gross national income, without improving the net income, i.e. thesum of the rents and profits, the salary being part of production cost. Yet, whatAdam Smith neglected is that only the net income must be considered. The factthat Ricardo evokes the national power issue to justify this assertion is revealing:

It is not on the grounds of any supposed advantage accruing from a largepopulation, or of the happiness that may be enjoyed by a greater number ofhuman beings, that Adam Smith supports the preference of that employ-ment of capital, which gives motion to the greatest quantity of industry, butexpressly on the ground of its increasing the power of the country for hesays, that ‘the riches, and, so far as power depends upon riches, the power ofevery country must always be in proportion to the value of its annualproduce, the fund from which all taxes must ultimately be paid.’ It musthowever be obvious that the power of paying taxes, is in proportion to thenet, and not in proportion to the gross, revenue.

(1821: 360–361)

In this quotation, economic power (characterized by the net product) seems tobe of more importance to Ricardo than the maintenance of a numerous popu-lation. The key to this argumentation lies in the idea that salaries will alwaystend towards a minimum level of subsistence. A nation must above all preservethe means of public action, necessary to maintain social order, within whichonly a minority of the population will see their welfare improved. In a note, J.B.Say strongly criticizes this passage of The Principles, on two points (quoted inRicardo 1821: 480–482):

1 one can’t assert that all employees never earn more than the minimumlevel of subsistence. A higher number of employees inevitably increasestotal savings.

2 if power issues are taken into account, an excess of population alwaysremains desirable, even if it originates no additional savings.


In his answer, Ricardo refuted the fact that he wasn’t concerned with the happi-ness of the great majority (1821: 361n). He acknowledged having limited histhought to power issues, but he denied having dismissed those of general pros-perity. This should close the debate, as both authors seem to be equally inter-ested in wealth and power. But Say’s remark reveals that they have two verydifferent points of view. Say considers production and consumption as the ulti-mate ends of humanity. Even if savings are desirable, they are not necessary if acountry only wishes to keep its rank in the hierarchy of nations. Thus, whymust population growth, which doesn’t add to savings, be considered as uselessfor the only reason that the nation will gain no additional advantage from it interms of power? Given Ricardo’s silence on this particular point of Say’s criti-cism, one is inclined to suppose that he was most of all concerned with increas-ing England’s relative power and that he also had a different conception ofmilitary technique. In his opinion, capital availability was a far more decisivefactor than the strength of the armed forces in the level of military power. Inthis way, he anticipated the imperatives of modern wars.

Ricardo’s theory has often been interpreted as a concealed plea for a free-trade policy which favoured England, who dominated industry and trade, morethan any other country. And indeed, as the reasons for war are not clearlystated, the alleged peace through free trade appears to be more dogmatic thantheoretical. Unlike his predecessors, Ricardo gives no description of an eventualadvent of world peace, nor does he mention a progressive transformation ofoffensive military systems into defensive ones. In his chapter on colonial trade,he recognizes that monopolized trade between a metropolitan country and itscolonies can, under certain conditions, highly benefit the metropolitan country,whereas it disadvantages the colonies’ economic interests. It seems, however,harsh to blame Ricardo for having been cynical when promoting free trade inthe name of the harmonization of national economic interests, in order to for-mally establish a doctrine favourable to England’s economic and politicalpower. One must keep in mind the high level of abstraction of Ricardo’s system.He never directly considers nations are linked by power relations, they are ‘areasof competitive forces’. Ricardo’s system, the highly technical and theoreticalpresentation of which has opened the way to neo-classical analyses, does notdeal with considerations of ‘politics’. In a surprising contrast, i.e. the enthusias-tic assertion of free-trade advantages coupled with a total indifference for theeconomic causes of war, Ricardo pays particular attention to the management ofwar and post-war economies. He also confirms his wish to discourage govern-ments from entering new conflicts, but without clearly explaining the reasonswhich incite them to do so.

Malthus asserted that, in the long run, wars would only disappear if eachindividual adopted an irreproachable moral behaviour and if food self-sufficiency was ensured; therefore, he had doubts as to the achievement of thisobjective. Ricardo also adopts a pessimistic view of the future of the marketeconomy. In the long run, the profit rate will tend to fall, leading economytowards a stationary state. However, his conclusions are different. Indeed, the


perspective of a stationary state can be delayed for a very long time owing tofree trade. Moreover, markets will thus be conquered through the optimal eco-nomic specialization to come from free trade. There will be no need for militaryconquests or aggressive policies, which are condemned. But once again, Ricardodoes not expound the reason for implementing such policies.

Ricardo never explicitly announces, throughout his work, the end of wars,nor does he ever clearly mention the eventuality of peaceful international rela-tions through free trade. His theory distinguishes the theoretical sphere, inwhich his system is elaborated, from the real sphere of economic policy. Thisseparation of economic analysis will be pursued by the neo-classicals, andnotably by Walras. In this way, Ricardo develops a system which is abstract andpragmatic at the same time, which dogmatizes liberalism but which in factleaves the majority of the population with little hope for a better life. Hissystem is very far from the enthusiastic peaceful utopia of the French liberal J.B.Say. On many points, Malthus’ and Ricardo’s pessimism regarding humanity’sfuture are similar, although both authors have different conceptions of inter-national trade advantages. Neither of them present international peace asimminent, nor even as an aim in itself.

From James Mill to John Stuart Mill: from classicism to therenewal of the liberal economic analysis of internationalrelations

Both of the classic ‘currents’, pessimist and optimist, were pursued throughoutthe nineteenth century. James Mill confirms the classical precepts expressed byhis predecessors, in a relatively optimistic presentation. John Stuart Mill doesn’tpay much attention to war issues, but he uses Ricardo’s pessimistic theory tosuggest an original thought on the State and human progress, in which inter-national conflicts are more or less explicitly mentioned.

James Mill: the defence of trade in spite of conflicts

James Mill’s work was directly inspired by Ricardo. But even before the publica-tion of On the Principles of Political Economy and Taxation, he devoted an entirework – entitled Commerce Defended. An Answer to the Arguments by which Mr.Spence, Mr. Cobbett and Others, Have Attempted to Prove That Commerce is Not aSource of National Wealth (1807) – to the defence of trade, accused of beingresponsible for numerous wars. He also refuted the idea that military expenditurefavoured economic development, by increasing consumption. James Mill’s ideason war, peace and defence are very ‘classical’. They cover three main subjects.

1 Wars always have disastrous economic consequences, whereas people arenaturally inclined to accumulation. A country at war allocates to its financ-ing a part of private savings, therefore decreasing the capacity of capitalreproduction after the conflict (1807: 151, 158).


2 Trade increases national prosperity, by favouring agricultural and industrialdevelopment, and is unfairly accused of being responsible for internationalconflicts. Commercial motives often provide governments with lameexcuses to justify their offensive policies (1807: 152–153). Mill condemnscolonial conquests, with similar arguments to those advanced by Smith,notably the idea that colonial trade is only of benefit to the exclusive inter-ests of monopoly.

3 Because of the progress of civilization, modern societies are unlikely to beinvaded. A ‘good’ government shouldn’t be aggressive and should developthe national defensive potential. Strategic considerations shouldn’t hinderthe economic policy. Like Ricardo, Mill refuses all kinds of protectionism,even in the name of defence (1807: 91–94).

Furthermore, and this is his most innovative contribution on these issues, JamesMill suggested the establishment of an international arbitration of conflicts. HisConsiderations on Representative Government contains a chapter on federativeStates, where he examines, among other things, the role of the US SupremeCourt. He considers it as the premise of a future international court implement-ing international law, which will become indispensable to continue worldcivilization.

Other English classical economists of the time also defended the liberal con-ception of conflicts and defence. In this respect, Mac Culloch, who popularizedRicardo, criticizes the ineffectiveness of protectionist trade measures imple-mented in the name of national defence and reaffirms the nation’s interest tolive in peace (Silberner 1957: 31–56). Tooke is another economist to haveworked on war issues. He presents two of the economic consequences of war:first, a tax increase, with an effect on prices in the case of an income tax (butnot with a consumption tax); second, an increase in demand, leading to a salaryrise (and thus to a population growth) and a rise in food and manufacturedgoods prices. As to the loan, it has no inflationary effect, since it does notenable the purchase of more goods than those drawn from the reduction of indi-vidual purchasing powers (‘crowding-out effect’). The effects of war on demandis not as stimulating as it is usually thought: the State monopolization of tradecertainly entails an increase in industrial production, but this is counterbal-anced by a rise in interest and insurance rates and in transport costs (Wolff1989: 63–66).

John Stuart Mill: the moralizing virtues of trade

John Stuart Mill mentioned the field of defence several times in Principles ofPolitical Economy (1873). Following Smith, he acknowledges the priority ofdefence over economy, in specific cases. He is against wars of aggression, whichare immoral, but he considers actions of national defence as justifiable. Hetherefore supports the Acts of navigation, which enabled England to make upfor its naval strength backwardness compared to Holland (1873b: 490). Like


Smith, he asserts that these laws are economically unfavourable but haveimportant political advantages. However, he considers them unnecessary for histime. Although he doesn’t go deeper into this matter, we can consider that hejustifies any kind of protectionism which favours national defence purposes,notably if the State is attacked by bellicose countries (1873: 492–493). On theother hand, Mill is opposed to agricultural protectionism, refusing to envisage atotal disruption of foreign supplies, even in the case of war. In this respect, hisargumentation is similar to Ricardo’s. The argument according to which thelosses resulting from war shouldn’t have significant economic consequences isone of the most original J.S. Mill advanced on war issues. Indeed, capitalrebuilding being very quick, nations can rapidly recover their previous indus-trial capacities.

Besides, Mill condemns wars on a moral plane, which is an original aspect.Like all classical authors, he praises the civilizing and pacifying virtues of trade.More than an economic advantage, the development of international trade ismorally desirable. It favours contacts between foreigners and also accustomsnations to be aware of the other nations’ wealth without envying it. Therefore,trade strengthens interests in favour of peace and against war. J.S. Mill pursueshere the classical tradition, by criticizing the mercantilist conception of con-flicting national interests:

and there is no nation which does not need to borrow from others, notmerely particular arts or practices, but essential points of character in whichits own type is inferior. Finally, commerce first taught nations to see withgood will the wealth and prosperity of one another. Before, the patriot,unless sufficiently advanced in culture to feel the world his country, wishedall countries weak, poor, and ill-governed, but his own: he now sees in theirwealth and progress a direct source of wealth and progress to his owncountry. It is commerce which is rapidly rendering war obsolete, bystrengthening and multiplying the personal interests which are in naturalopposition to it. And it may be said without exaggeration that the greatextent and rapid increase of international trade, in being the principalguarantee of the peace of the world, is the great permanent security for theuninterrupted progress of the ideas, the institutions, and the character ofthe human race.

(1873: 115)

Thus, Stuart Mill emphasizes the capacity of trade to develop the spiritualpotentialities of humanity, rather than its economic advantages. In otherworks, he insists on the State’s role in the establishment of institutions allowingthe moral improvement of each individual and the development of his orher talents, therefore contributing to human progress (1873: 305–308). Peopleshould prepare themselves for the advent of a stationary state, which Millconsiders to be inevitable. Moral progress, rather than economic progress, isthe true end of humanity. War is mentioned, together with the search for


enrichment, as an objective which has been used so far to focus the energy ofhumanity. In the stationary state, individuals can devote themselves to higherconcerns. J.S. Mill certainly makes no forecast as to a lasting internationalpeace in the future. But he presents wars and commercial conquests as a charac-teristic of a still-young humanity; in the future, societies should not remaininterested in economic progress; he therefore implicitly shows that inter-national relations should become peaceful in the long run.

Following Ricardo’s opinion regarding the limitation of economic develop-ment in the long run, J.S. Mill does not present national enrichment as the endof human action, contradicting in this way Adam Smith’s postulates. The ideaof peace among prosperous nations, owing to free trade, is abandoned in favourof a peace imposed by humanity’s maturity, in the context of a stationaryeconomy.

Conclusion

The works of Ricardo, Malthus and J.S. Mill show that these authors did notsubscribe unreservedly to the idea of a future state of universal peace, owing tofree trade. The idea of economic growth limited in the long term can explainthis. In fact, unlike Smith or Say, these authors give little importance to thequestion of the economic causes of war. International conflicts and defenceissues seem to be already considered as issues which go beyond the economicanalysis, prefiguring the neo-classical attitude.


Part 2

War or peace, resultant ofan economic systemNew economic analyses on defence-related issues since the mid-nineteenth century

During the nineteenth century, the thought on war and peace no longerdeveloped as the only alternative between free trade and protectionism. New,heterodox economic analyses on conflicts developed around the thinking onthe validity of the market economy. In this respect, the Utopian current, butespecially Marxist thought, made important contributions. The outbreak of theFirst World War, in a context of high economic interdependencies, underminedthe liberal current. The rise of totalitarian systems and the inter-war years crisisalso gave rise to new liberal studies on the viability of the capitalist system andon the causes of wars. Heterodox studies then developed, based on the analysisof institutions, history and even sociology. The part played by militarism in thecapitalist system is discussed. Statistical techniques are used to develop otherfield of research. But the studies on the problems specific to an economy of warhave led to a theoretical renewal, notably with Keynes.


4 War and the threat of war at theheart of the functioning of thecapitalism system

Before the development of Marx’s theory, the capitalist system had already beenquestioned by the Utopian economists. The Marxist movement, which wasnotably pursued by the theories of imperialism, and which continued after theSecond World War, shows that capitalism is fundamentally conflicting, becauseof its internal contradictions. It is therefore logical that this current consider-ably contributed to the economic analysis of war. The successive stages of theMarxist analysis of war and of military expenditures are presented here.

Socialism through war or peace: Utopians’ pacific reformsversus Marx’s revolutionary war

While attacked by the historical school, the analyses and conclusions of theclassical theory are questioned by Marx and Engels. They consider social rela-tions as fundamentally conflicting. The struggle thus lies in the heart ofeconomy. Their theory of civil war is, to a certain extent, applied to the analysisof conflicts between nations. Marx claims the scientific character of his work,which tries to contest the arguments of the classic political economy as to thesuperiority of capitalism. He thus distinguishes himself from the ‘Utopian’socialists who preceded him or were his contemporaries, such as Proudhon.Marx mainly criticizes the Utopian socialists on their wait-and-see policy, theirnaïve belief in a reform of social institutions ‘by the force of the example’.According to him, such an attitude is historically outdated, the socialists mustnow reach the stage of social revolution.

One of the main differences between ‘Utopian’ socialism and ‘scientific’socialism lies in the importance they give to violence in the passage to social-ism. Furthermore, they do not make the same analysis of militarism and con-flicts in a capitalist economy. Thus, two currents a priori both aiming at theestablishment of socialism, but by different means, challenge the liberal theoryin the nineteenth century. They have divergent conceptions of the transitiontowards socialism, and of its contents.


The Utopian economists of the nineteenth century: or peace owingto new social rules

The numerous economic theories developed throughout the nineteenth centurywere not generally very rigorous and bore a project leading humanity towardshappiness. They were often rival, and sometimes resulted in religions or lifeprinciples, far from all serious economic analysis. Marx called them the ‘Utopi-ans’ and distinguished them from scientific socialists, supposed dialectical andmaterialist. They were numerous, and often influential. Concerned with thegreat misery of most workers of their time, they generally fought against thecapitalist mode of production, and notably against the rules of property orcompetition. Often French citizens, they shared the feeling that France had ahistoric part to play in the reorganization of society, because of its revolutionaryor reforming capacity. Moreover, they considered themselves as the children ofthe Revolution, the ideals of which they defended. In this respect, Babeuf (alsoknown as Gracchus), a precursor, wished to remove the great corrupter, money,and develop an egalitarian society.

There has been two main Utopian movements, even if the borderlinebetween them is not always distinct: the Utopian socialists and the anarchists.These two movements differ mainly as to the role which must be given to theState in economic and political life. All these authors largely discuss war, peaceand defence issues, which are in fact often of great importance in their analysis.

The Utopian socialists

Among the numerous Utopian socialists who have had a direct influence on theideas of their time or an indirect influence on the economic analysis of war, it isespecially interesting to study the thoughts of Saint-Simon (notably because ofthe influence of the Saint-Simonian school on the French economy), CharlesFourier (and the associationism), Sismonde de Sismondi (one of the fathers ofthe social guarantee), Constantin Pecqueur (or the triumph of collectivism)and Michel Chevalier (or the socialism based on technology and free trade).

SAINT-SIMON, OR THE SUBSTITUTION OF A MILITARY SOCIETY FOR AN

INDUSTRIAL ONE

Saint-Simon (1868; 1869; 1875) wished to reconcile the religious tradition, therevolutionary experience and industry. He was highly influenced by Jean-Baptist Say’s political economy and especially by Say’s law. Like him, heasserted the undeniable opposition between welfare and bellicosity.

Saint-Simon analyses the economic crisis of his time as the inevitable resultof a precarious organization in which individualism and competition have per-nicious effects. Property is the most unfair privilege, it creates exploitation, pre-vents the most efficient use of production factors and leads to the anarchy ofproduction. The effects of war can only be negative, whether in terms of human


losses, or of disruption of production and trade. Saint-Simon denounces warsled for so-called commercial interests; industrial expansion only requires freetrade and security. He also refuses acts of violence, riots or revolts to reform thesociety. Only peaceful means can lead to solid social foundations.

Saint-Simon refutes all interpretations of history which refer to Providenceor chance. History is marked by periods of equilibrium, characterized byharmony among the political system, the social institutions, art and the eco-nomic system. The periods of crisis lead to a new equilibrium. The course ofhistory is determined by the law of continuous progress. Whereas in the MiddleAges, wars and conquests were essential to the system’s equilibrium, withcapitalism, industrial power replaced military power. This process was acceler-ated by the evolution of warfare technique, and thus of technical progress. Withthe discovery of gunpowder, the harquebusier became more efficient than thevaliant knight; from then on, the villains could defend their territory, and theformer nobility became a parasite. The sense of Saint-Simon’s famous parabolagave a decisive role ito manufacturers in society, at the expense of the ‘adminis-trative’ class (1869).

In Saint-Simon’s opinion, the industrial system bears a process transformingsocial relations. The industrialists must hold the highest rank in society; theyhave the advantage of numbers, of produced wealth, of intelligence and science,and they can manage without the other classes. The term ‘industrialists’ doesn’tonly refer to the industrial production based on mechanization, but also to allforms of material, agricultural, craft, industrial and commercial production.Therefore, when the industrialists will have become aware of their mission, theywill peacefully come into power, originating a change in property. Indeed, stateintervention in economy has always been disadvantageous for industry; there-fore, the society should be administered by the industrialists themselves (thisidea has also been developed by Auguste Comte). The industrial system will becharacterized by the end of the exploitation of one person by another, fullemployment and an Employment Law. Each individual will receive accordingto his or her capacities, with the establishment of a social hierarchy, governedby an elite. The most important industrialists will also voluntarily run thepublic administration. Therefore, the State will gradually disappear, societybeing no more governed, but administered. With a controlled economy, criseswill be avoided owing to the Chambers of inventions, examination and execu-tion, formed of qualified people. France will become a big factory, managed likeall firms. This organization will be very centralized, notably with the establish-ment of a powerful central bank (1875).

Saint-Simon appeals for the development of the social ideal of fraternity. Allprogresses of ‘industrial values’ lead to a decline in military values. Industrialblooming is the best way to guarantee world peace, because people becomeaware of the identity of their interests. The industrial society marks the end ofthe class war and of all conflicts (1869: 81–82). Saint-Simon thus proposes thatall European nations be governed by national parliaments, which would form aEuropean parliament. So as to avoid war within the confederation, numerous


internal works should be undertaken. However, before achieving this aim,many wars may still occur. He also expounds an intermediate project of aFrench–English alliance with a common Parliament, a common currency andfree trade, which would guarantee a peace favourable to economic development(1868). Considering the European race as superior to the others, he believed ithad to widen to other countries, for their own good. But all these proposals arefounded on only a few solid economic observations.

Pursuing the founder’s thought, Saint-Simonian economists insisted onthe universal harmony that would succeed wars and misery, the peacespontaneously appearing from the unified industrial society (Bazard 1877:190). Auguste Comte also developed the idea that people are constantly urgedto form larger associations, which favours the durable widening of peacefulzones.

CHARLES FOURIER: OR THE BRILLIANT DESPOT PROVIDING ETERNAL PEACE

According to Heilbroner (1992: 122–3), Charles Fourier was probably a littleinsane. His world, which had six moons and anti-whales harnessed to vessels,was at least fanciful or phantasmagorical. However, his influence on theUtopian socialists has been important. Politically, he expressed pacifist ideasduring the war of 1870 and he sided with the Commune of Paris.

In Fourier’s opinion, progress and development entailed misery, which is ‘themost scandalous disorder’. He put the blame on bankers and salesmen, ‘theseleeches, these vultures, these hornets which practise the noble profession of thelie’ (1846: 222). He also criticizes the industrialists who beset the State, covetplaces, require protectionist tariffs and seek concessions concerning canals,mines or railroads. He also attacks traders with similar arguments. Condemningthe high mechanization of the heavy industry, Fourier pleads for an economybased on the agricultural sector, a kind of pre-capitalist economy. However, hewould rather reform the industry than the State, because economy and socialprogress comes from civilian society. The civilized and barbaric State, basedonly on violence, is opposed to God’s will. Fourier states that world unity andpeace will succeed conflicts between enemy peoples. Industrial trophies shouldreplace slaughters. The army and the navy are two of the main ‘social parasites’:they distract the workforce, they lead to a tax increase, they deprave the youth,which thus loses its taste for work. He suggests the substitution of destructivearmies for productive ones, which would build monuments or undertake worksof irrigation, reforestation and draining. The resulting cost would be muchlower than the one generated by war, as human losses and destruction would beavoided. He appeals for the establishment of industrial armies:

In conformity with the thesis of the duality and counter-expansion of themovement, the Association must be capable of gathering productivearmies, like civilization gathers destructive ones.

(1846: 559)


The unitarian government will be the centre of great world industrial opera-tions, it will direct industrial armies in immense works of collective interest.Everyone will be employed in the activity the most suitable for him or her,which will entail harmony and the production of abundant resources. Fourier ishardly interested in collectivist ideas, all the less since equality is the enemy ofvariety. In his phalansterian ideal society, capital, money and property remain,but they are integrated into a system of spreading participation. He then devel-ops a project of unification of the human race, with the idea of world conquestby a brilliant enlightened ‘despot’. He indeed predicts that a state of perpetualpeace should follow the European war, mainly under the enlightened control ofFrance, which would then dictate its excellent laws to Europe, then throughoutthe world. Therefore, the military conquest and the politico-economic domina-tion of the despot should save the world: ‘It [the government] would run all thegeneral affairs of the globe, all the general operations; of which it would be thehigh industrial regulator’, quoted by Desanti (1970 [1834]: 216–217).

In this new context, the notion of conquest could be rehabilitated, forpeaceful purposes. All forms of power or tyranny are likely to disappear, so aretheir corollaries, the army and the police. In this ideal world, there will be nomore wars, nor internal disputes. However, the lack of historicity in Fourier’smodel leads us to suppose that domination relations will last at the inter-national level.

Although Charles Fourier’s analyses remain weak from the economic pointof view, his influence on the economists of the twentieth century has not beennegligible. Notably, he directly inspired Constantin Pecqueur and Victor Con-sidérant. Considérant, indeed, recommended the abandonment of aggressivegovernmental policies and to substitute destructive armies for industrial armies.Like Fourier, he considers that peace is impossible as long as workers and indus-trialists have not conquered both material prosperity and moral dignity. Onlyfree association in phalansteries, within the framework of a unified European (oreven world) economy (or even society), can lead to a generalized peace.

CONSTANTIN PECQUEUR: OR THE WORLD STATE FACTOR OF PEACE

Saint-Simon and Fourier both inspired Pecqueur (1842a, b). Often quoted byKarl Marx, he was reformist as well as pacifist and was one of the most influ-ential Utopian socialists, in spite of the weakness of his economic analyses.

In Pecqueur’s opinion, all wars disadvantage the prosperity of the people;they are always the result of a bad calculation, even for the conqueror. Warresults from the exploitation of people, due to the system of private property. Tofight against economic crises and poverty, he recommends the expropriation ofthe owners of the means of production in a peaceful way. Pecqueur favoursState collectivism but he is opposed to the communist doctrine, which leads tothe exploitation of the best people by the ‘selfish, unfair and pervert’ ones. LikeSaint-Simon and Fourier, he does not advocate absolute equality. He alsorejects associationist socialism, which could induce the maintaining or revival


of competition. He recommends a single cosmopolitan association; the Statewould be the only capital owner and the only employer, all citizens being civilservants. The programme of humanity’s ‘social and political economy’ would befraternity, liberty, equality, unity and solidarity.

Pecqueur recommends a reform of the army before its abolition. FollowingFourier, he proposes an active and laborious army (instead of an inactive andexpensive one), ensuring both national security and prosperity. The establish-ment of a single power through a union of nations would definitively eradicateall national rivalries. But this would only be feasible once all nations havereached the same level of development. Meanwhile, the economic unity ofEurope, the most unitarian human family, could be achieved; in the spirit of theGerman association of his time, Pecqueur considers that customs unions preparefor peace and that protectionism could be used in order to ensure economicdevelopment. He also recommends the creation of international courts, of aLeague of Nations (following Saint-Simon), for international conflict resolu-tion. As a cosmopolitan, Pecqueur wishes to develop economic interdependen-cies between peoples and abolish nations, which are bellicose elements ofinternational relations.

Other Utopian economists

Many other economists who are today considered as Utopian were not ‘social-ist’. Almost all of them have dealt with defence or war issues and have proposedpacific solutions to change the economic and social system. For example,Robert Owen bases his thought on the negation of free will and on the power ofreason. Humanity must be guided by an irresistible moral influence. Completelypacifist, he was opposed to the revolutionary method and to the use of class warto implement social reforms. He presents war as an absolute evil, the expressionof madness; what nations lose in war would be sufficient to ensure the prosperityof the human race (1970 [1842]). Science, morality, justice and happinesscannot coexist with war, violence and wealth destruction. Owen wishes to con-vince the military themselves of the economic and social destructive effects oftheir profession, which must be abolished. Other theories have been developed,notably by Etienne Cabet (1840). This one considers that humanity is good bynature. Wars are the sad result of bad social organization; they should disappearwith the advent of communism. However, it is necessary to convince the rich,without dispossessing them, because the immediate abolition of property wouldinduce violence, which must be avoided. Nevertheless, in the long term, theState should possess all means of production. Cabet recommends a fraternaldemocracy, named ‘Icarie’, which is an egalitarian society, without property ortrade, without master or slave, without exploiters or exploited. The offensivearmy should be replaced by a defensive militia. Cabet suggests the general disar-mament and the fraternity of all peoples, the abolition of customs, the freedomof trade and industry. He also recommends, in the same way as Louis Blanc butby different means, a confederation of peoples.


The opportunity of interventionism has also been discussed. After havingadmired the works of Adam Smith, Sismonde de Sismondi criticized, from1819, the invisible hand principle, by revealing the existence of overproductioncrises and the necessity of social justice. Economy’s aim should be the happinessof all, and not only a wealth increase. Rejecting the law of outlets, he considersthat non-interventionism induces the exploitation of the poorest. Whileremaining favourable to private property, he recommends several reforms,notably a system of basic welfare benefits, thus prefiguring modern systems. Sis-mondi scarcely developed his analysis of war; indeed, he does not connect warwith economic crises. Like most economists, he considers the army as useful todefend the country and denounces the governmental foreign policies, which aremore aggressive than defensive. Following the liberals, he is opposed to thesystem of permanent armies and of war financing by loans (1819). Agreeingwith Sismondi, Louis Blanc believes that State intervention in the economy isnecessary; it is notably an instrument of information and forecast, useful toreduce economic crises. Regarding war, he underscores its utility to strengthenthe governments’ power, within the national territory as well as abroad (1839).He denounces the negative (human and economic) effects of armed conflicts,for the conqueror as well as for the vanquished. Moreover, the permanentthreat of war makes it difficult, even impossible, to implement the economicadvantages of peace. The system of armed peace is as dangerous and as counter-productive as war itself. Finally, Louis Blanc proposes the creation of a highConfederative Court which is intended to settle conflicts between memberstates.

Finally, following Saint-Simon, Michel Chevalier (1832) considers thathumanity’s objective has always been the replacement of the military order bythe industrial one, and of conquest by the association. Unlike Malthus, heasserts that productivity can compensate for the population increase, and more.He also rejects Marx’s concept of class war and calls for the agreement of allproducers. Moreover, he wished to promote the Mediterranean System (Systèmede la Méditerranée), i.e. the association of all peoples living around this sea, andthe connection of East to West by a railway. This should inspire the later estab-lishment of a universal association, with an international system of industrialworks. It would be a technical, economic and political revolution. Govern-ments, henceforth pacifist, would abandon military expenditure and finance thebuilding of canals and infrastructures. This Mediterranean Confederacy wouldensure industrial expansion and the advent of peace, ‘like magic’, people finallyunderstanding the peaceful character of common activities. He also states thatthe universal association will only be established once all inequalities of class,race and sex are removed. An alliance of bankers should give them great polit-ical power, which is desirable, because they are cosmopolitan by their function.By favouring the growth of production, and by establishing a peaceful power,they are the surest ferments of the European union (inspired by Enfantin),which will lead to the cessation of war.

All these analyses are not very rigorous with regard to economic theory.


They often represent acts of faith concerning technical progress and thecapacity of men to agree and to organize themselves, within the framework ofan international system of conflict settlement, mainly centred on a dominant,pacifying and even colonizing (or civilizing) Europe.

The anarchistic movement: for peace without the State

According to William Godwin, the father of anarchism, war has its source inliberalism and property rights. In the ideal society, it would disappear. Very crit-ical of Malthus’ law of population, he formulates the principles of a societywithout government where everyone would take advantage of the commonwork in proportion to their needs. The anarchistic movement has later beendeveloped under the influence of the works and actions of Proudhon andBakounine.

PIERRE JOSEPH PROUDHON: FROM A WAR FACTOR OF PROGRESS TO A

PEACEFUL CONSEQUENCE OF INDUSTRIAL DEVELOPMENT

In Proudhon’s opinion, studying the laws of social economy comes down tomaking the theory of the laws of reason and creating philosophy. Havingaccepted labour as the only source of value, but refuting historical materialism,he was violently criticized by Karl Marx, who replied to his Philosophy of Miserywith a book entitled The Poverty of Philosophy (1896). Proudhon asserted thatMarx’s aggressiveness against him was due to the fact that he had thought likehim, but before and even better than him. He refused to rely on violent revolu-tionary actions to improve society and he believed in the efficiency of a peace-ful reforming action.

Proudhon, who states it is impossible to separate economics from politics,intends to demonstrate how a civilization which starts with war tends towardsuniversal pacification. He has not been very well understood, all the more as heremained quite ambiguous on this matter. After he underlined society’s mainevils, he expounded the causes of war and peace, and then presented the maincharacteristics of a future peaceful society. Proudhon considers that, in thenascent triumphant capitalism, some economic rules are opposed to justice,notably private property and the excessive role of the State. The whole socialquestion amounts to the problem of property. This provokes a devastatingcompetition and leads to economic crises, disparities, unemployment, oppres-sion and tyranny, because it cannot be imposed without force. One person’sexploitation by another is, above all, defined by the famous slogan ‘Property isrobbery’, which will later represent the anarchistic refusal of the State (1861:347). But at a first level, property is politically justified; it is the best protectionof human freedom and the only force capable of opposing the State. Yet, Stateintervention aiming at reducing pauperism in fact aggravates it, notably becauseit can induce capital outflows. Collective property would result in the State’sinterference in all economic fields. The nationalization of the means of produc-


tion would favour the rise of civil servants and of monopolies opposed to theworkers’ interests, within which would prevail carelessness, waste andfavouritism. The centralized State is an instrument of exploitation and subjec-tion, it destroys liberties, generates an unbearable financial burden, and it iseven incapable of ensuring national education. He recommends the abolition ofthe State and of nationalities (1858: 289). The necessity of a government,which only existed so as to make the capitalist oppression accepted, would dis-appear with it.

In a rather original way, Proudhon’s work is marked by a negative image ofpeace, synonymous with nothingness and inactivity. Peace without war is unin-telligible, it is war at rest (1861: 23). War is a divine fact, based on pauperismand it should disappear with it, although the warlike spirit will always be neces-sary for social development. From his point of view, war is a phenomenon ofgrowth. Humanity’s life is a permanent war, against need, against nature,against others, against him or herself; People are warlike animals. War is amajor fact which dominates history, it has, like religion, its superior principle,its end, its internal order. It is neither just nor inequitable, it is a product ofconsciousness. It enables the society to reach civilization, notably because itleads to the development of national law. If political issues are the visible causesof war, economic needs are its fundamental secret causes.

The first, universal and always constant cause of war [. . .] is the same as theone which urges nations to scatter, to form establishments far away, to seeklands and outlets for their population excess. It is the lack of subsistence; ina higher style, it is the break in the economic equilibrium. . . . In the lastanalysis, pauperism: the original cause of all wars is there [. . .]. Yet, [. . .]nowhere could the power to produce equal the power to consume [. . .]. Inbrief everyone is affected by pauperism.

(1861: 326–327)

Pauperism explains international conflicts, civil wars and revolutions. War isbased on the economic anarchy of free trade. Proudhon considers that, with itscolonial ambitions, Europe is entering a cycle of violence and of disregard forprinciples; it is the decline of the Christian nations.

Unlike Saint-Simonian or liberal ideas, he recommends the preservation ofprofessional armies, the specialization of certain citizens being necessary in thecontext of rapid war technical improvement (accelerated by the appearance offirearms and their industrialized production) (1861: 482). He is thereforeagainst all ideas of a ‘productive army’.

Proudhon states that war must be transformed, must change from the heroicphase (with armed conflicts) to the economic one: ‘Reinstating war in itsancient prestige and paying homage to the warlike spirit condemned by theindustrial spirit does not come down to admitting the perpetuation of war in itsformer forms’ (1861: 369).

Weapons have a destabilizing effect in modern societies, they compromise


order. However, it is necessary to maintain the warlike spirit, and use it in thestruggle for social progress. He presents the military institution as the firstschoolteacher of world history, and pacifism cannot replace it.

At the economic level, Proudhon criticizes international agreements ontrade liberalization, notably the trade treaty with England, the competition ofwhich will weaken the French industry and increase the risk of exporting toFrance the misery of the English working class (a kind of beggar-my-neighbourpolicy) (1861: 423).

Proudhon described his conception of the ideal society as a pacifist one,which presupposes ‘mutualism’ (a mutualistic system), federalism and theextinction of pauperism. State education, employment and temperance arenecessary to fight against pauperism. Justice, freedom and independence are thethree main social objectives in the mutual association. Ownership replacesproperty, the mutual system rules the distribution of trade in kind and freecredit is established. Unlike Fourier and Saint-Simon, Proudhon wishes for anegalitarian society. This leads him to suggest the creation of workers’ companiesin charge of wealth production, which, like soldiers, will use their machines toovercome pauperism.

The judgements of warlike competition would be substituted for the judge-ments on the battlefields. Peace is then based on economic law. Proudhonwishes to develop a positive, dynamic peace, with the replacement ofheroism by industry: it is what he calls ‘the synthesis’. He considers that allpeoples and governments want peace: ‘Only humanity is great, is infallible. Yet,I believe I can speak in its name: humanity doesn’t want anymore wars’ (1861:510).

The disappearance of armed conflicts presupposes the destruction of theircommon cause, namely monarchies and dictatorships but also, more generally,nationalities, which are opposed to world economic unification. In the idealsociety, national groups should be considered as links of much larger groupings,confederacies of small States, which would ensure the international equilibriumpostulated by the law of nations.

As early as 1852, Proudhon develops a project of a European Union, whichwould remove the risk of interstate power rivalries. As with many other Frenchsocialists, he imagines that this confederacy will be established by and forFrance. The decisions of this country, which no other dares to attack, willdetermine the political future of Europe, and notably European peace, or evenworld peace. The project of the federated states of Europe is not based on theidea of a great State but of a sovereign and independent Confederacy of States,capable of bringing together separate countries. Federalism preserves the advan-tages of competition, but limits its dangers, guarantees order in freedom and thesovereign power of the people. This mutualistic federalism should bring justiceand social peace.

In the anarchistic society imagined by Proudhon, economic principlesprevail over militaristic ones. The idea of conquest is incompatible with thefederalist principle: each ‘linguistic and racial’ group remains the master of its


territory and governs itself on a mutualistic base. These communities mutuallyprotect themselves against foreign enemies or dangers of domestic tyranny, andthey consult each other in the interest of their respective economic activities.The administration works on a contractual base, with a strong autonomygranted to municipalities. The society can defend itself in case of attack but hasno right to judge or punish. Only consciousness can judge consciousness. Refus-ing this rule comes down to admit war, authoritarian systems and force abuses.Anarchy abolishes all exploitation and desire for wars:

The capitalist and owner exploitation stopped everywhere, employmentabolished, equal and true trade guaranteed, value constituted, cheapnessensured, the principle of protection changed, the world market opened toproducers of all countries; consequently, the barriers brought down, theancient law of nations replaced by trade agreements; the police, the justice,the administration, placed everywhere in the hands of the industrialists; theeconomic organization replacing the governmental and military system ofgovernment in colonial possessions as well as in metropolitan countries;finally the free and universal competition of races under the single law ofcontract: here is the Revolution.

(1951: 48)

The passage to this type of system must be achieved without any violent revo-lution, in which Proudhon does not believe. He wishes to develop an anti-society within the capitalist society, based on the principles of association andmutuality.

MICHEL BAKOUNINE: OR PEACE BY FREEDOM

Michel Bakounine is one of the main theorists of anarchism. His numerousworks are political, lampoonist, critical against State communists. Nevertheless,he isn’t very well known, for his economic analyses, which have never beenexpounded in one great work. However he adheres, at least partially, to Proud-hon’s initial socialism (1867: 78). Even if he acknowledged ‘Mr. Charles Marx’smerits’, he was firmly opposed to the idea of an authoritarian organization,giving him influence within the international. His programme was socialist,anti-authoritarian and anti-religious (1980 [1895]: 101). He disapproved of theworking-class exploitation, the State and war, although the latter could servethe anarchistic revolution.

For Bakounine, there are two social classes which have opposite interests:the ‘political classes’, composed of all the privileged persons, with regard to‘land, capital or even only the bourgeois education’, and the ‘underprivilegedworking class’ with regard to capital or land, and ‘deprived of all education andinstruction’. Slavery is when one is forced to work for someone else, just likebeing a master means living on the work of others. The bourgeoisie only appliesthe anarchistic law of laissez-faire to itself, provided that the ignorant masses


remain subject to the austere discipline of the State. The economic cost of theState, necessary for the bourgeoisie’s protection, is very high, notably because ofmilitary expenditures, war being inherent to state control.

It [the bourgeoisie] had not calculated that the military system was costly,that already by its sole internal organization, it paralyses, worries, ruinsnations, and that, furthermore, governed by its own logic which has nevercontradicted itself, it has war as an infallible consequence; dynastic wars,wars of points of honour, wars of conquest or of natural boundaries, wars ofequilibrium [. . .] and everything to satisfy the ambition of the princes andtheir favourites, to enrich them, to occupy, to discipline the populationsand to fill history.

(1895: 208)

He foresees France’s defeat in the war against Prussia and considers that it couldbe a chance of ‘a mass uprising of the French people’, i.e. an anarchistic revolu-tion. Indeed, France will be under the Prussian administrative yoke, which willlead to tax increases, thus aggravating pauperism (1870: 69).

Bakounine was a founding member of the central committee of the newLeague for Peace and Freedom, in September 1867. This movement can beclearly distinguished from ultra-pacifist tendencies expressed elsewhere, becauseit considers that peace is acceptable only ‘under the supreme condition offreedom’. Freedom, which can only mean the abolition of historical rights, theprohibition of perpetual contracts and the recognition of the right to secede,should be developed in a democracy, within the framework of a union ofnations. The League has to fight against the States’ desire for glory, greatnessand power. With the creation of the United States of Europe, civil warsbetween different peoples should become impossible. According to Bakounine,centralized, bureaucratic and military States cannot take part in this type ofinternational confederacy (1867: 46–47).

Marx and Engels: the class war, an expression of a civil war properto the capitalist system

Marx and Engels showed a great interest in conflict issues, whether civil ormilitary, national or international. The tense political context of their timecan explain their numerous allusions to matters of war and peace, and to Euro-pean military or political events. In this respect, in 1848/1849, numerousrevolts occurred in Europe; the French–Prussian war broke out in 1870; in1871, the social unrest in France led to the ‘Commune’ of Paris, whichwas repressed in blood. However, and this is not the slightest paradox, in spiteof the importance of State conflicts in their analysis of daily events, to whichthey often refer in their correspondence, Marx and Engels did not in the endsucceed in developing an economic theory of war or of the military sector’s rolein the economy. Nevertheless, they aspired to explain all phenomena owing to


this method of historical materialism. In the same way, military production doesnot appear in the Marxist schema of reproduction, no allusion is made, forexample, to its influence on the profit rate. Besides, the later developments ofthe Marxist theory, particularly by the theorists of imperialism, will give a deci-sive role to conflicts between economic powers in the normal evolution ofcapitalism. We must thus distinguish the thought of Marx and Engels fromthose on which the Marxist ideology is based. To briefly summarize their analy-sis of war, peace and defence issues, we can mention the following broad out-lines:

1 war, conflicts or security weren’t favoured theoretical subjects, in spite ofboth economists’ interest in the socio-politico-military splits of their time.

2 conflict lies at the heart of capitalism, notably in the class war, of whichwar might only be a derived element.

3 war – as well as national or internal security issues – is destined to disap-pear; it is a future vestige of the archaic history of the modes of productionwhich preceded socialism, and of course communism.

War: a (reluctantly) neglected theoretical analysis

Marx remained concerned with the lack of analysis of war issues in his theo-retical works. We know today that he intended to write a volume of Capitaldevoted to the State, but that it was never written (1857: 263–265). Severalelements indicate that Marx wished to widen the field of application of hishistorical materialist method to realities other than those studied in Capital. Inthis respect, he left notes for a work, which was never written, and which wouldhave dealt, among other issues, with the relations between the military industryand the civil one. It would also have gone deeper into the study of internationalrelations which are, however, described as ‘derived production relations’, as ‘sec-ondary and tertiary facts’ (but without explaining whether this concerned onlyeconomic exchanges or conflicting interstate relations in general, whatevertheir nature). In a famous letter to Friedrich Engels, Marx expresses his wish tointegrate into Capital an analysis of the relations between military technologiesand economic development:

The army’s history illustrates better than anything else the soundness of ourconception of the relation between productive forces and social conditions.The army, in general, is of great importance in economic development.The salary, for example, was first of all fully developed in the army, amongthe Ancient [. . .]. In the same way, the division of labour within a activitywas first of all established in the armies. These ones summarize in a strikingway all the history of the forms of bourgeois society.

(1857: 1600)

Later, Marx comes back to this point:


In which domain does our theory on the determining of the organization oflabour by means of production prove to be more brilliant than in the indus-try of men slaughtering? It would really be worth it for you to write(because I lack the necessary knowledge) something on this matter. I couldadd it, with your signature, as appendix to my book.

(Quoted in Silberner 1957: 200)

This letter shows that Marx leaves the matters which fall within the militarysector to Engels. Davis found no less than eighty articles on this issue, signed byEngels, published in the Neue Rheinische Zeitung, in the year 1848 alone.Besides, the Anti-Dühring (1878) is partially devoted to the ‘theory of violence’,or, in other words, to the study of some of the consequences of the relationsbetween military and civil sectors.

Marx, for his part, wrote several articles more or less concerning the eco-nomic study of war, peace and defence. At first, numerous reflections on thesesubjects are integrated to the Manifesto of the Communist Party (1848a), pub-lished in association with Engels. On the other hand, Capital contains hardlyany analysis directly linked to military issues or to the explanation of inter-national conflicts. But the discourse On Free Trade (1848b) deals with thesematters. Important indications on his conception of war and conflicts appear inhis correspondence, notably with Engels, as well as in his numerous articles,notably in the Rheinische Zeitung.

Conflict of the heart of capitalism

The notion of conflict is central to the Marxist analysis of capitalism, togetherwith the concept of historical materialism or of class war. Even if Marx andEngels did not study it clearly, they nevertheless greatly inspired the concept ofeconomic war, but only from the class war point of view.

We know that Marx was highly influenced by Hegel’s philosophy. Hegeldeveloped a theory of violence considering it as a necessary stage in the processof social change. In the very long term, this evolution should lead to social struc-tures enabling each individual to freely prosper. However, these social changeswill only succeed if people struggle, first against themselves, then against currentinstitutions. Revolutions and wars are often necessary stages in this process.Marx used Hegel’s method of dialectics, represented by the ‘Master–Slave dialec-tic’. From this point of view, people, social groups or nations, but also ideas, havefundamentally conflicting relations, which lead to changes in the structure gov-erning these relations, once internal tensions become insurmountable. This evo-lution is a dialectical process, which is self-maintained, the evolution in theintellectual sphere being at the basis of all these changes. World history is indeeda history of the development of the idea of freedom, each stage being dominatedby a ‘spirit of time’, with contradictions inherent to this conceptual structure.The State is a central element in this evolutionary process, as individual freedomcan only exist within the submission to State laws. Therefore, social evolution


also entails interstate wars. Thus, war plays a central part in the dialecticalprocess leading societies towards perfection. Enthusiastic about ‘great statesmen’,leading battles for what he considered as being ‘the idea of freedom’, Hegeladmired aggressive democratic systems of government.

When he began his work, Marx announced his wish ‘to set Hegel’s philo-sophy back on its feet’. According to his own argumentation, ‘it is not Man’sconsciousness which determines his existence, but on the contrary his socialexistence which determines his consciousness’ (1859: 273). Thus, changes inthe spirit of time, in the evolution of ‘ideas’, are in fact only the expression ofthe transformations of production relations through time. He had a materialistconception of history, a ‘dialectical materialism’; the consciousness of class isnot the nation’s one. In other words, if List considers that national conscious-ness expresses the sense of belonging to the nation, according to Marx the con-sciousness of class membership prevails.

However, neither Marx nor Engels ever clearly applied the historical materi-alism method to the analysis of war. Pribram mentions that, in a series of letterswritten between 1890 and 1894, Engels relativizes the importance that must begiven to economic determinism in the Marxist theory. In 1890–1894, Engelsadmitted that one shouldn’t give a too-narrow sense to the concepts of eco-nomic functions and relations. He wished to include among the elements ofthese concepts geographical and racial factors, science, traces of the previousstages and even ‘public power’. Furthermore, he questioned the existence ofmutual relations between economic conditions on one hand and, on the otherone, the political, legal, religious and philosophic events’ (quoted in Pribram1983: 251). This does not challenge the Marxist analysis itself, rather, it under-lines the fact that Engels questioned the decisive and exclusive explanation inlast resort of the materialist interpretation of history. This could explain whyMarx did not apply the historical materialism method to war and internationalrelations, in spite of his expressed intentions.

In Marx’s work, political phenomena lie in the superstructure of capitalism(1859: 273). They are thus directly determined by production relations, whichdepend on the level of development of the productive forces which form thesociety’s economic infrastructure. Economic conflicts occur at this last level,owing to production relations. The class war is therefore the basis of all socialevolutions. In the Manifesto of the Communist Party (1848a) Marx writes: ‘Thehistory of all hitherto existing society, is the history of class struggles’ (1848a:162). This struggle is described as a war between oppressors and oppressed. Inthe Marxist presentation, history is characterized by the succession of modes ofproduction (proslavery, Asian, Antique, feudal, capitalist), each creating theconditions of its own disappearance: the domination of a class gradually leads tothe appearance of an opposite and oppressed class, always more determined toput an end to its exploitation and to express its own values. However, only afew indications are given as to the nature of the events which provide theimpulse for the transition of a mode of production to another, even if revolu-tions or wars are the most evident ones.


An unexpressed conception of ‘economic war’

At the national level, the class war can generate revolts, strikes or civil wars.For their part, the ruling classes try to hinder the downfall of the capitalistmode of production by resorting to foreign markets, which explains why theyencouraged free trade. Thus, Marx and Engels consider that, with the exceptionof the founding thoughts of Quesnay and Smith, the theoretical defence of freetrade has been organized to serve the bourgeoisie’s interests and has thereforeno scientific value. Political economy is only a ‘common economy’, the qualityof which Marx considers as having been mediocre since the 1830s; he evenevokes Bastiat as the most representative liberal economists, they who deny theexistence of economic contradictions and make an apology for the establishedorder, without analysing the objective reality (1870: 685). Peace is consideredas inherent to capitalism, because one of the basic hypotheses of this theory isthe pacifying character of capitalism.

For Marx and Engels, the free-market economy (and thus free trade), afterhaving been a factor of progress, has now become a hindrance to economicgrowth, because it entails a radical opposition between particular interests andthe general interest. Free trade cannot be considered as a solution to pauperism,which is dissociated from trade, liberal or protectionist policies led by the State.In fact, competition is the struggle of individuals against individuals, of classesagainst classes and free trade only transposes this struggle to the level of inter-national relations (1848b). A protectionist article, attributed to Marx, considersthat protectionist duties correspond to ‘the organization of a state of war inpeacetime, a state of war directed against foreign countries, but whichinevitably turns, in its execution, against the country itself ’ (quoted in Sil-berner 1957: 205). Marx also considers that the replacement of wars or warthreats by economic competition is not the solution to international conflicts,even if their form might change (i.e. from military conflicts to economic ones);but he remarks that the liberals’ opposition to military expenditures is rarelyexpressed in order to influence political decisions (1852: 586).

The concept of economic war is thus clearly evoked, even if not conceptual-ized. Marx underlines one of the main consequences of the economic weapon,namely its cost for the countries involved. Furthermore, free trade not onlyenables capitalist economies to find a provisional way of avoiding the fall of theprofit rate; it also allows capital (the bourgeoisie) to dominate labour (the prole-tarians) (1848b: 141–156). The entire free-trade analysis comes down to anadaptation of the class war idea to interstate relations, international economicrelations being characterized by tensions and confrontations. If Marx andEngels have not been deeper into the study of military conflicts, it is becausethey did not consider them as essential for the understanding of their time,unlike economic war. Marx and Engels, with their long-term analyses of pro-duction modes, did not connect vertical conflicts (between classes) to horizon-tal ones (between States), which marked the end of the nineteenth century.These ideas were later pursued by Gunder Frank and Arrighi Emmanuel.


War: the result of derived production relations

For Marx and Engels, war in a capitalist system is, above all, based on the classwar. It is, however, capable of changing the path and length of the ineluctablelaw of the system’s evolution. War can result from the competition between theruling classes of capitalist States regarding trade or colonial objectives. It canthen be interpreted as the expression on the international scene of the internaleconomic contradictions of each capitalist society. It is a political phenomenondetermined by the economic sphere (1848a: 171). Marx thus describes war asbeing the perpetual state of the bourgeoisie, which historically had to fight toimpose its power on other classes and which is always in conflict with the bour-geoisies of all countries. And yet, while asking for the proletariat’s support to itsfight, the bourgeoisie gives it ‘the elements of its own culture’ and ‘puts in itshands weapons against itself’. Even if Marx does not express this idea explicitly,his conception links international war with the class war, in the long run.Indeed, he often insists on the necessity for capitalism to conquer foreignoutlets, in order to thwart the law of the falling tendency in the profit rate. ButMarx and Engels also consider that war could lead proletarians to be mistakenabout the identity of their real enemies.

Marx and Engels present violence as an essential factor of progress. Civilwars which promote the proletarian’s interests are considered as positive, like allinterstate wars which lead to the same result. Engels thus approved the conquestof California by the United States, stating that the civilization of this colonywould be useful for the cause of revolution, which can only develop in countrieswhere capitalism is sufficiently advanced to be crushed by its internal contradic-tions (1849: 1063). War is not a matter of morality, but of revolutionary effi-ciency; it is analysed in the light of its politico-economic consequences. Byaccelerating history (and thus the advent of communism), wars or revolutionsserve the cause of the working class. Marx and Engels analyse the advent ofnations, or the realization of national unity, as historically necessary stages inthe progress towards the proletarian revolution, by allowing the economicdevelopment of capitalism and of the bourgeoisie in the second half of theeighteenth century. When the social revolution is achieved in industrializednations, the concept of nation will disappear, as well as interstate conflicts, tothe benefit of an international peace. Kautsky (1909: 173) revealed a contra-diction in Marx’s assertions on the nation, between the Manifesto of theCommunist Party and Capital. While, in 1871, Marx disapproved of theFrench–German war and the annexationist ambitions of Germany, he sup-ported, in 1849, the war of conquest led by the United States against Mexico.At the same time, Marx was opposed to the claims for independence ofSlavic Austrians. Nevertheless, in Kautsky’s opinion, he must not be consideredas a proponent of aggressive annexationist wars, nor as an enemy of self-determination. He explains that Marx and Engels proclaimed above all ‘thesuperiority of the European revolution over individual nations. They wereopposed to the nations’ aspiration for self-determination when it contradicted


the international revolution’s interests and threatened them’ (1874b: 173). Infact, both economists seem to consider the achievement of national unity as anecessary preliminary to the development of the working-class movement.However, the nation should not be considered as a revolutionary concept.Everything which refers to it is, on the contrary, counter-revolutionary. Theworkers must not adhere to the idea of nation: the workers’ cause, and not thenational cause, is the only defensible one. Thus, Marx writes:

communists are criticized for wanting to abolish homeland, nationality.The workers have no country. We cannot take from them what they havenot got. Since the proletariat must first of all acquire political supremacy,must rise to be the leading class of the nation, must constitute itself thenation, it is, so far, itself national, though not in the bourgeois sense of theword.

(1848a: 179)

The success of social revolutions will notably depend on the trade policiesled by States. Marx considers protectionism as an instrument of coercion,even of economic war (he even uses this term). Besides, in Germany, theprotectionist policy is the bourgeoisie’s weapon against feudalism; it removesfrom social structures their archaic forms (1848b: 156). However, the Germancase is specific; generally, the workers’ interests lie in the support of the bour-geoisie for the liberal philosophy, because free trade is more progressive thanprotectionism, and thus more likely to accelerate the internal downfall ofcapitalism

In the first analysis, Marx, like the liberal school, envisages free trade as afactor for peace. However, the reasons and the methods of this assertiondiverge. In Marx’s opinion, free trade increases the violence of the class war;rather than prosperity, it accelerates capitalism’s downfall. Free tradeaccompanies the transposition of nations’ internal economic contradictionsto the international market, which also becomes conflicting. In doing so,economic confrontations tend to replace military conflicts. In this way,capitalism is more peaceful than feudalism. But it is only once communismis achieved that antagonisms between peoples will really and definitivelydisappear.

National differences and antagonism between peoples are daily more andmore vanishing, owing to the development of the bourgeoisie, to freedomof commerce, to the world market, to uniformity in the mode of productionand in the conditions of life corresponding thereto.

The supremacy of the proletariat will cause them to vanish still faster.United action of the leading civilized countries at least is one of the firstconditions for the emancipation of the proletariat.

In proportion, as the exploitation of one individual by another will beended, the exploitation of one nation by another will also be ended. In pro-


portion as the antagonism between classes within the nation vanishes, thehostility of one nation to another will come to an end.

(1848a: 180)

The end of war is thus connected with the end of class war. Marx’s assertions onthe pacifism of capitalism do not lessen his hostility to economic liberalism as apermanent system, which only transforms military conflicts into economic ones.Engels insists on the immoral character of trade, which is a robbery, and on itsinterested pacifism, insofar as it favours the conquest of international marketsby certain capitalists (quoted by Silberner 1957: 208). Thus, the cosmopoli-tanist arguments only hide the bourgeoisie’s selfish interests. The liberal idea ofharmony among national interests through free trade neglects the existence ofdisparities, exploitations, domination and their adaptation to the internationaldivision of labour. Marx also considers that the German labour party mustn’tapprove of the thesis of the peoples’ international brotherhood, which derivesfrom bourgeois ideology. From his general point of view, the school of Manches-ter wishes peace in order to lead the industrial war (1853: 705): the concept ofeconomic war is thus expressed. On this subject, Marx is in opposition withSaint-Simon and the Utopian socialists who believed in the pacifying role ofindustrial development (conflicts ensuing from poverty), even of manufacturersthemselves. In Marx’s opinion, before being a matter of poverty, war is first ofall a matter of exploitation and alienation.

In Marx and Engels’ analysis, free trade is thus judged differently, dependingon the period analysed:

1 in a first stage, free trade is considered as favourable to revolution, as it islikely to accelerate capitalism’s maturation, and thus the moment of itsdownfall, under the weight of its internal contradictions;

2 in a second stage, international economic competition itself becomes retro-grade and is used by the bourgeois class to perpetuate its economic domina-tion.

Economic competition is a war phenomenon; only its disappearance can lead tointernational peace.

War: a phenomenon destined to disappear

War has contradictory effects on the situation of the working class according tothe period considered. Engels notably expressed specific comments on thenegative consequences of international conflicts or an arms race on the prole-tarian cause. Only the communist society could lead humanity towards peace.

Engels was wrong when he predicted that the art of warfare had reached itspeak during the war of 1870/1871 (1878: 198). But he was strangely premoni-tory when he predicted, as soon as 1888, the occurrence of a total world warwhich would last three or four years and generate a violence inconceivable until


then, capable of accelerating the revolutionary process (1895: 1131). Threemain conclusions on conflicts may be drawn from his different articles ondefence and war issues.

1 The militarism which dominates Europe is becoming a real economicburden and accelerates the States’ financial collapse and thus capitalism’sdownfall. In Anti-Dühring (1878: 196–201), he demonstrates that militaryart and technique, as well as the size of armies and navies and the level ofcommunications, are determined by economic conditions. Military organi-zation, tactics and strategy also evolve as productive forces develop.

2 In the long term, a world war will open the way to the victory of commun-ism, by creating the conditions of the proletarian revolution. Moreover, itis only once the revolution will have spread worldwide, through armedconfrontation, that the peoples will be united in a universal fraternity.

The bitter experience has taught us that the ‘European fraternity ofpeoples’ is not achieved by means of hollow sentences and of pioushopes, but only by radical revolutions and bloody struggles; that it doesnot concern the fraternal union of all European peoples under a singlerepublican flag, but the alliance of the revolutionary peoples againstthe counter-revolutionary peoples, an alliance which doesn’t material-ize on paper but only on the battlefield.

(1849: 1062)

Engels also insists on the chance that represents, for the working-classmovement, the ‘geometric progression’ of military expenditures resultingfrom changes in military techniques (firearms, shells, explosives) and fromthe defence policy (notably with the establishment of the military serviceafter the Commune of Paris). Indeed, tax increases, made necessary by therise in military budgets, ‘push the most destitute popular classes in the armsof socialism’. The arms race between France and Germany, initiated by theconflict in Alsace–Lorraine, is accelerating this process and must thus bewelcomed with optimism (1895: 1131). The proletariat will later benefitfrom the progress of arms techniques, as well as from its own familiarizationwith the military sphere, owing to the obligatory military service. Thevictory of communism will mark the end of militarism, which will bebroken from inside, according to the laws of the dialectic historical materi-alism (1878: 200).

3 In certain letters, Engels moderated his optimism as to the revolutionaryoutcome of war, and he expressed his fear that such confrontations result,on the contrary, in an outbreak of ‘chauvinism’, which would prevent thedevelopment of social movements. Therefore, in the shorter term, insteadof accelerating the revolution, a war can have the opposite effect. An eco-nomic exhaustion of Europe due to war could hinder the social revolutionand favour the American industrial hegemony. An international war would


indeed lead to the decline of the working-class movement, instead of stimu-lating it. This one would probably be taken back twenty years, becausechauvinism would be inflamed for several years, leading the proletariat toforget its class solidarity (quoted in Davis 1991b).

Therefore, all these fears moderate the certainty expressed in Anti-Dühring,according to which a war, whatever its immediate effects may be, will have onelong-term consequence: the victory of the social revolution. Engels’ laterthoughts showed that war could represent either the acceleration or the deceler-ation of the social movement, depending on its capacity to mobilize (or not)workers’ interests.

After Marx’s death and towards the end of his own life, Engels wrote aproject on disarmament, published in 1893, in which he denounces the rearma-ment process of European countries started several years earlier. The continualincrease in the level of armament which countries have to maintain exhauststheir economies, and leads to an impasse, of which the only way out is totalwarfare. Engels recommends the beginning of a disarmament process whichcould be achieved by transforming the ruinous system of permanent armies intoa system of militias, based on the people’s general armament. He thus proposes anew conception of militarism, as well as a disarmament by people, rather thanby force. His project is centred on the idea of an international agreement on agradual decrease of military service: he presents it as the simplest and the quick-est way to prepare the transition from permanent armies to militias. Germanyshould suggest it to Austria, Italy and France, the support of this last country,however, being considered as fairly unlikely. Engels thus looked for the meansto avoid an international war. His conviction as a revolutionary theorist,according to which war prepares the ground for revolution, at least in the longterm, gives way to his wish to interrupt the arms race between capitalist coun-tries. This conclusion is particularly interesting with regard to the Marxist theo-ries developed in the second half of the twentieth century, according to whichthe militarism of capitalist economies, maintained by the arms race, is a factorof their power, but also of their destruction, in the long run.

In their main works, Marx and Engels reject the appeal for workers’ unity infavour of national defence as well as the ‘pacifists’ appeal for workers’ mobil-ization for peace. In fact, military conflicts hide the real problems of society,which are those of the class war, and lead the proletariat to lose its class con-sciousness. As for the pacifist doctrine of the liberal economists, it only masksthe fact that, from now on, economic war replaces military conflicts, and thatpeace serves the bourgeoisie’s interests. Nevertheless, Marx and Engels considerthat world peace will be the ultimate result of the societies’ historical evolution,at the stage of communism, after the social revolution. However, unlike theUtopian socialists, Marx and Engels never clarified their view of the futuresociety. Marx himself said he didn’t wish to ‘boil the pots of history’. Once inpower, the proletariat will gradually abolish all class differences, and thus theState itself (Engels 1878: 316–317). The new societal system of government


would ensure individual prosperity and freedom, with the end of private prop-erty and of competition, and with the collectivization of the means of produc-tion and the establishment of a planned economy. There would be no moresocial classes and no more exploitation of one person by another. The internalsocial conflicts would disappear. However, wars will only cease when this socialstructure has been generalized throughout the world (Marx 1848a: 124). Armiesshould be maintained as long as the worldwide struggle between capitalist andsocialist systems remains. Once communism has been established throughoutthe world, permanent armies will disappear, because there would be no moresocial conflicts, and no socio-economic reasons for aggressive wars any more.

Divergences of Marxist theories about the consequences ofmilitarization on the stability of capitalism

Conflicts at the centre of capitalism and the revolutionary struggle:the first theorists of imperialism

The theories of imperialism, developed at the beginning of the nineteenthcentury, opened the way to an important area of application of Marxist theory.However, neither Marx nor Engels ever developed a real theory of imperialism.In these theories, war is a central issue: it ensues from the competition betweenimperialist States for the division of foreign markets, at a stage of capitalistdevelopment characterized by capital export, because of the limitation ofinvestment possibilities within national borders, given the constraints of thelaw of the falling tendency in the profit rate. Peace, on the other hand, is almostnever mentioned, because the duty of the oppressed classes is to fight the bour-geois democratic system, and because international conflicts are presented asinherent to the capitalist economic system. World peace will therefore only beachieved once communism has spread worldwide. National defence is a bour-geois concept, which does not reflect the real interests of the majority of thepopulation, the real nation of which is proletariat.

In spite of a few common characteristics, there is not only one, but severaltheories of imperialism, and their conclusions as to the future of capitalismdiffer. Rosa Luxemburg was the first and only Marxist of the time to present areal economic analysis of imperialism and of the economic role of the militarysector, pursuing Marx’s schema of capitalist reproduction. But Lenin is the mostwell-known among these theorists, because of his works but also because of thepart he played in the Russian revolution of 1917. In Imperialism, the HighestStage of Capitalism (1916), he asserts the ineluctability of wars in a capitalistmode of production. Other theorists, notably Hilferding, never asserted that theevolution of the capitalist system would inevitably lead to confrontationsbetween major powers.

The theories of imperialism of the beginning of the twentieth century gaverise to a very important Marxist current of analysis, which was presented as theonly satisfactory alternative to the liberal models of international relations.


Hilferding: the likely but not inevitable war, at the stage of financialcapitalism

Rudolf Hilferding was the first Marxist theorist of imperialism. He published hismain work, Financial Capital, in 1910. His thesis states that capitalism hadreached a new stage in its development at the end of the nineteenth century,i.e. the ‘financial capital’. Since then, the capitalist economy is characterized bya process of increasing centralization (with the emergence of numerous monop-olies, cartels and trusts), of a concentration of banking activities, and thus of adeterioration of competition (1910: 315–319). Financial capital representsbanking capital in the form of money, which is transformed into industrialresources. Its development coincides with the concentration of economic powerin the hands of a few shareholders (in joint-stock companies), whereas theproperty of capital is scattered. The banking capital henceforth dominatesindustrial resources. Banks have thus acquired an unprecedented power, whilethe State’s role in the economy has increased, favouring the adoption of protec-tionist policies guaranteeing strong profits for monopolies (1910: 407–420). Thedevelopment of direct investments in other advanced capitalist countries, i.e.the establishment of firms abroad, enables a nation to bypass protectionist bar-riers. The development of capital exports is indeed necessary to escape theinternal contradictions of the State economy.

Furthermore, the leading powers wish to extend their colonial empire, inorder to increase the security of their supplies of raw materials and to find newmarkets for their manufactured goods. The capital of industrialized countries arethus in conflict to widen their sphere of influence to non-developed zones. Theimperialist policy is connected to the financial capital rise.

Subsequently, demand for armaments increases, for defence but also forforeign policy. The army benefits the main national economic interests, becausethe leading capitalist firms resort to the State to defend their profits. Therefore,at the stage of financial capital, militarism characterizes capitalism (1910: 491).Thus, Hilferding elaborated one of the first economic (and not political) analy-ses of imperialism.

In spite of the increasing militarization of capitalism, Hilferding considersthat wars could be avoided, owing to the resistance of the proletariat and of themiddle class (1910: 491). The policy of Jaurès and the French socialist party atthe beginning of the twentieth century relies on the same idea. In FinanceCapital, Hilferding extrapolates on the future outcome of the evolutions ofcapitalist structures. He announces the coming of an ‘organized capitalism’ era,characterized by the control of the entire capitalist production, and by the dis-appearance of money, the price system becoming purely theoretical. A generalcartel associated to a central bank will thus control the whole national produc-tion (1910: 329–330). Hilferding developed this argumentation between 1915and the end of the 1920s. In the 1920s, he asserts that organized capitalism is infact a stage towards socialism. The principle of the free-market economy is grad-ually replaced by one of planned production.


With regard to international relations, Hilferding predicts that, in a longerterm, the increase in the size of firms and the internationalization of their activ-ities will lead to an agreement between the most powerful capitalist interests,beyond national borders. The exploitation of non-developed zones will guaran-tee the preservation of their strong profits, but also relatively high salaries inindustrialized nations (1910: 423–424). This idea of an agreement between themost powerful capitalist interests, on a worldwide scale, was pursued by Kautsky,in his theory of ‘ultra-imperialism’.

Kautsky: the agreement between powers at the stage of ‘ultra-imperialism’

Kautsky considers that capitalism can prevent major imperialist conflicts, whichwould entail its end. A theorist of the German Social Democrat party, heplayed an important part in the second International, as guarantor for an ‘ortho-dox’ Marxism (with regard to his works written between 1890 and 1914). Later,he was severely criticized by the Marxists of the third International, who con-sidered his attitude to be opportunist, feeling that he supported the system inpower.

In Kautsky’s theoretical works, numerous signs herald the end of capitalism,especially the increasing monopolization of economy and the ‘proletarianiza-tion’ of the middle classes. This last phenomenon is the result of an undercon-sumption process of the working class, which leads to overproduction. Theexpansion of markets is not sufficient to compensate for the effects of productiv-ity increase and capital accumulation; the search for foreign markets is thereforenecessary. But the non-capitalist zones, which represent most of these newoutlets, do not have the same potential of economic expansion as the capitalistones, and the underconsumption crisis cannot be durably curbed. However,Kautsky does not consider that orthodox Marxism includes a catastrophic con-ception of the economic downfall of capitalism. Territorial expansion is a wayto thwart the internal contradictions of capitalist economies (quoted in Hauptet al. 1974: 119). In the capitalist mode of production, firms have to constantlyincrease the scale of their production, to remain competitive, by acquiring ahigher level of specialization in their activities. But this rise in productivity andthe division of labour creates the need for new domestic and foreign outlets.The State would then have to lead a policy of power, to reach two objectives:

• have a significant influence over the definition of international tradingrules;

• create new ‘jobs’ for the middle classes, threatened by proletarianization.

However, like Hilferding, Kautsky did not believe in the ineluctability of a gen-eralized confrontation between leading imperialist powers. On this subject, hedeveloped a theory of ultra-imperialism which later gave rise to numerous con-troversies. According to this theory, the process of capital export can contributeto stabilize capitalism, if the imperialist powers agree, forming a kind of big


world ‘trust’. This rapprochement of the leading powers’ interests could help toslow down their militarization, and thus avoid arms races and wars:

Can’t the current imperialist policy be supplanted by a new, ultra-imperialistpolicy, which would substitute for the fight between national financialcapital, the exploitation in common of the universe by the financial capitalunited on the international scale? This new phase of capitalism is at leastconceivable. Is it feasible? There are yet no essential premises which allowus to answer the question.

(1915: 144)

Lenin (1916: 166) virulently questioned this conception of ultra-imperialism,calling Kautsky an ‘ex-Marxist’ and accusing him of playing the game of ‘thepropaganda of peace and unity with the opportunists and the social-chauvin-ists’, asserting that imperialism implies a fundamental antagonism betweenmonopolies and competition, and develops possibilities of huge financial profitsfor only a small part of the capital. To complete this break between these twoeconomists, Kautsky violently criticized the new Soviet system of government,which he didn’t consider as a stage towards socialism but rather as the dictator-ship of a new dominant class, which had the means of production, ‘indepen-dently of the people and often in opposition to it’.

Rosa Luxemburg: the inter-imperialist war for outlets in non-capitalist zones

Rosa Luxemburg considers war results, most of all, from differences in the modesof production. In 1913, she expounds her theory on inter-imperialist conflicts inThe Accumulation of Capital (1913). The reproduction of the capitalist economyis conditioned by its capacity to show the surplus necessary to keep on financingaccumulation. However, the expansion of the domestic market is not infinite,and sooner or later capitalists will have to look for new outlets abroad. Indeed,demand insufficiency hinders the accumulation process, in Marx’s reproductionschema, the existence of solvent markets being a necessary preliminary forinvestment. The originality of this analysis compared to Marx’s own is to postu-late that the reproduction of the capitalist economy can be ensured throughtrade, and not only to the process of production. Non-capitalist markets consti-tute privileged areas for the spread of capitalist forms abroad. The military andeconomic conquest of these zones by the dominant imperialist economies,which aim at their exploitation, will momentarily offset the insufficiency ofoutlets. But conflicts of interests for the division of these territories can appearbetween imperialist countries. Military expenditures are thus useful for conquestand for the empire’s defence, but also for the preservation of the civilian peacein colonized zones, the native culture and industry of which will be destroyed tothe benefit of capitalist forms. Therefore, in a military conflict, territorial con-quest is not an end in itself, but aims at spreading capitalist forms in countriesstill little concerned with capitalist development. The military conflict is a civi-


lizing colonial war and not an armed conflict between bourgeois States,although it could later lead to inter-imperialist conflicts in colonies. War is thusprimarily a war of production modes, based on the conquest of all non-capitalistforms of production.

In her works written on the eve of the First World War, Luxemburg consid-ers that the internal contradictions of capitalist economies will lead imperialistpowers to wage wars. Militarism, a characteristic of imperialism, notably inadvanced capitalist economies, is reinforced by the fact that the military sectorshows a surplus generally superior to the one (which would have been) obtainedin other sectors. Indeed, the production cost of the surplus is reduced, becausethe rate of exploitation of the variable capital increases (the fixed capital assetsremaining unchanged), owing to a tax rise which results from the increase inmilitary expenditures. The rise in the taxation rate diminishes the proletariat’sconsumption and means of subsistence. But, at the same time, fixed capitalassets become more important compared to variable capital; this is one of thereasons, in Marxist theory, for the falling profit rate in a capitalist economy. It isthus necessary to distinguish the short-term effects of militarism, which arebeneficial, from the long-term ones, which are disadvantageous, because theyintensify the internal contradictions of the capitalist mode of production.Capitalism’s maturation is moreover accelerated by the development of the mil-itary sector, because the tax rise resulting from it forces farmers to sell theirproducts at markets, thus favouring the integration of the agricultural sectorinto the whole economy; military expenditures therefore generate the develop-ment of new markets. Finally, and this is an essential element of capitalism’spreservation, military expenditures serve to exert economic control (1913). Butthe role of military expenditures in the resolution of the contradictions of thecapitalist economic system can only be transitory. In the long term, all nationalimperialist expansion comes up against the imperialist ambitions of anotherpower. The world territory being limited, inter-imperialist conflicts will arise, ina context of internal economic crisis. All the requirements will then be met forthe proletariat to come into power, in many European countries.

Rosa Luxemburg was the first to apply the Marxist political economy to thestudy of military expenditures. A controversy still remains today as to the inter-pretation of her theory. For some theorists, she developed a theory of undercon-sumption. Military expenditures are a way to invest the surplus, withoutincreasing the productive capacity. Others reject this interpretation. Rowthorn(1980), for example, considers that this theory, on the contrary, demonstratesthe important role of military expenditures as an incentive for capital accumula-tion, by favouring technological progress and destroying the internal hindrancesto capitalist expansion. Apart from Rosa Luxemburg, few authors of this periodwere interested in the analysis of the economic effects of military expenditures.

Moreover, she refused the idea of the socialist party’s support for nationalis-tic movements of self-determination (quoted in Haupt et al. 1974: 190–191);according to her, these could only reflect ‘the movements of the ruling bour-geois class’ and delay the advent of the proletarian revolution. The conquest of


foreign markets and colonies is a necessary stage in the evolution of capitalisteconomies, whereas the division of each State in autonomous national entitiesisn’t. In this respect, she is opposed to Kautsky’s point of view, which isfavourable to Poland’s demands and according to which all oppressed nationsshould sooner or later reach autonomy. The debate on the ‘national question’became very animated among the Marxists, as from 1905 (Weber 1983). Forexample, the Austrian theorist Otto Bauer criticized the orthodox Marxist con-ception according to which the advent of socialism will entail the progressivedisappearance of national disparities. He considered that the International hadto realize international unity in national variety. This theory was highly criti-cized by Kautsky, who believed that, on the contrary, nations wish to unite inlarge state entities, as shown by the development of international economicexchanges, which is a first stage in the rapprochement of nations as well as afundamental tendency of capitalist economic development.

Lenin: the inter-imperialist war will entail the end of capitalism

Towards 1905, in his analysis of the war between Russia and Japan, Leninenvisages the possible defeat of Russia: according to him, the bureaucratic heav-iness of the Russian state apparatus, as well as its corruption, prevent the devel-opment of modern weapons as well as the establishment of an effective militaryorganization, the military suffering from a lack of competence, and the logisticsproving to be insufficient. For Lenin, there is thus a real interdependencebetween economic and military force.

Furthermore, Lenin considers the Japanese victory as more desirable, becauseit would favour social progress, the Russian bourgeoisie being more reactionarythan the Japanese one. Besides, a defeat would durably weaken the Russianeconomy, and thus the tsarist system of government. After the Russian defeat,Lenin considered that all requirements would be met to launch the revolutionthere: the tsarist power would be weakened by the general economic decline,resulting from the importance of human and material losses, from the scale ofthe waste of resources, and from the impossibility of getting the credits neces-sary to restore economic prosperity. Later, the year before the beginning of theFirst World War, he denounced the ‘bourgeois chauvinism’ and the ‘socialchauvinism’, as well as the support of this cause by some Mencheviks and by theSecond International (1916: 185). He then called on European oppressedclasses to recognize their true interests, and join their forces to serve the socialrevolution rather than national defence. The international conflict mustbecome a civil war in each country; it is also necessary to facilitate nationaldefeat, to better prepare the social revolution. Finally, workers should defendthe struggle for national self-determination in colonies (1915 article, quoted inHoward and King 1989: 71).

Lenin only gradually elaborated his study of imperialism. In 1905, heanalysed the reasons for war as based not only on the search for profit, but alsoon the adventurism of the tsarist system and its wish to protect its dynastic


interests. In 1908, he noticed an escalation of the competition between Euro-pean countries in colonies, accompanied by an aggravation of the tensions inthese territories. Yet, such a situation could later lead to international conflicts.In 1913, he considered that the European arms race revealed the wish of everynation to widen its domination on foreign markets. But another more theo-retical explanation is given: the increasing militarism of the Europeaneconomies would enable the ruling classes to strengthen their control over thepopulation, while delaying the fall of the profit rate, because of the strongprofits generated by the military sector. Militarism helps to reduce social con-testing, while allowing the bourgeoisie to extend its economic control abroad.According to Lenin, war is thus the result of the internal economic contradic-tions of the capitalist system.

Lenin expressed a theory of imperialism during the First World War, in Impe-rialism, the Highest Stage of Capitalism (1916). War is only the expression ofcapitalism’s internal economic contradictions. It represents a new stage in theevolution of capitalism, which is henceforth characterized by financial capital(following Hilferding’s analysis) and imperialism (following Hobson’s, but alsoBoukharine’s analysis). War is thus historically outdated.

The historical evolution of capitalism can be divided into a few main stages,each being characterized by a new stage in the evolution of state institutions.The highest stage of capitalism is imperialism, or monopoly capitalism, whichappeared towards the beginning of the twentieth century. This stage has fivemain characteristics (1916: 90–105):

1 the development of more and more important monopolies, which graduallyacquire a decisive role in the economy. The cause of this is the concentra-tion of production and capital;

2 the appearance of financial capital (and of a financial oligarchy), resultingfrom the merging of banking and industrial capital;

3 the development of capital exports;4 the division of the world between a few main international monopolies;5 the completion of the world division between the leading capitalist powers.

Capital exports are caused by the exhaustion of investment opportunitieswithin the national territory. However, Lenin does not explain this phenome-non on the theoretical level. He does not refer to Hobson’s theory of undercon-sumption, nor to Marx’s law of the falling rate of profit (as Hilferding andBoukharine do). Nevertheless, it would be erroneous to assert that Lenin’stheory can only apply to the colonialism period. Indeed, capital is not necessar-ily exported outside Europe and annexations do not only concern non-capitalistzones. In last resort, Lenin considers capital centralization as more importantthan underconsumption.

Wars correspond to the questioning of the sharing of foreign marketsbetween various imperialist powers, due to the disparity in national economicgrowth rates (1916: 115). With time, the economic hierarchy of major capitalist


powers changes, leading sooner or later to a modification in the hierarchy ofpowers. In this way, the First World War corresponds to the expansion ofGermany’s economic power, which resulted in the German contesting of theBritish and French supremacy in foreign markets. The stake is the access to newmarkets for goods, but also to protected spheres of capital investment, as well asto new sources of raw materials. Therefore, international instability results morefrom new capitalist economic powers than from old colonial ones. A durableagreement between leading imperialist powers (according to Kautsky’s idea) isimpossible. Even if international cartels can exist, they can only be temporary,because the disparity in national economic rhythms implies frequent question-ings of the established order. Lenin, like Boukharine, does not envisage a lastingpeace, for example with a ‘super-imperialism’, in which a single capitalist powerwould militarily dominate the world, this hypothesis being envisaged byTrotsky. Lenin is first of all concerned with political action, and in a way, heelaborates a theory which helps him to come into power. He blames Hilferdingfor not having made his theory lead to revolutionary prospects, and for nothaving recognized the inevitable character of an armed conflict between imperi-alist powers, which would mark the beginning of the social revolution.

Unlike Boukharine, Lenin does not believe that the internal economic con-tradictions of national economies have been fully transferred at the level of theworld market, while the process of capital centralization and of the formation ofmonopolies developed. First, the process of economic centralization is not fin-ished, and conflicts of interests remain within each economy. Second, theincrease in the number of monopolies reduces the capacity of adaptation ofcapitalist structures to an economic crisis. This theory explains why Lenin didnot, at least at first, support a total take-over of the State apparatus by the prole-tariat, and a replacement of previous State structures by completely renewedones. The social revolution must of course entail improvements in the demo-cratic system, but they must be relatively limited to begin with. These are theTheses of April (Lenin 1918b: 67–68). Thus, Lenin rejects all idea of a relativelyautonomous State action. The economic materialism of Marx’s theory is pre-served. Unlike Boukharine, Lenin adopts a purely ‘economist’ conception ofinternational relations, refusing to talk about a relative interweaving of thepolitical and economic spheres.

In his work State and the Revolution (1918a), Lenin evoked or criticized theideas of Bakounine, the theorist of anarchism. They both considered that warenabled the oppressed classes (proletarians but also poor farmers and someminorities) to unify against capitalism. Lenin at first also shared his convictionthat capitalist State structures must disappear, and be replaced by institutions ofmass democracy similar to those established by the Commune of Paris in 1871(1918a: 15). But with the political evolution, Lenin revised his point of view onthis matter, and in 1917, he came over to the idea of the necessity for a phase of‘proletariat dictatorship’, so as to protect the first benefits of the revolution, andthus the necessity to take control of the State apparatus (1918a: 37). In thiscontext, the State, assisted by its army, exerts control over the population, in


favour of the ruling classes, thus preventing all from contesting. The Stateapparatus is indeed far too developed in capitalist countries (notably because ofthe existence of permanent armies, helped by an important bureaucracy) to beabolished all at once. In support of this new conviction, Lenin followsBukharin’s thesis of ‘State capitalism’, considering that the bourgeois stateapparatus is only adapted to serve the interests of the most parasitic and reac-tionary capitalist classes, which lead wars that threaten civilization itself, whileweakening the capitalist system, all the more so as it is henceforth a matter oftotal warfare. The thesis of the development of militarism, aiming at strength-ening the domestic economy with regard to others, as well as at reinforcing theState’s control over the population, is once again reaffirmed. In the communistsociety, defence will be ensured by universal conscription and the armament ofall workers. On this issue, Lenin’s opinion differs from Bakounine’s, whoprophetically criticized the proletariat’s dictatorship, which he considered asimplicitly expressed in Marx’s theory.

Bukharin: the economic war and the progressive autonomy of the State

The triggering of the First World War accelerated the achievement of NicolasII. Bukharin’s main work, Imperialism and the World Economy, published in 1915,in which he develops the idea that capitalism has reached a new stage in itsdevelopment, i.e. the State capitalism. This stage is characterized by an increas-ing integration of capitalist economies in international markets, with the devel-opment of financial capital (following Hilferding). Capitalism is subject to twotendencies (1915).

First capital centralization or monopolization, which is characterized byoperations of concentration of the economic structures and by an integration ofthe financial capital into ‘State capitalist trusts’. This process is accompanied bya separation of property and control, which favours the development of a classof rentiers and many parasitic classes. At the domestic level, the bases of theeconomic crisis have disappeared, because of the positive economic effects ofthe State’s increasing intervention in the economic sphere. The state apparatushas been transformed and one may henceforth speak of a State capitalism, veryorganized, which exerts a strong control over the economy. Economic interven-tionism is all the stronger as the country is at war, but the return of peacedoesn’t imply it will significantly decrease. An aggravation of impoverishmentof the majority of the population should also occur. But because of these evolu-tions in national economic structures, competition and conflicts tend to disap-pear within national borders, and to be transposed to the international level.

Second, the internationalization of capitalist economies which are more andmore subject to world market laws. The fight against the fall of the profit ratedoes not take place on a national scale any more, but on an international scale,as shown by the internationalization of industrial activities. States defendnational interests on the international scene; they wish to conquer new marketsand notably expand their colonial empire. The antagonism among certain


national interests in the struggle for the division of foreign markets can createinternational military conflicts. Because of the new economic role assigned tothe State, the borderline between the economic and political fields becomes lessmarked. International tensions should increase with the development of eco-nomic wars, which are only preludes to military conflicts:

The prodigious development of the productive forces and the extremeshrinking of free outlets recently, the powers’ customs policy linked to thehegemony of the financial capital and to the aggravation of the difficultiesin realizing market values create a situation where the last word belongs tothe military technique.

(1915: 82)

Bukharin’s conception of international conflicts doesn’t correspond to Lenin’sthesis of 1917. First, whereas Lenin considers that imperialism is a phase of stag-nation of the capitalist economy, Bukharin states that, on the contrary, imperi-alism opens important possibilities of development for capitalism, becauseseveral regions of the world which are still agrarian may well be exploited byindustrialized nations. Then, whereas Lenin explains conflicts as the expressionof a new division of world markets, which corresponds to the changes in theeconomic hierarchy, Bukharin considers that public policies influence worldmarket structures at least as much they are influenced by them. However, hedoesn’t believe an agreement could one day be reached between the imperialistpowers, for example by forming an international cartel, as predicted by Kautskyin his theory of ultra-imperialism. The disparities in the levels of national eco-nomic power will prevent all agreement from lasting, because the particularinterests of different countries could not all be satisfied by a single commonagreement (1915: 137). The inter-imperialist wars will be inevitable andrepetitive.

Bukharin’s analysis could be interpreted as an attempt to question pure eco-nomic determinism (Howard and King 1989). Indeed, given that, at the stage ofState capitalism, the State has henceforth an economic role, its action is a deci-sive factor in the evolution of the international economic structures. Therefore,relations of the world market and those of the system of the States would be co-determined, and there would be no more direct causal relation between the eco-nomic base and the superstructure. It would thus be a matter of review of thehistorical materialism already begun by Trotsky, in 1914. From Bukharin’s pointof view, the social revolution could only be achieved by ways other than thelegal political ones, because the parliamentary bourgeoisie gradually adapted thepolitical apparatus to its interests, resulting in a lack of democratic procedureswhich could challenge its power. Parliamentary institutions are therefore onlyscreens masking the reality of the domination of a new quasi-totalitariancapitalist system. The state apparatus should be abolished after the revolution.War tends to reinforce even more the domination of this new bourgeoisie stem-ming from the internal centralization of capital, by justifying State control at


every level of national institutions. The leaders of the labour parties couldeventually be bought by the bourgeoisie, which explains the failure of theSecond International. Later, Bukharin (2003 [1920]) justified the measures ofthe militarized social organization, considering that it was necessary to replaceState capitalism by State socialism. State capitalism has opened the way tosocialism, notably by gradually removing competition and market relations. Butit is necessary to introduce militarism into the society, so as to encourage theworking class to organize itself. Bukharin thus presents the State as a realizationindependent from economic criteria. In his theory, the ‘effects of nation’ aresuperior to the ‘effects of class’, which is quite surprising.

The experience of power: from ‘war communism’ to Stalinism

In 1919, Bukharin and Préobrajenski published The ABC of Communism (1969[1920]), in which they consider that war inevitably leads to the revolution. Thisraises the problem of the transition towards the socialist system. To start with,the authors state that the ‘proletariat dictatorship’ will retain the state appar-atus; coercive measures must be maintained until communism spreads world-wide. This period of transition must be short because of its cost. The firstnecessity is to win the civil war. In order to achieve this purpose, Bukharin rec-ommends, in 1920, the adoption of a model of ‘proletarian militarized produc-tion’, which will contribute to fulfil military objectives, but will generate wastesof economic resources. However, this war economy will initiate technologicalprogress which could contribute to ensure economic prosperity with the returnof peace. Besides, the socialist society will neither have an army nor a navy.

The theoretical promises weren’t honoured in practice. War communism wasmaintained long after the end of the civil war, until 1921, and the model of pro-duction and organization applied to the military sector and to the defenceindustries was applied to the civil sphere. The revolt of the sailors from Kron-stadt in 1921, which expressed the complete exhaustion of the Soviet popu-lation following this continuous ‘war effort’, incited the Soviet leaders toundertake an economic reform, the New Economic Policy, which was main-tained until 1927. After Lenin’s death, Bukharin and Préobrajensky defendeddivergent opinions as to the choices which had to be made regarding economicpolicy. Bukharin considered that agricultural prosperity, which could only beensured through free individual initiative, spurred by self-interest, was an indis-pensable condition to provide the surplus necessary for the industrializationprocess. He was criticized by Préobrajensky who wanted to immediately pursue apolicy of industrialization, by taking the indispensable resources from farmers.Stalin, who was close to Bukharin and came to power owing to the support ofthe ‘right-wingers’, disapproved of them and chose the solution of forced indus-trialization. After this period, the Soviet official theory was transformed intothe statement of dogmas, of undeniable truths, most of which had only few con-nections with Marx’s theory. The dictatorship was justified as necessary, becauseof the persistence of the capitalist danger, and it was even justified as being the


expression of the people’s will, by authors like Andrej Viskinsky. Stalin wishedto make his theoretical contribution, and ‘showed’ that the various elements ofMarxist theory justified the main orientations of the Soviet policy. The five-year plans favoured heavy industry, and the armament industry disadvantagingagriculture, housing or consumer goods.

The various Marxist theories of imperialism that developed at the beginningof the twentieth century were thus divided over the issue of capitalism’s future.Kautsky envisaged the possibility of an agreement between imperialist countrieson a world division, and consequently of a peaceful coexistence, at least for acertain time. For Lenin or Bukharin, on the other hand, contradictions ofmodern capitalist systems, as well as uneven rhythms in national economicdevelopments, would sooner or later result in a generalized conflict betweendominant nations. But in actual fact, both world wars were followed by a periodof international peace which did not challenge the market economy. Leninelaborated his theory in a perspective of conquest of power, during the FirstWorld War, and this could explain why he insisted on the idea that capitalismwould end in a confrontation between leading imperialist powers, which are inconflict for outlets.

Marxist analyses since 1945: military expenditure,underdevelopment and falling profit rate

From 1945 to the 1960s, the dominant Marxist current believed that militaryexpenditures had a positive economic effect on the capitalist system. Unlike theanalyses of imperialism from the beginning of the twentieth century, theMarxist analyses of militarism developed after 1945 mainly studied the eco-nomic effects of military expenditures on the capitalist structures. Thus, thetheory of the ‘permanent arms economy’ considers militarism as a factor of thepreservation of the capitalist system. Besides, other relations between militaryexpenditures and capitalism were expounded, notably the ones between eco-nomic crises and wars or political changes at the international level (structuralor historical and structural analyses).

Military expenditure as a solution to capitalist under-consumption

The Marxist ‘orthodox’ theory started giving numerous arguments for the posit-ive effects of military expenditures on capitalist economies. At first, militarismgives an ideological advantage: governments use the external threat to reinforcenational unity. Then, imperialist policies in colonies or neo-colonies help tocounter the fall in the profit rate. Moreover, military research and developmenthas positive effects on the civil sector. Furthermore, military expenditureencourages the aggregated demand, thus decreasing the under-consumptiontrend which prevents the realizing of a surplus. Finally, they represent one ofthe most important counter-tendencies to the long-term decline in the profitrate. But such arguments were questioned within the Marxist current itself, and


notably the question was raised as to whether militarism only benefited the cap-italists of the militaro-industrial complex or the entire economy. The theoriesthat considered military expenditures as a major element in the stabilization ofcapitalist economies have sometimes been called theories of the ‘permanentarms economy’, in Kidron’s own words (1968), and focused on the concept ofunder-consumption. Baran and Sweezy (1966) are the most famous representa-tives of this current.

BARAN AND SWEEZY’S THEORY: MILITARY EXPENDITURE AND THE

ABSORPTION OF THE SURPLUS

According to Baran and Sweezy (1966), military expenditure contributes toabsorb the economic surplus generated by monopolistic capitalism; the armsrace is thus in accordance with capitalist logic which tries, through unproduc-tive spending, to maintain a constant production-demand ratio. The surplus canbe absorbed by capitalist consumption, by waste, by civil governmental spend-ing, but military expenditures are the most effective solution; indeed, theycomply with capitalism in so far as they don’t redistribute incomes to those whoshow a weak productivity, while stimulating collective values. Disarmamentisn’t compatible with capitalism, which always generates international tensions.

In the Theory of Capitalist Development, first published in 1942, Paul Sweezy(1946) considers that militarism thwarts the under-consumption trend inherentto the capitalist economy, by opening new opportunities for investment. But it’sonly after the second World War that he develops, with Paul Baran (1957), histheory of monopolistic capital, presenting military expenditures as a majorelement in the running of capitalist economies. Militarism is thus considered asone of the main factors in the absorption of the surplus. The economic surplus,which tends to increase in aggregated value, is defined as the difference betweenthe value of production and the production costs, at the level of the wholeeconomy. Military expenditures would thus have played a significant role in thepreservation and the development of American power since 1945. ‘Militarism’,‘imperialism’ and ‘the absorption of the surplus’ are closely connected in capital-ist economies.

According to Baran and Sweezy, a country maintains armed forces accordingto its position in the ‘hierarchy of exploitation’ which has characterized capital-ism at the international level since the Middle Ages, with a structure ofMetropolitan–colonial countries. An empire represents, in this terminology, the‘sphere of exploitation of a given metropolitan country’. The level of militaryexpenditure depends on the nation’s membership of an alliance, its level ofnational ambition or the degree of stability of the international system. Beforethey had the means of leading an imperialist and expansionist policy, theUnited States developed alliances with older powers, at first France, thenEngland, enabling them to establish a secondary but relatively vast empire (thesphere of exploitation being notably widened by the Monroe Doctrine), whichdid not require a high level of force. They finally became the dominant nation


after the Second World War, like Great Britain after 1815. However, while arelatively weak level of international military needs characterized the period ofBritish hegemony, this level grew constantly under American domination. Thiscan be explained by the United States’ need to maintain their leadership and towatch over their new colonial empire, composed of fragments of formerempires, after decolonization. But this high level of military expenditure is alsodue to the emergence of a rival system and to the policy of opposition to theEastern bloc. The authors consider this situation as a ‘new historic phenome-non’. American politicians and journalists put forward the argument of a neces-sary defence of the ‘free world’ (1966: 171); however, Baran and Sweezyquestion the reality of the threat, notably by asserting that Soviet foreign policyis essentially defensive. Such an assertion can be reconsidered today, given thepresent knowledge of Soviet policy and the events that took place after 1966,the year of publication of this work in the United States. The authors even rec-ommended the development of trade between capitalist and socialist countries,and denounced American firms’ opposition to it, which they explained as stem-ming from their hostility to the expansion of socialism worldwide, because oftheir own imperialist ambitions. Thus, as stated by Baran and Sweezy, inter-national economic relations are characterized by an economic war, in which thestrategies of the multinational companies are assisted by their government’s pol-icies. The American policy towards Cuba is quoted as an example.

Baran and Sweezy consider that, in the United States, ‘the oligarchy’ isinterested in an important development of the military budget. Indeed, thearms sector benefits from a strong profit rate, because it is protected from marketlaws; moreover, the military sector conveys a culture that favours the reinforce-ment of the oligarchy’s social position. Finally, the high level of military expen-diture during the 1940s and 1950s contributed to preserve monopolisticcapitalism, by preventing the development of massive unemployment, butwithout avoiding a ‘creeping stagnation’. Indeed, several problems hinder theuse of military expenditure as an economic stimulant (1966: 194). Notably,with the evolution of arms technologies, military goods and services createfewer new jobs; indeed, they require high expenditure in research and develop-ment, engineering, control and maintenance, fewer employees and more skills.Thus, the rise in military expenditure will become less and less useful toincrease investment and create new jobs. Besides, Baran and Sweezy considerthat the capital intensity of arms production tends to increase, therefore redu-cing its capacity to thwart the fall in the profit rate. Finally, keeping a highlevel of armament implies a high level of taxation, detrimental to economicactivity; however, a tax decrease owing to a cut in military expenditures wouldentail a serious crisis of overproduction.

In the 1970s, Marxists widely shared the idea that the militaro-industrialcomplex represents only a very temporary solution to capitalist economic stag-nation. These analyses were resumed by the theory of monopolistic statecapitalism, according to which the capitalist mode of production is doomed todisappear because of a lack of capital; defence industries offer to capitalists the


advantages of the market mechanisms, without the disadvantages; the Statefinances research and development and guarantees outlets owing to its long-term commands and export subsidies.

MICHAEL KIDRON: MILITARY EXPENDITURE AS A SOLUTION TO

OVERPRODUCTION

According to Michael Kidron (1968), military expenditure is the key elementof capitalism’s success after 1945. The high level of military expenditure in the1950s and 1960s curbed over-production and unemployment, and thus pre-vented over-investment and generated important technological spin-offs for thecivil sector. Expenditure on arms certainly slows down economic growth, byleading to a high level of taxation of profits, therefore diverting resources fromproductive investment. But, all the same, the fall in the profit rate is checked,because the rise in organic composition of capital in civil activities is sloweddown, even if this one is higher in military production. This can be explainedby comparing armaments to luxury goods (sector III, in Marx’s theory). Theyare neither consumed by employees, nor used as means of production in con-sumer goods industries. Therefore, the permanent arms economy is the ultimateand the most powerful counter-tendency to the falling rate of profit. Following‘imperialism’, a new stage in capitalism, i.e. ‘permanent armament’, is thusreached. The high level of military expenditure on arms also favours exports,while maintaining the level of full employment.

Kidron therefore considers that the arms race is useful, because the foreigndanger justifies the State’s orientations. It is the result of economic competitionas much as it is of military competition, especially as it imposes an economiccost on the opponent. At the political level, these expenditures fall within thescope of the bourgeois ideology. The capitalist economy thus becomes apermanent ‘economy of armament’. But in the long run, the arms race reducesthe stabilizing economic potential of military expenditures, and becomes, inturn, a factor of economic instability. Indeed, as the arms industry becomesmore and more capital-intensive and technological, its efficiency to reduceunemployment declines.

In the same way, in his analysis of the effective demand, Pivetti (1992)asserts that military expenditures is one of the most effective ways to reduce thegap between the effective demand and the productive potential. Indeed, a weakpropensity to spend and an excess of savings structurally characterize capitalism;yet, military expenditures can reduce this difference, in so far as they representan additional spending which stimulates investment.

THE DEBATE ON THE IMPACT OF THE MILITARY SECTOR ON CAPITALIST

ACCUMULATION

The analysis of militarism by the theories of ‘under-consumption’ was criticizedfrom the 1960s. This can be explained by the new economic context, with a


lasting economic crisis, while international military budgets kept on growing.Marxist theorists then put many arguments forward to show that militaryexpenditures only benefited the militaro-industrial complex, and not the entireeconomy.

Some Marxists contested Kidron’s analysis, which assimilated military pro-duction to the production of luxury goods, considering that Marx himself haddoubts as to the validity of the Ricardian theory of luxury goods. As stated byPiero Sraffa, the only industries that have an influence on the profit rate arethose which provide consumer goods and production means. However, no con-clusion can be drawn as to Kidron’s point of view given the lack of explanationof the Marxist theory. Because of the problems of access to information and ofdata processing, an empirical confirmation is difficult to obtain in the long run.However, some econometric studies tended to refute the argument of under-consumption, notably Ron Smith’s (1977), which shows that military expendi-tures are not positively correlated with the level of employment, because theyare, according to the author, too capital-intensive. Ernest Mandel (1975) alsostated that the rise in the organic composition of capital in military expenditurecontributed to the fall in the profit rate, therefore exerting a destabilizing eco-nomic effect. However, Howard and King (1989: 110) question this point ofview, by using Bortkiewicz’s model, which tries to demonstrate that the evolu-tion of the profit rate is independent of the conditions of production in thethird sector. Gottheil (1986) expressed another criticism, which we shallpresent in detail, of the idea that military expenditures are a solution to under-consumption. This author refutes the importance of the defence sector in eco-nomic growth. In an article, which gave rise to numerous controversies, heunderlines a fundamental contradiction between the post-1945 Marxist analysesand Marx’s own analysis on the role of the military sector in the development ofcapitalism. Indeed, in Marx’s analysis, the activities connected to war are symp-toms rather than causes of the economic crisis and don’t fundamentally affectthe future structure of the capitalist society, which inevitably advances towardsself-destruction, because of its internal economic contradictions. In Marx’smodel, the decline in the falling rate of profit derives from the growing capital-intensive nature of production technologies (capital accumulation law). Mili-tary expenditures would be able to thwart the falling trend of the profit rateonly if arms production becomes less capital-intensive than the average produc-tion of the non-military sectors. Yet, this situation doesn’t correspond to reality.Therefore, in Marx’s model, the military sector would contribute to the fall inthe profit rate rather than to its recovery, unlike the neo-Marxists’ assertions.Moreover, the profit rates obtained in the field of military production are not, inthe long run, higher than the rate of average profit in the other economicsectors (because of the tendency to equalization of the profit rates). Gottheilalso rejects the idea that military expenditures absorb capitalist overproduction,in so far as Marx’s theory provides no mechanism likely to remove the gapbetween global demand and production. He asserts that the main weakness ofneo-Marxist theories is to forget that, by converting civil goods into armaments,


even in the absence of demand, the capitalists ‘tax’ themselves, given that pro-letarians are paid on the basis of the ‘subsistence level’. After all, the rate ofprofit obtained is not different from the one achieved under the conditions ofoverproduction. Therefore, military expenditures do not hold an important partin capitalism’s survival, by thwarting the fall in the profit rate. Only one asser-tion can be drawn from Marx’s theory: faced with several solutions of invest-ment to absorb their overproduction, the capitalists generally prefer militaryprojects to civil ones, even if the latter would lead to the same rate of profit.Finally, he mentions that Marx considered that nothing could thwart thebronze laws of the capitalist evolution, and that he would certainly not havebeen inclined to revise his model, even if he had witnessed the important devel-opment of the militaro-industrial complex.

James Cypher (1987) answered Gottheil’s article. He notably blames him fornot having made a faithful description of the ‘classical’ Marxist point of view onthis issue, especially Rosa Luxemburg’s, according to which the ceaselesstechnological innovations of the defence sector would have a positive effect onthe profit rate. Yet, Cypher considers that the military technology spin-offs onthe civil sector lead to lower costs. Cypher also blames Gottheil for omitting inhis analysis 60 per cent of the military activity, which are more labour- thancapital-intensive, such as military operations, maintenance, salaries. Cypheralso draws a parallel between the periods of increasing military expenditure andof increasing profit rate.

According to Ernest Mandel (1972), military expenditure reduces theincreasing structural gap inherent to the capitalist system between supply anddemand, and permanent armament is one of the most important means to solvethe problem of capital excess. However, even defence expenditure destroys apart of the surplus, thus thwarting capitalism’s tendency for over-accumulationand the fall in the profit rate; they are not a remedy to its contradictions. Toachieve this last objective, three conditions would indeed be necessary:

• the armament sector must be characterized by a long-term decrease in theorganic composition of capital;

• the purchasing power necessary for arms purchases must be created by alevy on the social surplus value, but without affecting the real wage of theproletariat;

• the rate of surplus value in the third sector must be sufficiently higher thanthe social average so as to increase the global profit rate.

These conditions are contradictory and incompatible with the capitalist system.At best, military expenditure has a neutral effect on the evolution of thecapitalist system. At worst, it has negative effects on the competitiveness ofcivil production.

Mandel’s analysis of the permanent economy of armament was later criti-cized. It was notably accused of explaining neither the capitalists’ motivations,nor the internal social conflicts. This analysis seems profoundly simplistic and


above all cyclical, as confirmed later by Chesnais (1990) or Serfati (1995) inFrance.

Controversy regarding the economic consequences of military expenditurewas resumed outside the field of pure economic theory, notably in debates onthe economic influence of the militaro-industrial complex. These analysessometimes go beyond the borders of economic theory and also interest the polit-ical or sociological fields. Marxist theory, essentially multidisciplinary andaiming at a global understanding of society, seems particularly well adapted toapprehend the various facets of militarism.

Marxist theory of militarism

According to Ron Smith, Marxist theory, which provides a general theory ofsociety, seems to be the most adapted theory to take into account all the varioussubjects regarding the field of militarism, not only the economic subjects butalso the political and ideological ones. Marxists have never succeeded in estab-lishing a general theory of militarism, their analysis of which can only be frag-mentary. Several specific analyses of militarism, more or less connected with theMarxist current, were developed in the 1970s. In France, Jacques Attali (1978)considered war as the final expression of industrial competition; it generatesdestruction and new demands, it modifies the modes of consumption and trans-forms social habits. War stems from uncontrolled economic competition, whichconsiderably limits the potentialities of disarmament of the dominant modes ofproduction. Bernard Rosier and Pierre Dockès (1988) consider that armed con-flicts (as well as social ones) give rise to major innovations in all fields, eco-nomic and technological, but also social and cultural. They underline theimportance of the poly-conflictual situation, i.e. the plurality of conflictingfields and of their mutual relations, in the creative innovation of societies. Agli-etta (1979) questions the exclusively economic explanations of war; he consid-ers that a State only exists within a system of States, which institutionalizessocial relations. The feeling of loyalty towards the nation is one of the majorhindrances to the system’s dismantling and results directly from a ‘militaryculture’, in which the whole society is immersed, and in particular from theidealized reference to the Second World War. Aglietta thus recommends a fightagainst the ‘cultural reproduction of militarism’, through pacifist movements.

Finally, to end this (non-exhaustive) presentation of the specific relationsbetween Marxist theory and the study of militarism, we will mention that theexistence of militarism confronts socialist theory with a problem, notablybecause the historical precedents showed that the reinforcement of the stateapparatus is inextricably linked to an increased militarism.

The renewed economic explanations of imperialism

Apart from to the theory of the ‘permanent arms economy’, other Marxistanalyses explained militarism as a consequence of the necessity of extending the


economic sphere of influence of the capitalist States abroad. The theories of theimperialism were thus renewed.

From the 1950s, in the context of the Cold War and of the world’s divisioninto blocks, the theories of underdevelopment tried to explain the specific prob-lems of the coexistence, at the international level, of developed and under-developed zones. These theories analysed the importance of unequal economicrelations with underdeveloped countries in the preservation of capitalism andgenerally recommended social revolutions in Third World countries. Thesestudies rejected the Ricardian conception of trade as a factor for development;on the contrary, they denounced the exploitation of the ‘core’ by the ‘periphery’owing to trade and foreign investment. Paul Baran (1957) was behind the thesisof underdevelopment through development. The division of the world surplusbetween various regions explains the differences in worldwide levels of develop-ment: the surplus is drawn from underdeveloped zones towards capitalisteconomies, through foreign investments, which enable capitalists to repatriatethe profits. The imperialist domination influences the social order of underde-veloped countries (compradores bourgeoisie), and the threat of an intervention ofcapitalist advanced powers (especially the United States) prevents all attemptsof autonomous action. The domination would therefore be economic as well aspolitical. The interest of advanced capitalist economies lies in the perpetuationof relations of dependence with underdeveloped countries, based on formercolonial structures: this policy is called ‘neo-imperialism’ or ‘neo-colonialism’.Harry Magdoff (1979) added Marxist elements to Baran’s thesis: the exploita-tion of underdeveloped zones by advanced capitalist countries would lead to afall in the organic composition of capital, the key factor of a lasting capitalisteconomic growth, in Marx’s theory.

Paul Baran gave rise to a new Marxist theoretical school of underdevelop-ment. The theory of dependence is derived from it, with Gunder Frank’s works(1970): since its origin, capitalism has always been characterized by relations ofsurplus extraction from colonies in favour of metropolitan countries. Colonial-ism is the original and permanent cause of underdevelopment. Foreign domina-tion relies on military power, either directly, or through the threat or thecollaboration of some nationals. Moreover, the internationalization process ofcapitalism leads to a reduction in workers’ national consciousness in underde-veloped countries. Hans Singer and Raul Prebisch’s famous theory showed adeterioration of the terms of trade for countries producing primary products,since the nineteenth century, which would explain the increasing gap betweenrich and poor countries. Free trade would thus become an instrument of imperi-alist domination. Arghiri Emmanuel (1972) does not attribute unevenexchange to the differences in the organic compositions of capital, but to theincreasing difference in real wages between rich countries and poor countries,which Bettelheim questioned.

None of these theories explain why capitalist countries are so interested inhindering the growth of underdeveloped countries, while it would be more prof-itable for them to trade with more advanced economies. According to Howard


and King, Paul Baran omitted to mention the possibility of economic develop-ment through exports. Besides, the motivations of the American strategy in theThird World are more political than economic.

The relation between wars and economic cycles: the historical economy

In several Marxist-inspired theories, the question of the relation between warand economic cycles gave rise to both structural and historical studies.

A certain Marxist theoretical current attempts to re-read the history ofcapitalism in the light of a structural analysis, based on two fundamentalMarxist laws: the laws of the falling and equalizing tendencies in the profit rate.In this respect, Samir Amin (1975) considers that the alternation of phases ofexpansion and of ‘structural crisis’ characterizes the history of the capitalistmode of production. The capitalist system (especially the international emigra-tion of monopolistic capital) leads to unequal trade and to the exploitation ofworkers, notably in the periphery. Ricardo’s law of comparative advantages isno longer valid, and poor countries should choose a strategy of self-centreddevelopment, dissociated from the international division of labour. This thesisresumes the work of Arghiri Emmanuel. The theories of regulation developed inFrance also agree on this analysis. But these studies are not always primarilyinterested in international conflicts, and often don’t even deal with militaryissues. However, as stated by Alexandre Faire (1975), one can consider thateconomic history is marked by the rivalries between major powers to share thespheres of influence and by the consequences of economic crises on inter-national relations.

The theorists of imperialism weren’t the first to assert that wars were theresult of specific national economic development characteristics. The Englishclassical authors had already integrated the issue of colonization into theirglobal economic thought, but they didn’t consider colonies as a condition foreconomic prosperity. We previously mentioned that Schumpeter considers theaccess to new outlets as no longer necessary in the twentieth century, becauseother elements, especially major technological innovations, can offer capitalisteconomic growth a new reprieve. Nevertheless, Hobson presented imperialistpolicy as an inevitable characteristic of capitalism. This system leads to overpro-duction, an uneven distribution of wealth, under-consumption, a capital surplusand consequently to periodic depressions. In this context, imperialist Stateswish to expand their foreign markets and secure their supplies in raw materials.But within each country, only a few specific groups benefit from this imperialistpolicy; a reform of the capitalist economic system should be undertaken, so as toreduce economic disparities, notably through taxation and public expenditures.Immanuel Wallerstein (1974) developed the theory of the ‘world economy’, orof the ‘world system’, in the scope of the historical economic current. He usesthe concepts of inequality and dependence in his analysis of international rela-tions. No State has ever succeeded in establishing a world empire, but themodern age, which began towards the middle of the fifteenth century, was


characterized by the emergence, first in Europe and then at the global level, of aworld capitalist economy. The world economy is divided between a core, aperiphery and a semi-periphery. The central state is the hegemonic power,which imposes its laws worldwide by controlling a large part of the internationalmarkets. The dominion is assessed in terms of comparative advantages andimplies the monopolization and the merging of certain businesses on the terri-tory of the central State, which then acquires a decisive advantage in agricul-tural and industrial productivity, but also in the fields of finance andinvestment. However, all hegemonic powers are doomed to decline, and thisdownfall is followed by a period of increasing economic and military competi-tion. The interstate war thus occurs when the political frame corresponding tothe domination of a formerly hegemonic power hinders, instead of favouring,the production and distribution processes at the international level. War is nottriggered by central States but by a competitor State; war is therefore inherentto the organization of the world capitalist system, characterized by unevendevelopment, exploitation and competition. Peace will only be reached whenthe existing system will have been dissolved and replaced by a world socialistsystem.

In the same way, Georges Modelski (1979) and William Thompson (1988)established a theory of the international policy’s long-term cycles. The worldsystem would be characterized by three main structures: the global politicalsystem, the world economy and the world cultural sub-system. It can be ruled byseveral States but also by a single world power, capable of maintaining theworld order through its monopoly of military resources. Since 1500, severalworld powers have successively structured the global system. The rise and down-fall of these world ‘leaders’ is cyclical, and every cycle begins with a global war,from which emerges a new structure of the world system, and a new dominantpower. In spite of their economic basis, these theories fall in the scope of thepolitical field rather than of the economic analysis itself.


5 ‘Turbulence’ inherent tocapitalism

Both world wars have relatively weakened liberal theory. This theory wasn’tprepared to explain these conflicts, which it had kept out of the field of politicaleconomy, as an inevitable consequence of the poor knowledge governmentshave of the real laws of economic. In fact, the Marxist theories of the time (andnotably the theories of imperialism) seemed to be more appropriate to explainthe new political and economic crises. Some non-Marxist economists thencarried out new studies on war and peace issues. The issue is to improve thefunctioning of the market system, both in wartime and peacetime, to ensure itslasting. Many analyses, more or less ‘heterodox’, have then been developed,before and after the Second World War.

The heterodoxies of the inter-war years: economistsconfronted with war

Liberal theory was not appropriate to explain the two world conflicts. Sometheorists, such as Sombart, Veblen or Schumpeter, have then elaborated theo-ries that differ from classic liberal doctrines, finding in the sociological andinstitutional characteristics of capitalism the explanatory factors of wars.Besides, for the first time in history, economists became strongly involved inanalysing the economic management of war and post-war years. The issue is tosave the market economy, by organizing as well as possible the war economy, soas to supply the means for victory, while avoiding economic crises when peacereturns. The Keynesian analysis is particularly exemplary of this new interest forthe issues of war and peace management. Worried about the emergence of anew ‘Bolshevik’ system and then of a planned system in Soviet Union, the mili-taristic character of which he recognized, Keynes suggests the ‘protection’, atleast in the short term, of a capitalism that defends democracy and shieldsagainst totalitarianism. His argumentation is one of an activist of marketeconomy, of which he acknowledges the imperfections and dangers, but also theproductive potential and the necessary respect of individual freedom. The econ-omists of the time were concerned with similar politico-economic issues, even iftheir analyses diverge. The economic analyses on the causes and consequencesof both world conflicts spurred a real renewal of economic theory, and more


conclusively, of the economic analyses of war, peace and defence. The greattheoretical systems are renewed by many rival and additional analyses, stronglyinspired by the study of current economic realities.

The future of capitalism in question: Veblen, Schumpeter andSombart

With the historical method, born in Germany, the explanation of internationalconflicts from the point of view of the social orders’ historical evolution becamecommon. Three ‘heterodox’ economists have pursued this tradition, butwithout belonging to the German historic school, even if it strongly inspiredSombart. Veblen and Schumpeter transcended the traditional field of economicanalysis, widening it to other social sciences, and the study of defence and warissues came within this orbit. However, if Schumpeter is recognized as a greateconomist, it is not always the case for Veblen. These three authors havedeveloped analyses of the place of war and militarism in the capitalist system:

• Werner Sombart underscores the dynamic role of military expenditure notonly on capitalism’s evolution, but also on the State’s imperialist character.

• Thorstein Veblen tries to demonstrate that war is outdated, a phenomenoninherited from a ‘feudal habit’.

• Finally, Joseph Schumpeter expounds the conditions under which waroccurs in a capitalist economy.

Veblen: or the ‘feudal habit’ of war and the evolution of society towardspeace

War, peace and defence issues hold an important place in Veblen’s work. Hedevoted two whole works to them: Imperial Germany and the Industrial Revolution(1915) and An inquiry into the Nature of Peace and the Terms of its Perpetuation(1917). His approach being highly original, its complete presentation wouldrequire very long developments. Biddle and Samuels presented Veblen’s entiretheory of war, peace and national security in detail. We shall present it heremore concisely and in a different way. Veblen uses the institutionalist methodto demonstrate the decisive role of economic nationalism in modern societies.He also underlines the opposition between ‘dynastic’ States and ‘modern’States, regarding the maintenance of international peace.

Veblen devoted numerous works to war, peace and defence issues, but thesecontributions have often been neglected, because of an insufficient scientificrigour, mainly because his analysis, which combines economic, political, soci-ological and legal thoughts, is considered as ‘multidisciplinary’. But, actually,Veblen wished to reform the whole of social science, and he considered theorthodox economy as too static (notably the general equilibrium concept) andunable to take into account institutional changes, phenomena which explainsocial evolutions. Veblen had no doubts as to the ‘scientific’ character of his


theory, he even blamed the historical school for its insufficient rigour. But, infact, the validity of Veblen’s methodology was questioned by several economists,notably by Blaug (1993). Blaug quotes the analysis of Ward (1972), criticizingthe methodology of institutionalism. However, this methodological criticismcannot only apply to Veblen, but also to numerous works on defence economics,in particular to Walras, Pareto or Schumpeter’s works of applied economics.However, the first two authors clearly distinguished applied economics from‘pure’ scientific economics, and the last author presented a generalizing theory ofthe passage from capitalism to socialism. Although Veblen did not succeed inestablishing a sufficiently general theoretical system, the institutionalist analysisrepresents an alternative to the dominant orthodoxy and opened the way to thedevelopment of several heterodox analyses. But only a few works on the historyof economic thought give him an important place. Schumpeter (1954) onlyquotes him in a chapter devoted to the developments of fields of analysis con-nected to economy. Besides, Veblen has had no direct followers, even if severalcontemporary economists can be related to institutionalism.

FROM THE PREDATORY INSTINCT TO THE KEY ROLE OF ECONOMIC

NATIONALISM IN MODERN SOCIETIES

Veblen’s theory on war and peace is both simple and complex. Simple, becauseit presents a rather clear theory of the evolution from the dynastic (warlike)State towards the modern (peaceful) State, and of the possible return of thedynastic State. Complex, because there is no determinism in Veblen’s work;unlike Marx, he proposes no ‘law’ of social evolution, which results from apermanent adjustment between instincts and institutions. Therefore, it isimpossible to forecast a society’s future orientation. Veblen’s ideas on peace areparticularly illustrative of the numerous implications of this non-determinism.Whereas on one hand, he underlines the possibility that militarism intensifiesin most developed countries, on the other hand he welcomes the advances ofworld peace, which, in his opinion could well last.

From Veblen’s point of view, institutions influence the ways or habits ofindividual thoughts, thus determining social evolutions. Institutions guidehuman action, but at the same time, the changes in mental habits (the spread-ing of new ideas) lead to institutional and social changes (1915: 58–59). Heconsiders that a society’s evolution has always been determined by ‘the preda-tory exploitation’. Human relations are characterized by force and by theinstinct of predation. In a Darwinist presentation, he considers that wars con-tributed to the process of social selection, by eliminating the weakest institu-tions. War has always been a key element of the socio-economic developmentof societies, as have the various economic or political measures taken in thename of national security, and this without hindering trade. In fact, warand trade have always been in interaction; moreover, the development oftrading relations has never guaranteed international peace and has no vocationto do so.


However, societies tend to become more and more peaceful. Veblen presentstwo ‘models’, the dynastic society and the modern society. In both models, acompetition between commercial interests and dynastic ones still remains. Thepredominance of one or the other determines the social structure. After havingbeen dynastic, Anglo-Saxon societies are modern; but some developing coun-tries, such as Germany, are still following the dynastic model, without havingachieved their economic and political modernization (1915: 65–68). Thedynastic State has inherited specific mental habits from the feudal era, notablycharacterized by bellicosity, the sense of duty and the spirit of subordination. InGermany, victorious wars, as well as the discipline of war preparation andindoctrination, are a key element in the population’s ‘allegiance’ to the State,in the respect of its authority and in the maintenance of the warlike spirit(1915: 81). Such characteristics can also be explained by Germany’s difficultyin asserting itself as a nation on the international scene. Conversely, Englandhas known a period of relative peace since the eighteenth century, whichenabled it to promote the ‘arts of peace’ rather than those of war. In suchmodern societies, peace is the normal state; the government is representativeinstead of autocratic; the individual economic initiative is respected; the‘material realities’ are recognized. The ideal public policy fundamentally differsin these two countries: Germany aims at strengthening its military power; forEngland, military expenditures tend to be reduced at the minimum level neces-sary to ensure national defence (1915: 173).

However, military and trade conflicts still occur, including between so-called‘modern’ States. Veblen explains this fact by the persistence of dynastic tend-encies within modern societies and by the important part played by patriotismand nationalism in their cohesion. Numerous problems hinder socio-economicprogress.

There is always an appreciable warlike animus present in these modernnations; necessarily so, since their governmental establishments arenecessarily of a coercive character and their ruling classes are animatedwith dynastic ambitions. In this matter the republican states uncriticallyimitate the dynastic ones so effectually as to make no grave exception fromthe rule. The historical tradition and precedents run that way. So that theferment is always at hand. But in the absence of special provocation thecommonplace body of the population, being occupied with other interestsand having no natural bent for fighting in order to fight, will by easyneglect drift into peaceable habits of thoughts, and so come habitually tothink of human relations, even of international relations, in terms of peace,if not of amity.

Temperamentally erratic individuals, however, and such as are schooledby special class traditions or predisposed by special class interest, willreadily see the merits of warlike enterprise and keep alive the tradition ofnational animosity. Patriotism, piracy and prerogative converge to acommon issue. Where it happens that an individual gifted with an


extravagant congenital bias of this character is at the same time exposed tocircumstances favoring the development of a truculent megalomania and isplaced in such a position of irresponsible authority and authentic preroga-tive as will lend countenance to his idiosyncrasies, his bent may easilygather vogue, become fashionable, and with due persistence and shrewdmanagement come so ubiquitously into habitual acceptance as in effect tothrow the population at large into an enthusiastically bellicose frame ofmind.

(1915: 60)

Therefore, all modern societies retain an inherent propensity for war, liable torouse at any time.

Veblen strongly criticized the capitalist society of his time. DebatingEngland’s case, he disapproves of the importance acquired by the owners class:this ‘idle class’, directly stemming from the warriors class in the former society,is interested in the increase of pecuniary values (capital goods) rather than eco-nomic valves (industrial production). Therefore, not only do the ‘absenteeowners’ receive an income without working, but they also tend to grow awayfrom concerns of production, leading the society to a crisis (by hinderinginnovation and individual initiative) (1923). Therefore, social institutionscannot evolve so as to make the society benefit from technical evolutions; theliving conditions of workers are thus worsened. But this situation paradoxicallyentails an intensification of the support the peoples give to national policies;workers are attached to the system, because of their patriotism. The feeling ofidentification of the individuals with the nation, i.e. nationalism and patrio-tism, is a mental habit inherited from the feudal era, favouring armed conflicts,which governments justify for reasons of defence of the population’s materialinterests or of national honour (1917: 22–23).

In imperial Germany, the forces of the community are turned towardsforeign aggression (1915: 157). The economic war also takes part in thisprocess. The German foreign policy mostly answers political considerations, thepeople’s prosperity being of secondary importance. However, the aggressivenessof the German imperialist policy won’t guarantee the population’s attachmentto the system. Veblen considers that the German ‘cultural community’ is in aphase of transition, the outcome of which is uncertain. It is very unlikely thatthis model will spread in other countries with more modern social structures;but a doubt remains regarding the modernization of the German archaic model.

THE IMPLICATIONS OF THE OPPOSITION BETWEEN DYNASTIC STATES AND

MODERN STATES FOR THE MAINTENANCE OF INTERNATIONAL PEACE

Veblen inferred from his comparison study of dynastic and modern States a setof principles for the preservation of international peace. However, the internalevolutions of societies towards more militarism or more pacifism remainfundamentally indefinite.


Nationalism and economic war play an important part in the preservation ofthe capitalist system. However, these weapons used by owners could well turnagainst them. Indeed, they awake the ‘dynastic instincts’ buried within socialinstitutions. This resurgence can only be temporary, in the case of a war forexample, and contribute to reinforce social cohesion when peace returns. Butthe intensification of such a logic can lead owners to call on the State tostrengthen their position; a process can then get underway and enable a militaryclass to come into power. However, Veblen is not determinist. He alsoexpounds another scenario, which he favours. The crisis of a society, because ofits institutional hindrances due to the ‘absentee landlords’, can be resolved bythe establishment of a new system. Society can be governed by technical ration-ality and be transformed into a technocracy, within which economists and engi-neers would be dominant; they would in fact be an ‘elite’ in the Darwiniansense. The society will then be peaceful, because the existence of a foreignenemy will no longer be necessary to maintain social cohesion. We recognizehere Saint-Simon’s ideas.

According to Veblen (1917: 82), the imperialist ambitions of Germanyand Japan will remain a cause of war in the future. The only solution for theother leading powers (except the unacceptable submission to a Pax Germanica)is to eliminate them, or at least to eliminate the ‘Imperial military clique’within these societies, so as to guarantee a lasting peace of neutral nations(1917: 187). However, Veblen was hopeful that the modern economic con-ditions would be sufficient to make ‘the dynastic spirit’ disappear in both dynas-tic states. He appeals for the creation of a ‘League of neutrals’. However, he wasopposed to the Treaty of Versailles, which he considered as a non-progressivemeasure of economic nationalism. From his point of view, the league of neutralshad, on the contrary, to ensure the equality of treatment in international tradeand to abolish all trade discriminations and all preferential tariffs within colo-nial empires, thus removing all interest in the appropriation of new colonies(1917: 259). German industry and trade liberalization will result in theimprovement of the population’s living conditions, and the acceleration ofsocial modernization. Modern societies such as England and the United Stateswill be encouraged to choose pacifism because of the aggravation of the eco-nomic consequences of war and of the increasing sophistication of militarytechnologies; therefore, war becomes more and more impersonal and loses itscapacity for social cohesion (1917: 310). Veblen considers that military expen-diture, the level of which is particularly high in dynastic societies, is a waste;however, this waste replaces that of ostentatious consumption, which wouldhave occurred if these sums hadn’t been levied for military ends. Therefore, mil-itary expenditures weren’t a cost for the Prussian society but, on the contrary,were useful to maintain a certain equality of living standards, which reinforcessocial cohesion (1915: 245). Veblen draws a parallel with the tremendous sumsspent on sport in modern societies, especially in England. In fact, these wastesare used to divert energies and attention. The future of peace depends on theconflicting relations between the ‘dynastic’ bellicose tendencies and the peace-


ful ‘modern’ ones. Even though he doesn’t exclude a lapse into conflicts, Veblenstates that ‘modernity’ should eventually prevail, and with it internationalpeace.

Schumpeter: the understanding of war in a capitalist economy

Schumpeter is confronted, in his work Capitalism, Socialism and Democracy(1942), with the difficulty of including war in his explanation of the historicalevolution of economic structures. This seemed all the more necessary as hiswork was written in the context of the two world wars, but mostly because theSchumpeterian analysis is multidisciplinary, not only economic but also polit-ical and sociological. Such a methodology appears particularly appropriate tothe study of war. Although he does not devote a specific chapter to its analysis,he often mentions it in his argumentation; his work is in fact of great import-ance in the explanation, based on social sciences, of wars in a capitalist system.But even if we only consider the strict economic field, to which this analysiswill be limited, Schumpeter’s contribution is illustrative of the evolution in theeconomic study of defence issues, during the inter-war period.

DEFENCE EXCLUDED FROM THE INTERNAL DYNAMIC OF CAPITALISM

Schumpeter insists on the evolutionary character of capitalism. Wars, as well asrevolutions, are apprehended as a part of the ceaseless alterations of the socialand natural framework, which modify the conditions of economic action. Theycan create the conditions of industrial changes, but can never be the main-spring of this process. Indeed, the driving force behind capitalism’s evolution isinternal, it is represented by ‘new objects of consumption, new modes of pro-duction and transport, new markets, new kinds of industrial organization, all theelements created by the capitalist initiative’ (1942: 121). Schumpeter uses theterm ‘creative destruction’. He doesn’t mention the role of the destructioncaused by war. Moreover, he explicitly rejected the idea of explaining economicdynamics through wars, considering that only major technical innovations wereliable to punctuate long-term cycles (1934: 246).

Schumpeter (1942: 144–152) analyses the ‘capitalism of giant firms’, withinwhich prevails the monopolistic or oligopolistic competition (or a combinationof both), the ‘perfect competition’ being the exception. However, the end ofcapitalism won’t be caused by the ‘destructive competition’ which would resultfrom struggles between giant economic entities, even if relations between giantfirms are compared to war relations. The economic power of monopolies is notconsidered as a valid explanation of the problems encountered by capitalism,because, first, monopolies rarely remain in the long run, and, second, theybenefit capitalism, contrary to what is usually thought. Indeed, the giant firmhas become the mainspring of progress and production long-term growth. Theperfect competition model is less effective. Schumpeter analyses the relationsbetween nations, at the macro-economic level, with arguments similar to those


used for inter-firm relations. No country will ever possess a monopoly for asufficiently long time to be able to exert a decisive influence on the inter-national balance of power; monopolies of products are not sufficient either(1942: 143). The effectiveness of the ‘economic weapon’ is thus refuted. There-fore, ‘economic war’ as the result of an aggravation of economic competitionbetween leading powers is not considered as a determining factor in capitalism’sdownfall.

Schumpeter considers that the success of capitalism is due to the action ofentrepreneurs and to the role of innovation, and not to State intervention.Wars and other exceptional circumstances are of secondary importance ineconomic development (1942: 154). Germany’s economic development wasmainly due to the economic union within the Zollverein, rather than to theFrench–German war, which nevertheless led to the foundation of the Germanempire. He does not consider war as a cause but as a condition for capitalistinitiative. Implicitly, he rejects the idea according to which the strugglebetween capitalist countries for the conquest of new territories has beenreplaced by the struggle for a new division of capitalist territories, even thoughthe theme of the ‘Lebensraum’ was important at the time. In Schumpeter’sopinion, the exhaustion of geographical outlets should stimulate internationaleconomic competition, because the new outlets would be mainly technical, andnot geographical; the economic world would then be divided ‘in hostilenational spheres’ (1942: 166–167). But as economic competition increases andcapitalism develops, international relations should become more peaceful,because of the rise in the cost of war and because societies will be more andmore characterized by pacifism and rationalism (1942: 181). Economic competi-tion does not lead to military confrontation. This analysis seems appropriate toexplain the current state of international relations, as well the proliferation ofinternational agreements for peace-keeping or of trade agreements to limit eco-nomic conflicts. However, Schumpeter believes that the end of the geographi-cal extension could endanger the long-term survival of capitalism. Thesaturation of new territories is one element (among others, such as population,technical innovations, the growth of the public sector) which leads the capital-ist system to lack resources. However, some young countries have not yet beenexploited up to the decreasing returns; moreover, other initiatives should besubstituted for the territorial conquest, and notably the creation of new marketsthanks to technological progress (1942: 167).

An original aspect of Schumpeter’s thought is to minimize the importance offoreign outlets in the development of capitalism. In the same way as publicaction, geographical conquest constitutes a ‘special event’, and thus doesn’tcontribute to the dynamic of capitalism. The opening of new countries (sourcesof raw materials and bases of new cities and industries) certainly enabledcapitalism to grow rich, but in fact only the entrepreneurs’ actions have beendecisive. The public policy is only there to establish a framework for their indi-vidual action (1942: 171). Even if geographical extension was an opportunity todevelop private initiative, nothing proves that it explains the performances of


capitalism. The following arguments show the importance given to economicmechanisms, dissociated in the last resort from the political field.

Thus, Schumpeter presents a very liberal conception of the evolution ofcapitalism: with time, the economy removes geographic boundaries. The realboundaries become technical. The future development of capitalism willdepend on its capacity to face the decline in the rate of innovation. But heremains optimistic: nothing indicates that geographical limits are also economicones. His analysis is very modern, in so far as it goes beyond the theory of impe-rialism while pursuing liberal theory.

The opposition to Marxist theories of imperialism is an essential theoreticalissue for Schumpeter. According to him, these thoughts are based on a falseidea: the bellicose character of the capitalist system. He disapproved of thishypothesis on the basis of social sciences arguments and not only on economics:its lack of vocation to lead the international policy weakens the bourgeoisie; itsfundamental pacifism harms its interests. Schumpeter expounded, in a study,‘The Sociology of Imperialism’ in 1918, his thesis on the increasing pacifism ofcapitalism. He describes the military profession as ‘the most anti-bourgeois pro-fession’. The more capitalism develops, the less wars have chances to occur forpurely economic reasons. ‘Military exercises’ are totally extraneous to the ‘men-tality’ and to the ‘capacities’ of the ‘men of the capitalist system’, who are alsoconcerned with the cost of war. In fact, even when it could represent a financialadvantage, the bourgeoisie would abandon the idea of war, because of its cost(1942: 182). This contradicts Marxist theory, according to which imperialismrepresents the last stage of capitalism.

The fact that capitalist societies must devote a lot of resources to militaryexpenditure is not contradictory, as their aim is defensive, and not offensive.Furthermore, the importance of military expenditures as an explanatory factorin the performances of capitalism is rejected (1942: 169).

Schumpeter also develops a theory of the political dynamic of capitalismclosely linked to the economic dynamic: as capitalism develops economically,its political base weakens. The bourgeoisie could lose the political leadership,because of its lack of political culture and of its incapability to create an effi-cient political class; most politicians are of non-bourgeois origins. The institu-tional consequence of the capitalist evolution is the destruction of theprotective classes which support the system. Yet, the military class is one ofthem. Here is evoked the ‘almost mystic prestige of the seigniorial behaviour’(1942: 191).

Yet this erosion of capitalism’s political foundations can lead to war, becausethe bourgeoisie will seek a leader able to manage political issues. War wouldtherefore result from a political dynamic inherent to economic development.

The particularity of Schumpeter’s analysis is to place war in a non-economiccategory, i.e. the cultural characteristics of an economic system; therefore,capitalism and socialism can indifferently be pacifist or warmongering. Indeed,two economic elements, private property and contracts (plus the bank credit forcapitalism) are sufficient to define a mercantile society; besides, the control of


the means of production and of production by a central authority define thesocialist system. All the other characteristics of these economic systems areindeterminate. Therefore, no one can say what socialism’s attitude will beregarding war or military expenditures, because of its ‘cultural lack of determi-nation’. The cultural characteristics of a civilization are, above all, the productof a specific historic evolution. Schumpeter is here in opposition with theMarxist theoretical interpretation: war does not lie in a system’s economicstructures, but is the product of its historical evolution.

Under these conditions, how can the fact that capitalist societies lead warsbe explained? Schumpeter gives three main reasons for this: self-defence, thesearch for economic profits (in the period of colonial conquests) and the pres-sure of specific groups which do not represent the bourgeoisie’s general interest(1942: 181). But, all things considered, this entire analysis tends to demonstratethat wars led for economic reasons are not inherent to the capitalist system,they have only been favoured by a particular historical context.

THE ROLE OF WARS IN THE LONG-TERM HISTORICAL EVOLUTION OF

CAPITALISM

For Schumpeter, the lack of a democratic representation of economic interestsis a factor of war. In the same way, economic changes stemming from inter-national conflicts are a problem for economic analysis.

In order to explain the permanency of wars between capitalist societies, it isnecessary to distinguish the economic from the political sphere. The politicalmechanisms of capitalism can indeed favour a national foreign policy which isopposed to the fundamental interests of the bourgeois class. Two facts mustthen be considered (1942: 357): first, public opinion can be manipulated tobenefit pressure groups, because the political process isn’t reliable; second, thebourgeoisie is not able to establish itself as a political class which would lead thenational foreign policy to coincide with its own interests. Some pressure groupscan therefore use the political system in their own interests. Yet, the problem isthat capitalism’s political action is based on the ‘classic doctrine of democracy’,deriving from the utilitarian philosophy of the Enlightenment; but decisions ofinternational policy should not follow the people’s will, which has no skills insuch fields. Furthermore, this doctrine increases the influence of specific groups(representing particular interests, or political ideas, or idealists), which mobilizepublic opinion in their favour. It is all the more dangerous as war can be pro-voked by ‘militant nationalisms, [. . .] By the propaganda of such or such groupswhose interests are at stake’ (1942: 407). The end of bourgeois democracy isthus predicted.

In the long run, the economic internal dynamics of capitalism tend to runout of steam; the predominance of monopolies and the disappearance of smalland medium-sized firms is an essential element in this evolution (1942: 189).This weakening of the economic dynamics has repercussions at the politicallevel, by decreasing the capacity of the classes in power to face foreign aggres-


sion; the ‘bourgeois fortress is demolished’ (1942: 190). Schumpeter’s analysisaims at minimizing the negative effects of the fiercer economic competitionentailed by the lack of new outlets and of new major technological discoveries(likely to originate innovation clusters). Capitalism’s adaptability is immense;therefore, the scenario of its disappearance following a confrontation betweenimperialist powers is improbable, although war accelerates the march towardssocialism. Internal decay will cause the end of capitalism: the bureaucratizationof firms and the weakening of the enterprising mind are determining factors inlast resort. Furthermore, both world wars have led to irreversible changes in theway of thinking about economic policy, with an increased interventionism,which is partially irreversible (this, moreover, explains the failure of the returnto the gold standard after the First World War). Schumpeter states that thisevolution confirms the main thesis of his work, according to which socialismwill sooner or later succeed capitalism. Economic policy issues are certainlybeyond the field of ‘pure economy’. But in so far as economic structures are lessand less capitalist, the analysis of public action and thus of the economic con-sequences of war is more and more necessary to understand current economicchanges. War is the only element among the ones Schumpeter considered as‘exceptional circumstances’ which he develops a little in his analysis, in anappendix to his work, written in 1949 and entitled The March TowardsSocialism. In this work, the author broaches at length the subject of war anddraws a parallel with the changes that have occurred in the capitalist economicstructures. Great wars can accelerate the transformation of a social system intoanother (socialism, in this particular case), which otherwise is too slow to beanalysed in the short term. The First World War had already greatly con-tributed to the progress towards socialism; the world crisis and the SecondWorld War acted as ‘additional accelerators’.

The new regulations and new tax burdens implemented to prevent anothergreat economic crisis show the submission of the business class to the workingclass. However, the transformation due to the First World War can go againstthe interests of the socialists themselves: inflation, in particular, can weakensocial structures. Schumpeter is strongly opposed to the inflationary policies ofjust after the war, and pursued the following years, which favour wage claimsand interventionism, therefore discouraging private initiative. In the same wayas Schumpeter underlines the catalysing role of war in economic changes,which are the result of ‘much deeper forces’, Keynes considers war as a historicalopportunity to durably modify the conditions under which capitalism is organ-ized: in this respect, he criticizes the return to pre-war economic policies, inparticular deflation and the gold standard. But both analyses conclude on thenecessity of peace at the international level and of State intervention toprevent capitalism from collapsing; indeed, even if Schumpeter considers itregrettable, he concludes his work on the idea that public action can enable thecapitalist economy to last, even in stagnation. He notably presents the highAmerican military expenditures after the Second World War as a way to fightagainst inflationary trends. Schumpeter’s work, as well as Keynes’ or those of


other economists of the time, is a good example of the new interest economistshad in defence issues.

Werner Sombart: or the civilizing effects of conflicts and military expenditure

Werner Sombart was influenced by the German historical school but also byKarl Marx, as shown by this quotation: ‘Capital . . . dominates the world andmakes our statesmen dance as puppets on a string’ (1886: 31).

Capitalism is presented as a historical category, a result of progressivechanges, led at least partially by the class war. Individualism, competition,acquisition and the rationalization of ideas constitute in this respect its mainelements. The development of capitalism and state intervention are two inter-dependent elements. Public action leads, by military means if necessary, to theimposition of capitalism as the dominant form of social organization and exertsimperialist influences over all other systems, the economic and social structures.

THE MILITARY SECTOR: A STIMULATING FACTOR OF CAPITALISM

In his study of capitalism, Sombart insists on the role of the State, whichhas first asserted itself as an organization of power necessary to strengthennational economic prosperity, often by coercive means, such as war, colonialismor trade restrictions (1932: 83). Furthermore, he considers that the warlikespirit still spurs the heads of big commercial firms, showing in this way howsimilar the skills required to be a business leader and a war chief are. As amatter of fact, the State favoured the development of the capitalist spirit,because in periods of money shortage, it alone had at its disposal the sumsnecessary to create new firms as well as an unequalled organization apparatusand it alone could undertake long-term projects, with distant consequences(1913b: 109).

In Sombart’s opinion, war is a necessary evil for economic development andthe army is a productive force which stimulates capitalism (1886: 24–26). Themilitary factor has two main consequences on the domestic economy: on theone hand, if the permanent army represents a cost, it is also an economicopportunity which exerts important macroeconomic effects on nationaleconomy; on the other hand, wars favour the reorganization and initiativeneeded for industrial revolutions. Sombart states that the European industrialrevolution and the capitalist system were yielded by war. At first, owing to thearmy, the modern States achieve national unity. Then, the military’s need forarmed conflict creates the prerequisites for the development of capitalism. Theynotably contribute to (1913b; 1932):

1 create big markets. The centralization of the State orders changes the con-ditions of production, favouring technological innovations, standardization,the rational organization of work, the merging of businesses, mass consump-tion and the systematic search for economies of scale. The increased


demand in weaponry also favoured the expansion of the armament indus-tries, which generated a prodigious development of the heavy industry, oneof the most important sectors of capitalism.

2 create fortunes. According to Sombart, fortunes are the result of landincomes, interest loans, trade profits, but also of victorious conflicts.

3 improve the spirit of competition and the search for profit. The militaryadministration is among the State sectors which exert a positive influenceon the capitalist spirit. The existence of a permanent army is a major socialevent in modern history, enabling the bourgeois ruling class to only dealwith economic issues. On this matter, Sombart insists on the particular partplayed by the Jewish people, the best example of a merchant people, con-demned to live out of all military activity during twenty-three centuries,apart from the trading activities required to provide the goods necessary forthe running of armies.

4 encourage industrialization and industrial integration. The more countriesare impregnated with the principles of military organization, owing to theexistence of a permanent army, the more they are effective from an eco-nomic point of view. This is the case of Germany.

5 develop the financial sector. If military expenditures entail public debt,they also contribute to the development of financial factors and institu-tions, by the establishment of a stock exchange and the growth of privatefortunes. However, war leads to serious budgetary disorders, considering theeffects of eviction and the necessity to increase taxes or to strengthen thefloating debt by long-term loans. Yet, an excessive taxation, as well aswrong industrial and trade policies, can hinder or even completely suppressthe enterprising mind, essential to the contemporary economic develop-ment.

6 develop the value of competition and of permanent struggle. The modernforeign policy leads to a continual increase in State militarization, to therise in military expenditure and to an arms race: ‘There has been, besidesthe capitalist evolution, a militaristic evolution, obeying laws independentfrom those which rule over the succession of purely economic facts’ (1932:88).

Sombart does not believe in the pacifying power of international agreements.The First World War revealed their powerlessness: ‘Internationalism is not theroad to peace: on the contrary’ (1932: 94). Moreover, State militarization is dueto the pressure of some interest groups, the influence of which is all the greateras the State is weakened by the class war. Therefore, capitalism also leads toimperialism.

THE IMPERIALIST STATE

Sombart (1932) considers that, since the 1880s, industrialized nations haveadopted a ‘neo-mercantilist’ policy, with the return to the idea of national


economy, the establishment of trade barriers, the contribution to the develop-ment abroad of important national monopolies, and an increased politicalcontrol over colonies: ‘Long ago, the State used to govern the economy; thistime, the economy rules the State’ (1932: 86). This reorientation of the Stateoccurs after a period of free trade which began in the middle of the nineteenthcentury. In spite of the assertions regarding the peacefulness of the creation of aworld trade community, England, which started the movement, never gave updefending its interests. Moreover, it benefited from free trade as long as it didnot fear the competition of foreign imports. The return to a ‘more realistic’policy is the result of the pressure of the dominant groups which do not findadvantages in capitalism.

The imperialist State first seeks to increase its markets in the least developedcountries, sometimes imposing a law very far from the Smithian principles. Asan example, Sombart evokes the destruction of the Indian textile industry bythe imports of English ‘cotton goods’. However, he criticizes the Marxist inter-pretation of imperialism, according to which it is totally determined by eco-nomic factors. The opening of new outlets, the supply in cheap raw materialsand the exploitation of producers in colonized territories, certainly preventedthe stationary state announced by Ricardo. But several extra-economic causesalso determine the phenomenon of imperialism (1932):

1 political ‘motives’, such as the growth of national power or the need forforeign security;

2 military reasons, the military machine urging the State to expansion andconquests;

3 nationalist factors, with the specific ambitions of a race or an ethnic group;4 religious bases, as shown by the expansionism of Moslem States;5 demographic justifications (search for colonial territories to absorb over-

population).

However, the capitalist economic system will spread beyond Western Europe,which will weaken its economic foundations, established in the nineteenthcentury through the exploitation of other peoples. Europe will soon only haveto rely on its own economic forces (1913b). Besides, the capitalist system willnot develop any more within its sphere of influence, because the non-capitalistforms will remain, and even develop. Indeed, capitalists tend to become aleisure class and to adopt seigniorial behaviours. Furthermore, the increasingbureaucracy further reduces the capitalist initiative and the enterprising mind: ‘Ibelieve that the capitalist spirit contains the germ of its own destruction and ofits death’ (1913b: 432).

Highly influenced by Marx, Werner Sombart later supported the Nazistheses. As a theorist, he presented a ‘non-specialized’ analysis of war, byshowing its various forms (from armed conflict to economic war) and its variouscauses. He moreover insisted on the important economic role of the State, andon the influence of the bourgeois class on its objectives and management.


The Keynesian revolution: an unexpected consequence of theanalysis of international security during the inter-war years

Even if he restricted the field of his General Theory of Employment, Interest andMoney published in 1935 to the domestic economy, Keynes always took intoaccount the international level. His work, The Economic Consequences of thePeace, published in 1919, as well as numerous articles and letters of the inter-waryears, show the interest he took in the analysis of the implications of the eco-nomic interdependence of nations, notably from the point of view of nationaland international security. At the time, war and the economic crisis gave rise tototalitarisms but also to some original initiatives of economic interventionism,notably in the United States and Germany, which led the way to a renewal ofeconomic theory. The old theoretical convictions remained, however, the refer-ence for European democratic governments; notably, the implementation ofdeflationary measures in the context of a return to gold parity.

Keynes gives great importance to war and security issues in his political andeconomic thought. The economic crisis reminds him that some decisions ofeconomic policy can modify the market’s short-term negative excesses, there-fore changing the course of history. Behind the theoretical concepts, Keynesexpounds governments’ practical duties and thus goes beyond the simplisticdebate between peace–liberalism and war–protectionism. He mentions thatpolitical leaders have to deal with several different and sometimes contradictoryobjectives; in addition to the economic crisis, which requires short-term meas-ures, there is a moral crisis which calls on governments to take into account thelong-term consequences of such measures on international relations. The immi-nence of the world conflict shows that democratic nations should unite in orderto defend their social model. Between national economic interest and inter-national solidarity, Keynes studied in an original way the strong links existingbetween security and economy and based his analysis on two main proposals:

• democracy and peace benefit from economy;• peace cannot last in a situation of economic crisis.

Democracy and peace benefit economy

The Keynesian analysis is based on the defence of political liberalism and peace.Given the international and social (even societal) chaos of the time, Keynesmakes politico-economic proposals so as to help the market economy to fightagainst fascist or communist totalitarianisms.

Keynes writes in a strained international context, marked by the world eco-nomic crisis and the rise of totalitarianisms. He considers that the stake is,above all, political, the economy being only an instrument of higher moral pur-poses, i.e. the defence of democracy and of individual freedoms, clearly differen-tiated from the Marxist formal freedoms. Yet, communism is particularlydangerous (1982 [1934]: 34). The liberal and Marxist ‘standard system’ must be


abandoned, and a new ‘scientific paradigm’ established: ‘The standard system isbased on intellectual error. [. . .] Our pressing task is the elaboration of a newstandard system which will justify economists in taking their seat beside otherscientists’ (1934: 32).

Keynes believes that the economist’s existence is only justified if he or sheelaborates concrete solutions to ensure the smooth running of the free- marketeconomy; it is therefore necessary to use a methodology where economic theoryis based on the observation of concrete issues. As far back as 1919, in The Eco-nomic Consequences of the Peace, he forecasts a revolution in Europe if nothing isdone to educate public opinion, whose hidden currents are, in the last resort, farmore decisive factors than political actions in the system’s survival. He reassertssimilar ideas on the eve of the Second World War:

We are seeing and enduring events, worse than which have not been seenand endured since man became himself. If we still recognise the difference,not merely between peace and war, but between good and evil, andbetween right and wrong, we need to rouse up and shake ourselves and offerleadership.

(1982b [1938]: 99)

Keynes does not believe that the confrontation between democracy and totalitari-anisms can be solved by armed conflict. Convinced that public opinion supportcan only be obtained from a new moral ideal, with notably a new economictheory, he denounces the uselessness of a new ‘war of religion’. Keynes defendedpacifism, considering that war is opposed to human nature and that it should beavoided by establishing adequate politico-economic structures. In 1921, heappealed for disarmament and expounded the advantages of the resulting savingsfor national economies. A general disarmament that would favour the economicpost-war recovery was indeed a wide-spread idea at the time: when the AmericanTreasury refused to grant Europe a new loan in 1919, it recommended disarma-ment, adequate taxation and domestic loans. Keynes proposed in vain the limita-tion of military expenditures to the Sub-committee of the British League ofNations for the arms limitation (1977 [1921]: 241). He worked for peace through-out the inter-war years, refusing to consider the eventuality of a war againstGermany until 1938 (1982b [1936]: 56); however, he rejected the socialists’ pro-posal to call on the nation to refuse to fight, pay taxes or work if war occurred.

Considering peace as a necessary condition of economic development,Keynes asks for an international economic agreement during the Genoa Con-ference of 1922 for the normalization of economic relations, so as to limit polit-ical risks in Europe (1982b [1938]: 102). In 1929, he contributes to a ‘Schemefor the rehabilitation of European credit and for financing relief and reconstruc-tion’ which suggests to the League of Nations the use of financial weapons toprevent future conflicts. The prospect of financial support for one of the warringfactions in a potential conflict should dissuade the other one from openinghostilities (1981b [1930]: 332). A few years later, in 1935, he defends the prin-


ciple of economic sanctions against Italy, for which he believes war would be areckless solution (1935: 370). Finally, in 1937, he asserts that there are ninechances in ten that the threat of sanctions against Japan would have a positiveeffect (1982b [1937]: 82). More generally, he declares himself convinced of theefficiency of economic sanctions. In 1935, he suggests the strengthening of theLeague of Nations, by limiting its members to countries really willing to pre-serve international peace; moreover, he proposes a consolidation of its eco-nomic and military power (the time for disarmament being now over) so as tobecome a deterrent power for ‘law-breakers’ (1982a [1935]: 374). He regrets,with a caustic irony, that this project has reached an impasse, because of theUnited States’ refusal to take part in it. A few months before the Munich Con-ference of 29 September 1938, he criticizes the wait-and-see policy of the alliedgovernments, and he recommends a ‘positive pacifism’ against the ineffective‘negative pacifism’ that Lloyd George and Chamberlain opposed to Hitler’s‘positive militarism’. He then suggests the creation of a new League of Nations(1982b [1938]: 99) with wide-ranging powers and the creation of a new ‘Euro-pean Pact’: this one would be responsible for defence as well as for the preven-tion of conflicts, by means of deterrence, and would guarantee Europeancollective security by channelling forces towards a concerted action. Its func-tions would be a: financial assistance, the use of a blockade and a total militaryalliance. In addition to this ‘European League’, similar institutions could becreated in America (‘American League’), in the Pacific (‘Pacific League’), or inAfrica (‘African League’).

But the fact that economic crisis in Europe and the United States persistedthroughout the inter-war years led Keynes to suggest other solutions, particu-larly a public economic policy, so as to save the capitalist system from externalor internal destabilization.

In 1932, Keynes refutes the idea that economic liberalism is synonymouswith international peace. He accuses the search for a maximal internationalspecialization and for a geographic spreading of capital of being responsible foraggressive national policies led in order to protect particular interests, conquernew markets and increase economic imperialism. He has doubts as to the eco-nomic advantages of an increased dependence of national economic structureson foreign capital and on changing foreign economic policies. He considers thatcapital outflows (notably when the ratio between the marginal efficiency ofcapital and interest rates is more advantageous abroad) prevent the implemen-tation of good national economic policies, and he denounces the separationbetween real property and the management of firms. He therefore proposes in1933 a radical break with the orthodox model:

For these strong reasons, therefore, I am inclined to the belief that, afterthe transition is accomplished, a greater measure of national self-sufficiencyand economic isolation between countries that existed in 1914 may tend toserve the cause of peace, rather than otherwise.

(1982a [1933]: 237)


With a regard to economic policy, this argumentation would notably implyfewer incentives to develop economic links abroad; and in fact, in 1930, Keynesrecommended a bank rate policy so as to discourage foreign investment andencourage ‘domestic’ investment in order to improve the British balance oftrade. However, he remarks that such a policy could only work if public opinionadheres to a feeling of ‘economic patriotism’. In 1943, during the first debateson post-war trade agreements, he advocates the regulation of imports, so as tostabilize the balance of trade, but also in order to favour the development of‘new staple industries’ (1980a [1943]: 261).

Keynes’ analysis is in fact very pragmatic; he isn’t opposed to internationaltrade, but only to its short-term negative effects. Indeed, in the 1920s, hedenounces the limits of a simplistic economic nationalism and recommends arecognition of international economic interdependencies. He hopes that his‘import and export programs’ of 1944 won’t entail trade restrictions and thatdomestic prices will remain close to world prices. Moreover, he criticizes manyforms of economic nationalism, notably the American isolationist withdrawaland the refusal of French public opinion to export gold to Germany.

Even if Keynes questions the links between liberalism and pacifism, he warnsagainst the risks for world peace of a too-aggressive economic behaviour of one orseveral nations towards other countries, as shown by the example of the Allies’policy towards Germany after the First World War. More generally, he denouncesthe political risks of a restrictive trade policy. If Europe doesn’t regain economicprosperity, its security could be threatened, because the economic crisis will leadto war. This idea first appears in his study of the reparations imposed on Germanyafter the First World War, by the Treaty of Versailles. From his point of view,these measures are likely to definitively lead Germany into a crisis and even tostarvation. Yet, the reaction can be terrible; economic exhaustion added to thepolitical humiliation of the Treaty of Versailles could enable military leaders tocome to power in Germany (1977 [1921]: 241). The Allies should fear this‘authoritarian reaction’ at least as much as they fear Bolshevism, because it islikely to lead to a European war (1971a [1919]: 184). Keynes even left the BritishTreasury so as to protest against the reparations imposed on Germany, and hestrongly militated in favour of a revision of the Treaty, and later even recom-mended the cancellation of all reparations. On this matter, he was strongly criti-cized by some American economists, but above all by the French economists,notably when he condemned the French project to occupy the Ruhr (the Frenchgovernment considering that Germany was voluntarily failing in its paymentobligations). Keynes regrets that economic science has not spread in Francewithin academic and official circles (1981b [1930]: 154): according to him, themain issue is not whether the reparation claims are morally justified; only theeconomist’s pragmatism should influence the political choices of the Allied gov-ernments. And, precisely, Keynes put forward the argument of international eco-nomic interdependencies: political measures which intend to weaken Germany’seconomic potential are short-sighted. Indeed, an economic recession in Germanywould spread to the rest of Europe, for two reasons:


1 before the war, Germany was the economic heart of Europe. Other coun-tries of central Europe need a strong German economy to be able to recover(1919: 145).

2 Keynes underlines the possible pernicious effects of reparations, whichcould force Germany to develop its foreign trade, thus worsening inter-national economic competition; reparations should therefore only absorbGermany’s normal surplus which otherwise would have been devoted toforeign investment and foreign trade (1971b [1918]: 380).

Keynes strongly criticized the national self-sufficiency policies followed duringthe inter-war years, along with the development of fascism, Nazism andcommunism. He denounces three great dangers of economic nationalism: thedoctrinarian’s foolishness, hate and most of all intolerance. Protectionism mustbe considered with circumspection: ‘For I must not be supposed to be endorsingall those things which are being done in the political world today in the nameof economic nationalism. Far from it.’ (1982a [1933]: 244). Because of his paci-fist convictions, he wishes to lower trade restrictions. In 1930, he approves ofthe project of international co-operation outlined at the Genoa Conference of1922, even if it is delayed by discussions on reparations and on the return to thegold standard. As regards Central Europe, Keynes recommends an economicunion to compensate for the loss of efficiency due to the political division insmall national entities after the First World War. Generally speaking, he isfundamentally opposed, on principle, to the establishment of a protectionistsystem, which wrongly claims to act in favour of national interests, notably byadvancing the arguments of key and of infant industries. Generally, these arefalse excuses aiming at applying restrictions to all industries (1981a [1923]: 147).

But, owing to his empirical methodology, Keynes believes it is not yet timeto significantly reduce trade restrictions. In this respect, he asserts, about theWorld Economic Conference of 1933, that trade liberalization, although desir-able, is less urgent than the limitation of the risk of a world financial crisis dueto the competitive struggle for liquidity (1982a [1932]: 39). Just like List, heconsiders that liberalism is only a long-term objective. However, unlike him, hedoes not consider that national economic interests are fundamentally conflict-ing and he appeals for the development of international economic co-opera-tion, while establishing national solutions of economic policy to overcome thecrisis. The difficult management of both these objectives in parallel, althoughsometimes contradictory, is the major issue of economic policy, and future inter-national peace depends on its success.

A lasting peace, without economic crisis

In order to better reconcile the imperatives of international peace and thedefence of national economic interests, Keynes appeals for an internationalagreement to cancel the inter-Allied debts and reparations, in his work, TheEconomic Consequences of the Peace (1919). His analysis relies on the argument


that the world economy is in serious danger of a debt crisis and that it is all themore likely to occur as, for the first time, the debt burden is not represented byreal capital and is not limited by the property system. A large indebtedness isn’tin keeping with the human nature and no people will agree for long to work tofulfil a foreign payment (1971a [1919]: 178). The cancellation of the inter-Allied debts would be a sign of solidarity among Allies and would contribute tothe emergence of a new Europe.

In the same concern for international co-operation, Keynes asks in 1919for American financial assistance, through an international loan, to help therecovery of European production, hindered by import surplus and monetarychaos (1971a [1919]: 180). When the Amsterdam Financial Conference tookplace in 1919, he also suggested the creation of a new world currency and ofbarter payments. However, international collaboration is difficult to implement.In 1933, he defends international co-operation in order to increase prices andpurchasing powers, and he denounces the sterile monetary policy followed byEuropean countries which uselessly hang on to gold, ignoring the economicprofits which could be gained from expansionist policies, based on the develop-ment of international trade. He recommends that Great Britain should followthe American example, and consolidate a sterling–dollar block (1982a [1933]:257–277).

After the Second World War, Keynes reasserts the necessity of internationalcooperation. As stated in his speech in favour of the Beveridge Report in 1942,the return to economic prosperity is worthless without co-operation and friend-ship agreements between peoples, which guarantee future international peace.In September 1945, he calls on Europe to work at its economic recovery, withthe help of the United States, to return as quickly as possible to liberal tradepractices allowing an expansion of world trade, which is in the long-term inter-est of all countries (1979 [1945]: 465). The same idea underlies the first outlinesof an international project, in which Keynes participates, in order to regulatestaple commodity prices and, more particularly, agricultural products. On thisissue, he defends a centralized international action substituting itself for thetraditional laissez-faire, so as to effectively fight against the negative effects ofthe fluctuations in raw material prices, notably through commodity controls,the control of stocks becoming the most effective way to prevent trade cycles(1980b [1942]: 113). This technique later gave rise to numerous debates at theinternational level, notably within the UNCTAD.

The issue is to succeed in harmonizing various national economic interests,which should later contribute to a military and economic disarmament. Gov-ernments shouldn’t choose to withdraw from the economy, even if the searchfor solutions of economic policies appropriate to specific national economicproblems becomes more problematic when the economy opens up to inter-national trade. Keynes implicitly considers that the economic policy he recom-mends will be all the more efficient as it will be followed by numerous countries.Unlike the mercantilists, who considered that one gains only what the otherone loses, Keynes has a dynamic conception of international economic growth,


contributing to the wealth of all, as long as international economic relations arestable.

Keynes’ pacifism is based on the idea that an economic interdependence ofnations is necessary. A new equilibrium in international economic relations mustaccompany the search for an economic internal coherence through publicpolicy. He suggests that the United States abandon their policy encouragingexports and limiting the tariffs of imports, which prevents Allies from repayingtheir debts (1977 [1921]: 272). Besides, he recommends the development of eco-nomic relations between Germany and Russia, weakening in this way Germany’scompetition on other markets, in a context of globalization. He also criticizes theblockade imposed on Russia, which is not economically profitable, and suggeststo raise it (1971a [1919]: 186). He didn’t consider the British economic crisis as adirect consequence of the conflict, which only delayed economic growth (1977[1921]: 259). The crisis has more fundamental causes, i.e. the difficulties result-ing from the fact that the economic forces of the nineteenth century havereached their term, that economic motives and ideals are no longer suitable andmust be renewed (1971a [1919]: 161). He puts forward two priority objectives:guarantee food security to the population and fight against the rise in unemploy-ment. State policy should give a new impulse to business, which is slowed downby the timidity of both entrepreneurs and public action (1981a [1924]: 219). Heaccuses European deflationary policies of the post-war years, based on an erro-neous conception of economic mechanisms, of being responsible for the persis-tence of the crisis. Notably, although the policy of high interest rates forlong-term loans may have been justified a few years after the war, it was wronglymaintained afterwards, disregarding the needs for productive investment; in fact,the underestimate of the war’s economic depressive effects wasn’t well perceivedbecause of two events: on one hand, the agreement on reparations and war debts,and on the other hand the return to the gold parity.

Keynes states that problems linked to war debts shouldn’t prevent the gov-ernments from encouraging productive investment. In the long term, economicprosperity leads to a fall in interest rates. In 1929, Keynes considers that theonly way the Allies could receive ‘reparations’ from Germany, apart fromlending it these sums, was to lower German wages; this would contribute to thedevelopment of export industries, thus resolving the problem of ‘transfer’(which, for foreign countries, consists of the conversion of the sums receivedfrom Germany into their own currency) (1983 [1929]: 451). But, in 1931, hecomes back to this idea, asserting that the international economy would bepenalized by the fall in demand due to the salary cuts in Germany (or in anyother country), aggravated by the burden of monetary debts stemming from war,which would be increased by such a measure. He then recommends the bringingdown of interest rates rather than salaries (1973b [1931]: 358). Keynes laterdeveloped other theoretical justifications, notably in the General Theory: thefall in effective demand due to cuts in salaries, in spite of their rigidity todecrease, is presented as the major cause of recession.

The return to gold parity is economically disadvantageous, because it


increases the war debt burden. Keynes suggests the stabilization of the curren-cies at their present value, through a capital levy rather than through a depreci-ation which would increase the monetary debt burden.

From Keynes’ point of view, war shows that prices cannot remain stable onlyby keeping the volume of money constant; he therefore contests the quantita-tive theory of money (and future monetarist theory) (1981a [1924]: 206). Sincethe war, gold no longer guarantees monetary stability, because the gold quantitycirculating throughout the world has declined and because the system of credithas been extended. He thus recommends a monetary reform, to channelnational savings towards national investments, and more particularly towardscivil engineering (1981a [1924]: 223), within an active policy of greatautonomous investments (1981b [1930]: 323). The government must aim at sat-isfying its citizens’ economic and social objectives and its economic policy isessential for collective prosperity.

According to Keynes, overcoming the current economic crisis implies thegeneralization of public spending financed by loans (1980b [1943]: 320). Hethus questions the restrictive liberal conception of State intervention limited toa few fields, notably defence. Ensuring prosperity in peacetime is also a Stateduty, which should mobilize as much energy as the preparation for war. Regard-ing military expenditures as specific public expenditures, he is concerned withtheir possible effectiveness against unemployment (1982a [1939]: 528–532).The stimulation of armament economic activities due to a rise in militaryexpenditure should induce a correlative rise in employment and wages. Thisshould lead to a rise in demand and thus in production and to a decline inunemployment. Making the hypothesis of a 150 million pound sterling increasein military expenditures Keynes (1982a [1939]: 528–532) concludes that thiswill help to overcome unemployment, because of a multiplier effect: ‘If so, thedirect effect of the armament expenditure may be to take 300,000 men off thedole. I fancy that even the pessimists would reckon that a fairly conservativefigure’ (1982a [1939]: 528–532).

However, the rise in arms production is only a stop-gap solution, which doesnot in itself meet social needs and which slows down the national potential oflong-term economic development. Military expenditure is the most unproduc-tive (but useful for national defence) of all public expenditures. Arms are eitherunemployed or destroyed in case of war; thus, their production does not repre-sent an inter-temporal transfer of purchasing power, but a definitive exclusionof production factors from the economic process. It is thus an unproductiveconsumption. The preparation for war, more than war itself, is a temporaryincentive to economic activity. But Keynes disapproved of what is now knownas ‘military Keynesianism’, because it only had short-term effects. It is better toguide public investment towards the building industry or civil engineeringwhich are socially useful:

I have a special extra reason for hoping that trade-unionists will do whatthey can to make this big transition to fuller employment work smoothly. I


began by saying that the grand experiment has begun. If it works, if expen-diture on armament really cures unemployment, I predict that we shallnever go back all the way to the old state of affairs. If we can cure unem-ployment for the wasted purpose of armaments, we can cure it for the pro-ductive purposes of peace.

(1981b [1939]: 532)

In fact, Keynes regrets that the only public spending of his time which helpedto overcome unemployment was military expenditure; without this, the Britishgovernment would never have resorted to loans. Yet, their effectiveness in over-coming the economic crisis can only be temporary; a policy based on otherpublic expenditure would be more effective. Besides, in 1941, in his thinking onEuropean economies after the Second World War, Keynes emphasizes the lackof productivity of military expenditure and the burden this represents for thenational economy, in so far as public finance would be better employed if itencouraged the national productive capacities. Therefore, he denounces thefact that, if Germany had no right to keep its army and armament industry afterthe war, its economy would be relieved of a considerable economic burden(1942: 339). Germany would thus benefit from a relative advantage in the post-war economic competition, at the expense of countries such as Great Britain,which share the burden of international security. He suggests that, in compen-sation, Germany contributes to the cost of world peace-keeping. Numerouseconomists will later side with Keynes on this point.

But when a second world war seems inevitable, Keynes starts studying thebest way to finance the conflict, without weakening the British economy. In ashort book published in 1940, How to Pay for the War (1978 [1940]: 3–155), heapplies to this subject the principles expressed in 1936, in the General Theory.Public action is necessary to curb inflation, in the context of a renewed eco-nomic activity because of the conflict. Keynes recommends an equal distribu-tion of the financial burden among all social classes, for justice as well as socialpeace. Renewed economic activity generates important private savings, half ofwhich will be levied through taxation, so as to finance war. The remainingfinancial needs could be satisfied by delaying individual consumption, owing toState measures decided in agreement with the syndicates, such as the postponedpayment. These measures should curb inflation by restricting purchasing power.

While ideas on economic and political issues raised by the First World Wargradually led Keynes to elaborate an original theory, the Second World Warenables him to apply his new principles, and to prepare the thought on thedesirable orientation of the economic policy after the conflict.

The successes of German industry had, in fact, been observed by Europeandemocratic countries since the mid-1930s; in 1938, Keynes explains thesesuccesses by the fact that this country uses its full production capacities, andasserts that Great Britain should follow this example. He is in fact favourableto a smooth State economic planning (1982a [1932]: 90). But even if he reha-bilitates interventionism, this doesn’t mean he is favourable to a militarization


of economic life; in 1915, he had already denounced the ‘German myth’, sharedby a minority of the German population, which recommends economic isola-tionism, ‘permanent war’ (and thus economic militarization), and the refusal ofindividualism, with a regulation system based on the State apparatus, aiming atan increasing effectiveness rather than human welfare. Keynes condemns this‘hideous doctrine’. This permanent refusal to alienate personal freedom to theState remains present throughout all his work; interventionism can onlyprevent the political liberalism system from being challenged by a too-violenteconomic crisis.

We can consider that Keynes contributed in a very original way to the evolu-tion of economic theory on defence and security issues. Rather than studyingthe internal conflicting character of capitalism, he tries to improve its imperfectrunning, therefore giving up the orthodox conception of the ‘invisible hand’. Bythis very fact, he widens the concepts of defence and security: from now on theydon’t only concern war and its preparation, but also economic security, i.e.national economic independence but also the smooth running of the worldeconomy. Indeed, economic misery can lead to a change in the economicsystem, such as the replacement of democracy by militarism or socialism.Strictly speaking, defence is no more than a particular production sector; thedefence sector even becomes a way for governments to achieve their economicpolicy objectives. The hierarchy between defence and economy is thus, at leastpartially, reversed. However, the economy can also become an instrument ofdefence: although he condemns the ‘trade war’, Keynes is still favourable to theuse of economic sanctions, notably as a mean of deterrence.

Keynes was a precursor of the contemporary analyses of defence, by introduc-ing economic issues into the security conception of capitalist and democraticStates. His concern for security issues is evident throughout his entire analysis,which was developed in several emergency situations, with the necessity ofdefending the country against economic crisis, war and totalitarianism. Eco-nomic interventionism is a preventive remedy for democratic systems, in astrained context. Beyond his proposals, it is Keynes’ methodology which provesto be ‘modern’ today: the economist must not hang on to ready-made truths, heor she must play a citizen’s role, i.e. find short-term solutions to preserve thestability of the democratic system. By his political convictions, Keynes isfundamentally liberal, defending the right of free enterprise and democracy.

The economic study of both world wars and their theoreticalrepercussions

Both world conflicts gave rise to an unprecedented wave of economic studies onwar, peace and defence, from 1914 to 1945. These thoughts greatly contributedto underlining the limits and advances of economics, notably on the issue ofinternational economic relations.


The studies of the economy of war: a new challenge for the economicanalysis

Both world conflicts gave rise to numerous economic studies on the economy ofwar. Financial considerations prevail in the works of the 1920s, but the implica-tions of state interventionism are gradually more and more often analysed.

War finances: a central issue for the liberal economists of the inter-war years

Liberal economists, usually opposed to economic interventionism, admit that,in case of war, their principles could be temporarily abandoned, provided thatthe return to a normal economic situation after the conflict is guaranteed.

A.C. Pigou devoted an entire work to the political economy of the war, witha first edition in 1921 and a revised one in 1940. He had previously written TheEconomy and Finance of the War (1916) and A Capital Levy and a Levy on WarWealth (1920). In The Political Economy of the War (1921), he considers that theFirst World War assigned to the economist the duty to study the economy inwartime, which is completely different from the economy in peacetime. He washimself a convinced pacifist, who refused to fight in 1914 and served as anambulance driver in France. However, he rejected the argument according towhich wars will progressively disappear because of their increasing cost: in hisopinion, wars are partially led for irrational reasons, notably a nation’s wish todominate others. Ensuring national defence is therefore a priority and militaryexpenditures must be considered as economically beneficial, in so far as theyrepresent a kind of ‘insurance’ to protect wealth. However, free trade andforeign investments are among the best guarantees of international peace. Pigoudoesn’t believe that the free-market economy automatically leads to anoptimum; costs and advantages in the sphere of social economy are differentfrom those of the private economy; interventionism can therefore be justifiedregarding the distribution of incomes (c.f. Welfare economics (1920)). Inwartime (1916), the economist should aim at maximizing the war fund ratherthan economic prosperity. The rate of participation of the workforce can beraised above its peacetime level, as can the utilization ratio of productive capac-ities. The reduction in investment and consumption may also prove to benecessary. Private capital is then likely to run out, expenditure usually devotedto thwart capital depreciation being delayed. In the same way, a part of thenational portfolio abroad is sold off. Thus, such measures heavily affect thepopulation’s present prosperity, but they also limit future economic develop-ment by transferring costs to the future. Therefore, neither the capital stockincrease nor its renewal are financed. Pigou moreover distinguished the ‘eco-nomic cost’ of war from its ‘total cost’ (1916). In peacetime, economic prosper-ity does not represent total prosperity, but only the part of it that is measurablein money; and in wartime, the total costs are much higher than their monetaryestimation, as they are also partially moral.

In the Political Economy of War (1921), Pigou explains that, in wartime, the


State must substitute for the market, in order to control the supply of essentialgoods and services: it therefore exerts a strong intervention on key economicsectors and runs firms, the owners being given compensation at negotiatedprices. This intervention generates important economic profits and maintainsprices at a rather low level because of the abolition of profits, in order toprevent producers from excessively increasing their prices, which would entail arise in the credit and the money supply, as well as in the national debt. Otherkinds of intervention can also be undertaken, notably a system of licences,bonds or certificates for the private purchase of some major goods, so as toprevent competition between public and private demands for these goods. Cit-izens must also be encouraged to lower their consumption, notably through pro-paganda and the appeal to patriotism. War expenditure must be financedthrough exceptional measures, tax revenue being insufficient; a governmentalloan seems inevitable, as a tax increase would exhaust the economy. In order toattract lenders, the State must diversify the available portfolio of options; butthe ‘negative indirect method’ is the most effective one, i.e. private individualsfreeze many other possibilities to invest their capital; capital exports should alsobe limited. Bank loans must be avoided as long as possible, because they wouldentail inflationary trends. The debt financing of war is however regrettablebecause it weighs heavily on the economy. National debt would be held bysocial groups with a high level of income, whereas the poorest classes would betaxed to cover the debt’s interests. Such pernicious effects could be avoided bythe implementation of a capital levy with the return of peace, which wouldserve to immediately extinguish the debt (1920). This tax would be excep-tional; it would bring about an allocation of incomes which would be morefavourable to the poorest classes, with no capital, while enabling the nation toquickly reach a high level of employment, of savings and of economic produc-tivity. Pigou foresees a post-war period of deflation in Great Britain, which heconsiders as necessary to recover economic competitiveness, under the goldstandard system. The resort to a capital levy is all the more possible as the mainpart of the debt is held at the domestic level; it would thus only represent atransfer of purchasing powers between the various categories of the population.

Other economists studied the issue of the financing of war, notably Keynes,whose contribution we previously evoked. It is impossible to restate here all thenumerous analyses which have been made on the subject. We shall onlymention the contribution of Wicksell, who, in 1919, gave a lecture on theeconomy of war, which was only published in 1978. In this work, he presentshis views on war’s economic consequences, a subject he finds very interestingfor the future developments of economic analysis. War leads to higher expendi-ture and to a reduction in the available productive power, the normal replace-ment of capital not being achieved. Like Pigou, Wicksell (1919) emphasizes theimportance of the monetary problems raised by war, the more or less rapidsolving of which conditions the success of the return to normal economic activ-ity after the war. The best way to thwart the inflation generated by war wouldbe a decline in the population’s purchasing power, and a rise in the govern-


ment’s purchasing power in the same proportions, owing to war taxes anddomestic loans at very high interest rates. Another solution is that Statesincrease the quantity of money, so as to create the purchasing power necessaryfor war. The rise in prices yields important profits for owners and businessmen,who then subscribe to governmental loans. But he denounces the injustice ofthis system because, after the conflict, the ‘general public’ must pay the interestand the redemption of these loans with its taxes. Post-war inflation is the resultof a poor running of the gold standard, due to an excessive issue of paper moneyby belligerent countries. He recommends a future reduction in these issues, sothat the level of prices remains constant. We find in this work some of the origi-nalities of Wicksell’s analysis, which presents several analogies with Keynesiantheory, in particular the importance given to the productive capacities, a refer-ence to the quantitative theory seen from the angle of income, the importanceof money in the relation between global supply and demand, therefore question-ing the theory of money as a veil.

Pigou’s and Wicksell’s analyses on the financing of war show that the econo-mists of the time wished to limit as much as possible the financial consequencesof conflicts, in order to ensure the return to a ‘normal’ economic situation inpeacetime. But thinking on the economy of war gradually led to a new concep-tion of economic policy. The rise in State interventionism during the SecondWorld War is so important that a complete return to laissez-faire seems hence-forth impossible.

The Second World War and the rise of economic interventionism

The Second World War was marked, even more than its predecessor, by Stateinterventionism. Several economists recommended a perpetuation of it, evenafter the end of the conflict, so as to avoid restructuring problems. Lauterbach,an American economist, asserts in his book Economics in Uniform: MilitaryEconomy and Social Structure (1943), that the economy of the Second WorldWar is likely to outlast the conflict because, unlike the First World War, theworld economy before the conflict was in economic depression, with an under-employment of productive capacities. Yet, militarism contributed to a rise in thepopulation’s living standards. In addition, governments learned from the FirstWorld War to be better prepared for a second war, by underlining the import-ance of economic self-sufficiency and of the use of governmental agencies ofcontrol of production goods, as well as of the industry’s monopolized organi-zation. Besides, the Second World War is characterized by the confrontationbetween two different models of society, totalitarian and democratic, which donot share the same conception of State–individual relations. Lauterbach criti-cizes the wait-and-see policy of democratic countries faced with totalitarianones (Germany, Italy, Japan), the latter having led a ‘unilateral war’ severalyears before 1939. The reaction of democratic nations was slow in coming andforced them to implement massive State economic interventionism, whichdeeply transformed the social structures, in a partially irreversible way. Indeed,


he doesn’t believe that the Second World War will be the last one and thepreservation of a ‘military economy’ could be necessary, therefore creating a‘new economic system’. We can consider today that such an analysis foreshad-owed the theories of a ‘permanent arms economy’ or the explanations of theCold War and of the American–Soviet arms race.

It is unfortunately impossible to undertake a detailed presentation of all theanalyses made during the inter-war years on the economy of war, which notablycompared its different characteristics and implications according to social struc-ture, whether democratic or totalitarian. The great economists we evokedpursued this thought. In 1940 Pigou published a new version of his The PoliticalEconomy of the War’. Keynes devoted numerous articles to the description of theeconomies of war in the various belligerent countries.

The studies of the economic conditions of peace: the Treaty ofVersailles, the debate on the reparations and the resurgence ofinternationalism

In the 1930s, the study of international economic relations developed a greatdeal. The reasons for these new theoretical developments lie in a question con-nected to the war: the reparations and the inter-Allies war debts. The debate onthis issue was very lively, not only in France but also in England and the UnitedStates.

The French disagreements on the question of the reparations: the example ofCharles Rist

After the First World War, the French economy was very much weakened andthe idea of reparations paid by Germany was then dominant. ‘Germany willpay’: this political, but also moral, conception was questioned by Keynes, as wellas the issue of the inter-allies debts (like several liberal economists, he wishedfor a moratium of these, on the basis of rigorous economic argumentation). In1921, the French economist Charles Rist underlined the concrete difficultiesthere were in implementing the measures which were provided for in the Treatyof Versailles. And indeed, German payments to France were very low in thefirst post-war years, and in 1924, the Dawes Plan decided to suspend them untilthe recovery of the German financial situation. When revealing the reparations’pernicious effects, Charles Rist was influenced by the economic principles ofliberalism and solidarity expounded in Keynes’ The Economic Consequences ofthe Peace (1919). However, he rejected the British economist’s pessimistic fore-casts as to the non-payment of the reparations, and attempted to look for thepractical means which would enable Germany to pay. Rist’s analysis was differ-ent from another more orthodox liberal view, defended by Jacques Rueff.

After the First World War, numerous French economists (notably Biardd’Aunet, Blondel and André Tardieu) denounced the aggressive militaryculture of the German people, and judged that the definitive dismantling of


Germany was a condition of world peace. This view was sometimes contested;for example, Yves Guyot (1921), editor of the Journal des économistes, recom-mended a moderation of the conquerors’ requirements, so as not to favour thespirit of revenge of the vanquished. However, he was favourable to the dismant-ling of the German and Austro-Hungarian empires. Charles Gide (1919),another French economist, criticized the suppression of the German colonies,because it hindered its industrial reconstruction and its capacity to conquer newmarkets in South America and Asia. Charles Rist (1921) attempted to demon-strate the lack of economic justification for some excessive French requirementsregarding reparations. On this point, he criticized the inaccuracy of the Treatyof Versailles, notably in regard to the exact amount of the reparations. Theideas expressed by Keynes in The Economic Consequences of Peace in 1919 nour-ished the debate on the opportunity of German economic recovery, which mostFrench economists considered to be dangerous. For Keynes (1919), the Treatyof Versailles was destroying the ‘economic heart of Europe’ (notably by sup-pressing the external bases of the German economic system, i.e. shipping trade,colonies and exports), and thus the potential for economic recovery of thewhole continent. Many French economists accused him of being pro-German;but others defended him, notably Rist, who welcomed Keynes’ proposal of aEuropean economic reconstruction owing to a free-trade policy. Rist sharedKeynes’ conviction of the necessary reconstruction of the European economicequilibrium, in order to ensure the economic development and security of allStates. Moreover, like Keynes, Rist (1921: 270) criticized the deflationary pol-icies followed after the First World War, and recommended the financial stabi-lization of Germany, considered as an indispensable preliminary to the paymentof reparations (this was indeed one of the Dawes Plan’s main arguments). Hedefends a policy of financial austerity to limit the fall in the German exchangerate; he also proposes Allied loans to Germany, since the financial crisis in thiscountry used up all its savings and credits, and considerably reduced its incomes.

If Rist’s conception was closely akin to Keynes’ and to the authors of theDawes Plan, another analysis was developed at the same time in France, whichdenied the existence of an ‘economic problem’ regarding reparations. Thedebate on reparations developed during the 1920s in France but also in GreatBritain and the United States, notably on the problem of the ‘transfer’. In 1924,Rist considered that Germany’s financial recovery would not be sufficient toensure the payment of the indemnities, because of this problem of transfer:following Say’s law, according to which products are exchanged against prod-ucts, he considers that the reparations would necessarily correspond to a transferof goods and services, which represented the only transferable wealth. In hisopinion, the main difficulty raised by the reparations was the conversion byGermany of paper Marks into gold dollars by selling goods or services abroad.The payment of reparations thus depended on the exportable part of Germanincome, obtained by import restrictions, a rise in exports and a fall in capitalexports. Rist then underlines the pernicious effects of the indemnities paidmainly in kind, as German products would compete with domestic ones; this is


the ‘paradox of the indemnity’. However, Rist considered that the nationalinterest (which was to be paid by Germany) shouldn’t be sacrificed to the pro-tectionist interests of a few industries (1924: 163–181). His view thus differedfrom Keynes’, who had adopted a ‘Listian’ conception of the protection ofinfant industries, and was thus opposed to the delivery of German products,even free ones. Keynes also feared that the payment in kind of the indemnitywould stimulate the German industry and trade, therefore worsening long-terminternational competition. These critics found a significant echo among Britishindustrialists, willing to recover their access to the German market, but inFrance the opinion remained favourable to the maintenance of the Alliedrequirements.

According to Rueff (1922), on the contrary, there was no problem of trans-fer, because of the mechanism of automatic adjustment of the balance of pay-ments; Germany could obtain foreign resources through an international loan,or through new taxes or domestic loans. As Germany will have to seek foreigncurrencies on financial markets, in order to ensure the transfer, the Markexchange rate will fall, without generating either an inflation or a sensitive vari-ation of domestic purchasing power; this fall in the exchange rate will favourthe rise in its exports. Jacques Rueff was thus opposed to the principle of theDawes Plan, limiting the sums transferable in cash and allowing them to belower than the amount of the tax levies for the indemnity, in case of a monetaryturmoil. Rueff considered that there was no problem of transfer, but only a bud-getary problem, which had to remain in balance (1922: 173). Rueff’s argumen-tation, widely approved by the French liberal economists, seemed to support thedefenders of the solution ‘to make Germany pay’. Louis Baudin (1922)explained that a rise in taxes and a cut in costs by export industries shouldentail a fall in Germany’s living standards, which he welcomes as a ‘kind ofpunishment for the aggressor’. As for Yves Guyot (1924), he suggested thatGermany devotes to the reparations the sums which were beforehand given tothe military sector.

Although liberal, Rist did not conform to the classical theory of the auto-matic adjustment of the balance of payments, because he considered that thedevelopment of an ‘exportable surplus’ was a necessary preliminary to Germanpayments. Besides, his pragmatism led him in 1922 to warn against the risk of atax evasion or of a flight of the German capital. In his opinion, ‘financial solid-arity, disregarded by the authors of the treaty of Versailles, remains the onlypractical solution’ (1922: 469).

The debate on the ‘transfers’ in Great Britain and the United States

The views of Rist and Rueff thus differed on the issue of reparations; however,there was no direct theoretical debate on this subject in France, unlike in GreatBritain and the United States. In these two countries, the debate developed onthe possible deterioration of the German terms of trade because of reparations,and on its impact on international economic competition. The American


economist H.G. Moulton (1926) rejected the classical theory of the automaticadjustment of the balance of payments and supported the Dawes Plan. Accord-ing to him, the weight of the reparations, given the lack of exportable surplus,disrupted Germany’s economic and financial system, unbalanced its budget andentailed a depreciation of its trade, a factor of temporary instability. In answerto Moulton, Jacob Viner (1926) attempted to demonstrate the validity of theclassical theory of the ‘automatic adjustment of international balances of trade’:if the depreciation of trade proved to be insufficient to develop an exportablesurplus in Germany after the war, it was because all conditions of the running ofthe classic economy were not fulfilled (notably because of a budgetary imbal-ance and domestic inflation). But he stated that Germany’s payments wouldautomatically enable it to show an export surplus. He also condemned incen-tives to export, which would hinder this mechanism, by stimulating imports atthe same time.

Keynes’ contribution to the debate was decisive, though controversial (1929:451, 460). He considered that the classical theory of the automatic adjustmentof the balance of payments did not work; the creation of an exportable surpluscould only arise from a modification of the German economic structure, with areduction in real wages, the development of export industries at the expense ofcapital goods industries, etc. In this way, he disagreed with Ohlin, according towhom the Allied loans to Germany led to a rise in the purchasing power of itspopulation. It is today acknowledged that Keynes’ arguments were opposed tothe principles of the General Theory, as they did not consider the role of theeffective demand.

The discussion on German indemnities thus gave rise to a debate on thecauses of the international economic crisis. The French economists, apart fromRueff and Rist, didn’t contribute much to it. The issue of the reparations wastoo closely linked to the political field, as France had been vanquished in 1870and obliged to pay reparations to Germany at the time.

The League of Nations as an instrument of peace

After the First World War, many economists declared themselves in favour of amore active role for the League of Nations, so as to avoid future internationalconflicts. We previously evoked Keynes’ contribution to this subject. In con-trast, a liberal economist like Pigou did not mention this issue, leaving it topoliticians. Wicksell (1919) is an example of the economist who supported theLeague of Nations: he asserted in 1919 that the societies of his time coulddurably remove war, owing notably to the intervention of the League ofNations, which must be conceived as a factor of economic internationalization,with a gradual abolition of national borders. He called for a fast removal, afterthe war, of the burden represented by the military budgets, instead of an imme-diate rearmament. He also recommended international agreements of economicco-operation, such as the ones existing for mail, telegraph or the railways.Measures of economic reprisals and protectionism against central powers, and


especially against Germany, could prove to be useful after the war, if thesecountries still represent a danger for the stability of international relations.However, Wicksell remains pessimistic as to the future of world peace, in so faras it is constantly threatened by the phenomenon of overpopulation, as Malthushad already pointed out at the beginning of the nineteenth century. Eachcountry should aim at limiting the level of its population, and all the more so asit should reinforce social peace, by generating a rise in wages and a fairer distrib-ution of property.

It is impossible to make an exhaustive presentation of the numerous callsfrom liberal economists for an increased role of the League of Nations or for theestablishment of international political and economic agreements. We shall justmention the example of Lionel Robbins, who concludes his work on the causesof the war (1940) by proposing a limitation of national sovereignty whichwould benefit an international institution guaranteeing peace; even if nationaleconomic interests are not antagonistic in the long term, in the absence of aninternational law preventing them, conflicts could reappear at any time,because of the possible resurgence of the ‘errors of the particular interest’, stem-ming from the pressure of particular interest groups. Robbins suggests the cre-ation of the ‘United States of Europe’, the creation of limited federations notbeing Utopian, unlike the project of an international union. Calling for thevictory of democratic countries, he states that in the future only the implemen-tation of such international political relations could guarantee a lasting inter-national peace.

The ideas of some of the liberal economists of the nineteenth century, andparticularly those of the French current, were thus pursued.

New economic thoughts on the causes of war

During the inter-war period, analyses on the economic causes of war by liberaleconomists were numerous. They mostly aimed at refuting Marxist or fascistarguments and at reasserting the classical conception of defence. But a new fieldof analysis, more heterodox, developed at this time; it used the most modernstatistical techniques to reveal the recurrence of ‘war cycles’, corresponding to‘long economic cycles’. Kondratieff and Schumpeter notably dealt with thissubject.

Liberal theory and the issue of the economic causes of war

Lionel Robbins blamed Leninist theory for its excessive simplifications and gen-eralizations and presented another explanation of war’s economic causes. Thissubject was indeed very much analysed by the liberal economists of the inter-war period, notably by Spiegel, who pursued the main liberal ideas on this issueduring the 1940s.

In a short book published in 1940, entitled The Economic Causes of War,Lionel Robbins wished to provide an answer to the imperialist theory of war,


which considers war as inherent to the running of the capitalist system.Without denying that international conflicts can have economic motives, heaims at demonstrating that the postulates of imperialist theory only rarelyproved to be true in the facts. Robbins denounces the cost for Westerneconomies of a permanent state of preparation for war, with a high level of mili-tary expenditure. He considers that the causes of war must be eradicated; it istherefore important to identify them, and especially to determine the import-ance of economic causes, admitting that other causes can also explain wars(notably the pressure of particular interest groups, or national hatreds). Implic-itly, Robbins’ project is to criticize the theories according to which all socialphenomena have economic causes. Recognizing that Lenin’s theory of imperial-ism has no ‘logical deficiency’, Robbins tries to question its appropriateness withreality.

With regard to capital exports, Robbins admits that they may have causedinternational tensions; however, the Leninist theory of financial capital cannotexplain the First World War, nor any other conflict between powerful States. Itis only interesting for the analysis of the relations between strong States export-ing capital and weak ones importing capital. As to conflicts such as theRussian–Japanese war, the conflict between Turkey and Italy (1911–1912), orthe political crises in Morocco (Tangier 1905, Agadir 1911), the defence offoreign investments was only an excuse hiding the leaders’ imperialist politicalambitions. The same conclusion may be drawn on the First World War: thestruggles of the financial capital and of foreign investors were not responsible forthis conflict (1940: 57). It is also erroneous to assert that German militarismbefore the First World War, or Hitler’s accession to power in 1933, was due tothe pressure of armament industrialists. In both cases, their influence was toolimited to be determining.

Robbins concludes his analysis by relativizing the responsibility of inter-national finance in the triggering of international conflicts (1940: 54–55). As asupplementary argument, he mentions that a few advanced capitalist countries(Holland, Switzerland and Scandinavia) have never followed expansionist pol-icies, whereas some of the most expansionist countries (such as Russia and Italy)are capital borrowers and importers. Finally, the author also mentions that highfinance generally loathes political complications. Regarding foreign investment,Robbins’ argument is that the national investors’ interests abroad don’t alwayscoincide, which is in opposition to what the Marxist theoreticians asserted.Besides, modern States leading a liberal policy are little concerned with territor-ial expansion, in so far as the costs of political domination are generally high. Infact, the author approves of Schumpeter’s idea that most capitalist societies arenot interested in war. However, Robbins presents several specific cases whichcan encourage these societies to go to war, notably the threat that the restric-tive trade policy of a hostile power represents for national economic security, orthe risk of disruption of international trading relations necessary to thedomestic economy, or even the limitations of international migrations in asituation characterized by the lack of ‘Lebensraum’ (1940: 63–74). Robbins


therefore considers that economic motives often explain wars; in modern times,trade restrictions are the major economic cause of wars, but, as stated by Marxisttheory, these protectionist measures are established under the pressure ofparticular interest groups within the nation and not of capitalists as a class.

Henry William Spiegel, famous for his work The Growth of EconomicThought, published a work on The Economics of Total War in 1942. Beforedetailing the characteristics of an economy of total war, he devotes a chapter tothe analysis of the economic causes of war. Spiegel refutes the motive developedby the theorists of imperialism according to which war stems from competitionon capital exports; he asserts that the theory of the work value and the conceptof surplus are erroneous. He follows Schumpeter’s ‘sociological’ explanation ofimperialism, which underlines the influence of old feudal habits. Like Robbins,Spiegel considers that wars are often waged for the economic interest of someparticular groups (notably armament manufacturers), without any economic jus-tification at the general level. But the originality of his argument is to show howthe warlike tendencies evoked by Schumpeter are stimulated by specific eco-nomic conditions, especially unemployment and the economic insecurity ofmodern societies. From his point of view, the strictly economic motivations ofhuman actions tend to decline, which explains why aggressive wars can occur.

Spiegel’s theory, as well as Robbins’, shows the strong impact the theory ofimperialism had on liberal economists. While trying to refute the logic ofLeninist theory, its opponents questioned the hypothesis that conflicts haveexclusively economic causes; besides, even when they acknowledged the eco-nomic nature of these causes, they underlined the fact that capitalist interestsweren’t united, but that, on the contrary, they were divided between variousinterest groups, the major part of which had no interest in an international con-flict. These liberal economists often quoted Schumpeter’s ‘sociological’ theoryof imperialism to explain the warlike national policies that seemed to have noeconomic rationality; imperialism would thus represent a resurgence of feudalhabits. This point of view explains why the liberal movement failed in theirattempt to provide an explanation of inter-imperialist conflicts as unified andsystematic as the Leninist theory. War can have economic causes, notably a useof public policies for some particular interest or trade restrictions; unlike in theMarxist interpretation, war is not a vital necessity for capitalism to continue todevelop. The liberal economists of the inter-war years thus reasserted the funda-mental principles of the Smithian theory of defence.

Studies of the ‘war cycle’: a heterodox field of analysis

Schumpeter (1934: 246) rejected the explanation of the economic dynamics bywars, stating that only major technical innovations could explain the rhythm oflong cycles. Although international conflicts do have an economic incidence,they do not govern the long-term economic dynamics. However, other authorsconsidered that wars had an important role in long-term economic cycles. Atthe time, economists were interested in long-term price fluctuations; studies


were based on the observation of raw statistical data or smoothed by a movingaverage process (Kondratieff).

From the 1920s until the end of the Second World War, several analyseswere developed relating to the influence of wars on long-term economic cycles,following Kondratieff’s work. They concluded that capitalist economies weregoverned by the rhythm of forty to sixty-year cycles. Kondratieff (1935) con-sidered that cycles, and thus economic crises, were inherent to capitalism;indeed, a period of economic expansion in advanced capitalist countriesentailed a greater demand for raw materials and the search for new markets,therefore increasing international tensions. At the domestic level, internal eco-nomic contradictions were also worsened, leading to political instability. In thisway, Kondratieff’s theory is Marxist. Wars, revolutions and conquests of newterritories are considered as consequences and not causes of the long-termcycles; such phenomena generally occur at the peak of an ascending phase –wars generate destruction and a rise in unproductive consumption, thereforeincreasing the demand for capital.

This idea of a relation between wars and long-term economic cycles wasnotably carried on by Imbert, Rose, von Ciriary Wantrup, Wagemann andHansen. Tarascio compares Kondratieff’s theory to the one presented by Davisin 1941 and revised in 1963. From a theory of fifty-year war cycles, Davis (1963)shows that major wars (i.e. for the United State, the war of the AmericanRevolution, the Civil War, the First and Second World Wars) begin at thepeak of a long period of expanding trade (and of a general rise in the level ofprices). Minor wars exert only a weak influence on economic trends. Major warsincrease the demand for resources, thus exerting an inflationary tension. Daviseven calculates a coefficient of the intensity of war, by comparing the level ofprices in wartime to average prices before the war. He thus describes aneconomic warlike cycle, i.e. the mutual interaction between war cycles and eco-nomic cycles (while Kondratieff’s theory only considers a unilateral link ofcausality).

Akerman (1944) went beyond these analyses of the role of war in long-termeconomic cycles, by asserting that political cycles caused long-term economiccycles. This idea is based on the similarity between the two types of cycles.Technical progress is cumulative and therefore cannot explain long-term move-ments, unlike Schumpeter asserted. On the other hand, economic crises areconsequences of the economy of war, at least in the long term (in the shortterm, war boosts economic activity). Political crises and economic crises arepositively correlated in the long term.

Other authors developed theories similar to Akerman’s. Hansen (1951)attributes the reversal of an ascendant economic cycle to the violent successionof inflation caused by war and of the post-war deflation which follows the returnto the gold standard. In the same way, Bernstein (1940) considers that the over-estimation of the national currency inherent to war is an explanatory factor forthe economic depression on the return of peace. Dickinson (1942) states thatthe First World War has had fatal economic consequences which explain the


inter-war crisis. His statistical tests reveal long-term economic cycles; he fore-sees that the Second World War will have even more negative economiceffects, given the loss of flexibility of the domestic economy, because of inter-ventionism. In the same way, Barrère (1947) underlines that war has prolongeddepressive effects, which explains why it is followed by a downward phase in theeconomic cycle. He also insists on the post-war difficulties in restructuring theeconomy, because of the loss of economic flexibility due to state intervention;another difficulty is that the important needs of post-war years lead to thedevelopment of productive capacities, which later turn out to be excessive.

Not all economists shared this conception of the central part played by warsin the reversal of the cycles. In this respect, in one of his last works, Lescure(1947) admitted that he hadn’t given enough importance to war in the expla-nation of long-term movements. However, he does not acknowledge the exist-ence of a direct link of causality between war and long-term economic cycles. Inhis theory, economic cycles depend on profit: the disequilibrium between supplyand demand is the first explanatory factor of these economic fluctuations. Froman observation of price series, he presents the characteristics of economic fluctu-ations. Wars entail an economic disequilibrium, because the demand for con-sumer and capital goods increases, until it exceeds their supply, generating a risein prices. The significant rise in production, prices and incomes resulting fromthe State’s use of the war funds durably destabilizes the economy. The normalinterplay between supply and demand is no longer valid. On the return ofpeace, an important lapse of time will be necessary to resolve the disequilibri-ums on the various markets. Moreover, a new difficulty will appear: the recon-struction works imply a development of the productive capacities greater thanthose required by a ‘normal situation’, and thus an overproduction is likely tooccur.

Economic studies of the inter-war period were characterized by theoreticalchanges compared to the previous analyses and by the rise in the studies on thecauses of war and its economic consequences. So as to explain why wars occur,economists developed new analyses of capitalist institutions. Studies on theeconomic consequences of war also gave rise to new debates on the way theinternational economy and the gold standard worked; they also provided a newconception of State intervention to avoid economic crises. The relationbetween major conflicts and great economic crises was also studied. Both worldconflicts therefore transformed the economic analysis, strengthening the econo-mists’ will to contribute to the explanation of current political phenomena. Theworld’s division into two blocks after the Second World War and the sub-sequent arms race maintained economists’ interest in defence issues. Benefitingfrom new statistical techniques and from econometric modelling, defence eco-nomics gradually became an autonomous field of analysis.


The diversity of post-1945 heterodox analyses on defence andwar

After the Second World War, apart from the neo-classical econometric analysesand the Marxist and Third World theories, a few thoughts were developed onwar and peace, which can be described as ‘heterodox’. They partially revisit theinter-war studies, but add new concepts, such as the militaro-industrial complexor military Keynesianism. The sociological and historical role of war is alsostudied in an original way.

The analyses of the militaro-industrial complex (MIC)

After 1945, the only direct developments of the ‘classical’ analysis of defenceconsisted of reasserting military expenditure’s lack of productivity and therefusal of an excessive militarism implying a strong interventionism, or in pursu-ing the idea of peace owing to free trade, with studies on economic globaliza-tion. A new concept, which can be connected to the liberal current, wasdeveloped after the Second World War: the militaro-industrial complex.

This concept is rather polemical, but unlike what is usually stated, itshouldn’t be considered as a Marxist interpretation of the running of the mili-tary sector. President Eisenhower was the initiator of this concept anddenounced at the end of his mandate the danger of the growing reinforcementof the MIC’s power in the United States, resulting from the unprecedentedincrease in military staff and armament industries, which was likely to questiondemocratic methods. The MIC concept includes the idea of an autonomousrunning of the military sector, of a close coalition between the interests of thedefence industrialists and those of the military, both being interested in a rise inmilitary expenditure. Its main members are the Department or Ministry ofDefence, pressure groups in Parliament or Congress, the armament manufactur-ers, the army’s prescribers and specialized, notably academic research institu-tions. Even if the concept of the MIC is rather controversial, many economistsacknowledge that the military sector’s specificity limits internal competition,favours a rise in costs, sometimes with the pressure of influential networkswhich are not willing to reach an economic optimum. Nevertheless, the mili-tary sector has considerable economic weight, notably in terms of emplace-ments, which increases the power of pressure the defence manufacturers haveon political decisions. Seymour Melman (1971) was one of the first economiststo put forward the negative economic effects of military expenditures in theUnited States, especially the loss of competitiveness, the development ofbureaucracy, the fall in productive investments and the creation of the MIC.He even mentions a state of ‘permanent war’ (1974). Military expenditures area waste, especially since the ratchet effects of the military sector on the civilsector, notably in the technological field, are very weak.

However, economists don’t all agree on the expression of the MIC. Someeconomists of defence prefer to refer to the ‘defence industrial basis’. One of the


major criticisms against the MIC concept was that it didn’t particularly help tounderstand the interactions between the economy and the military sector,because it’s an empirical, descriptive and static concept, unsuitable for the studyof dynamic effects; it would notably lead to a neglect of the long-term con-sequences of the arms industries, especially technological ones. Moreover, it isdifficult to empirically reveal the MIC’s real influence on military waste.

‘Military Keynesianism’ and its criticisms

The Keynesian analysis emphasizes the role of demand in the explanation of therelation between economic growth and military expenditure. Military expendi-ture is considered to be one area of public spending liable to be used by theinterventionist State to increase the national product, owing to a multipliereffect in a situation of insufficient global demand. If the aggregated demand isweak compared to the productive potential, the increase in military expenditureleads to an increase in demand, a development of profits and boosts economicgrowth. However, economists also used ‘Keynesian’ reasoning to demonstratehow military expenditure exerts a negative effect on economic growth.

In 1944, Beveridge showed that unemployment had decreased during bothworld conflicts and considered that a total war could be seen as a radical solu-tion against underemployment. He believed that State intervention in theeconomy in wartime explained these good results and that it should be main-tained, even after the return of peace. Full employment is a necessary conditionof international trade expansion and a social imperative; but this aim should bereached through peaceful measures of economic interventionism rather thanthrough war or a rise in military expenditure. Beveridge therefore recommendedthe use of national economic planning and the control of prices, wages andprofits, as well as the development of public spending, even if this implied abudgetary imbalance. Other theoreticians, especially Robinson and Eastwell(1973, book 3, Chapter 1), contested the ‘Keynesian militarism’ principles moresystematically, according to which military expenditures are a decisive factor inthe economic stabilization of capitalism. In Robinson’s opinion, the Keynesiananalysis doesn’t give enough importance to the utility of each investment. Gov-ernmental investments in armaments to fight against unemployment and thefall in profits can only have short-run positive effects. In the long run, militaryexpenditures turn out to have a negative economic effect; they are fundament-ally useless and represent a waste. Even if an arms race can contribute to limitcertain cyclical economic crises, capitalist societies are still unable to eradicateinternal poverty and to help developing countries to reach a minimum level ofprosperity.

In opposition to the theories of the permanent arms economy (in Melman’sown words), some authors of the Keynesian–Marxist movement consider thatmilitarism represents an economic parasitism, and that only a small part ofcapital benefits from military expenditure, at the expense of the other capitalistsand of the entire population. Defence manufacturers benefit from a permanent


levy on the federal budget and they have an interest in the continuation of anarms race. Mary Kaldor (1982) and E.P. Thompson (1967) consider that thesystem of arms production is the cause of militarism; an arms race would thus bemainly internally, not externally, determined. This explains several character-istics of the military sector, notably the length of the production cycle, the non-submission to market rules, or the pressure of particular groups at the expense ofthe general interest. McKenzie also analysed the specific characteristics of armsproduction, which can turn out to have negative economic effects: the lack ofcompetition, the limited number of suppliers, the State as the only buyer, thelack of respect for time limits, an overestimation of costs. However, McKenzie(1983) mentions that the militaro-industrial complex is not all-powerful, andthat the evolution of American military expenditure still strongly dependson the international situation. The MIC’s power interacts with other, biggerstructures, the State and the international system of States. In fact, militarismis a complex phenomenon, and not an exclusively economic one, whichraises the problem of its definition. McKenzie also debated on the idea thatthe technological innovations of the military sector have important positiveeffects on the civil sector. In his opinion, the economic effect of military expen-ditures differs according to the period considered. At the end of 1940s, the spin-offs of the military research on the civil sector were important (notably for theaircraft industry, electronics or nuclear energy). At the time, military expendi-ture contributed to encourage domestic demand in the United States; theyfavoured the absorption of the surplus, therefore preventing crises of over-accu-mulation. Furthermore, owing to their international economic and militaryhegemony, the United States captured new markets through economic assis-tance, like in Western Europe with the Marshall Plan. But afterwards, the bene-ficial economic effects of military expenditures decreased. Military productsbecame more and more technologically complex (‘baroque’), and thus less andless liable to benefit the civil sector. However, McKenzie considers that the lossof economic efficiency for American military expenditure is mainly explainedby the contesting of American supremacy by Japan and Europe. Besides,nothing proves that the alleged positive economic effects of military expendi-tures could not be reached through other public expenditure, in the civilsectors.

From the 1970s onwards, numerous econometric models and analysesenriched the debate on the impact of military expenditure on the main macro-economic variables (unemployment, inflation, growth, etc.) and strongly con-tributed to the establishment of defence economics as an autonomous field ofanalysis.

War, an essential factor for the American model’s durability: thereport on the ‘undesirable peace’ prefaced by Galbraith

In 1967, a secret report written by a group of anonymous economists and pref-aced by J.K. Galbraith, on the question of the utility of wars was published in


the United States and entitled Report from Iron Mountain on the Possibilityand Desirability of Peace. It aimed at determining the possible implications ofa lasting international peace on the American society. It studied the hypothesis that the world wasn’t ready to face all the economic, as well as polit-ical, sociological, cultural and ecological consequences of a large-scale disarma-ment. The authors put forward the hidden functions of war, such as socialstability or the promotion of national interests. Thus, the important problem isto determine how to minimize the consequences of world demilitarization, inparticular to find institutions (or expenditures) liable to replace the militarysector. The methodology and the arguments of the report are both connected toKeynesian and Marxist theories, but also to ‘neo-mercantilism’. Halfwaybetween political economy, political science and sociology, the report considersmilitary expenditure as one of the major bases of the contemporary capitalistsystem.

The economic effects of disarmament are difficult to estimate, notablybecause the non-military functions of wars in modern societies should be takeninto account:

• an economic function: war (or its preparation) entails the implementationof a ‘safety margin to stabilize the economies in their march towardsprogress’, it is a factor of ‘inertia’. War is a major factor in the rise of thegross national product, because it contributes to solve the problem ofthe stock surplus.

• a political function: the international policy diverts the public’s attentionfrom internal political problems, therefore reinforcing social cohesion.

• a sociological function: war and military institutions are used to channelthe ‘antisocial elements’, they represent ‘safety valves’ against movementsof social unrest. Indeed, military service strengthens patriotism and thecontrol of hostile elements. Moreover, conscription contributes to the regu-lation of the unemployment rate. Finally, the government often resorted tomilitary principles or measures when serious social crises occurred or so asto make certain measures of social reform accepted.

The report ascribes other important functions to war, especially an ecologicalrule, in so far as war contributed to the survival of human kind in the past, anda cultural and scientific one, inasmuch as war favours numerous discoveries inthese fields. Thus, a system based on war cannot disappear without creatingirreparable damage, unless substitutes are found. Social programmes (health,education, housing, transport) or space research are only imperfect substitutesfor war, the main function of which is political; a substitute for war implies theexistence of ‘enemies of replacement’. Some ideas, however, seem more promis-ing than others, such as space research or technological competition in thecontext of an economic war.

The authors of the report regret that the military sector is ruled according tothe principles of ‘laissez-faire’, and that nothing is done to determine:


• the level of arms production that is most favourable to price control;• the factors of correlation between the policies of military conscription and

social discords;• the minimum population decrease necessary to maintain the credibility of a

war threat;• the most appropriate cycle of frequency for the triggering of ‘warm’ wars.

As a conclusion, the report recommends the creation of a research agency onwar and peace.

This very original analysis, which found a wide echo when it came out,hasn’t been pursued; it stands on the borderline between economic analysis andpolitical sociology, but it can also be considered as a continuation of some ofthe heterodox analyses developed after the First World War, which studiedthe part played by war and military expenditure in the stability of capitaliststructures.

Some other heterodoxies

Pursuing a certain ‘heterodoxy’ born in the 1920s, which analysed the structuralcharacteristics of capitalism and the role of war in its development, WaltRostow (1960) has developed an original theory, according to which war repre-sents an important moment in national economic development. He believesthat economic development is characterized by a succession of five stages. Thefirst one, agricultural, is the traditional society. The second stage creates theconditions of economic development, owing to agricultural progress, to thedevelopment of a centralized State based on nationalism and to the conflictswith the other ambitions. The starting stage leads the society towards a cumula-tive and irreversible economic growth. The society is often characterized bypolitical revolution, new markets, as well as armed conflicts. Society thenreaches the stage of maturity, followed by one of mass consumption. Conflictsand wars accompany this historical evolution. Therefore, colonial wars charac-terize the first stages of development; they widen markets and limit the power ofpossible competitors; regional wars are provoked by new developing nations;mass wars are the result of a gap in the nation’s process of maturity. When a dis-equilibrium occurs in a given area, a conflict appears. Germany, Japan andRussia wished to use their new economic maturity but the leading power, theUnited States, put an end to these attempts. Rostow criticizes the Marxistanalysis, even if analogies with his theory can be found. From his point of view,people are not only interested in profit, but also in power, security, employment,family, and solidarity. The communist experience must be rejected because itleads to dictatorship and is in fact only a disease of the transition period.

It is impossible here to make a complete presentation of all specific analyseson the causes of war and on defence that have been developed since 1945. Weshall just quote the analysis of the French economist F. Perroux (1958), on the‘peaceful coexistence’ between East and West. He showed that the national,


regional or international logic of war exerts strong tensions on economic struc-tures and they establish class or domination relations between nations. The risein military budgets, because of the influence of the militaro-industrial com-plexes, diverts wealth and reduces the means of development. Even the devel-opment aids benefit the struggle between both systems and mainly consist of theexport of weapons, ideologies and people, enabling the dominant economy towiden its sphere of influence. Therefore, this ‘paradoxical’ aid favours the desta-bilization of the rest of the world. The twentieth-century economy hasn’t suc-ceeded in feeding, treating or freeing everyone. The poles of growth provide astrong impulse, but the economic development is unevenly distributed through-out the national territory. In fact, the domestic economies should break up andtrade should develop until the sovereign State becomes old-fashioned. The gapsbetween the socialist and capitalist systems should gradually disappear, owing topeaceful coexistence.


Part 3

From new debates openedby economics on peaceand war factors to aresurgence of the politicaleconomy perspectiveThe analysis of war and peace greatly changed from the 1960s, with the use ofmathematical and formalized methods, to study several questions linked to stra-tegic matters, as well as the economic impact of the military sector. With analy-ses which become more and more technical over time, defence economicsestablishes itself as an autonomous field of analysis, as does peace economics,with thoughts on military expenditures and on arms races.

As well as this high specialization of the study on conflicts and on the mili-tary sector, a more traditional debate reappeared, which is based on previousanalyses, in particular on the issue of the relationship between trade and con-flicts. Indeed, besides the liberal analyses on globalization, several studies focuson economic power relations, notably with the concept of economic war. Thelink with the analysis of war is two-fold: some analyses deal with the use of theeconomic weapon as an instrument of political or military pressure; the rela-tionship between the military sector and the civil sector, in a historical andinstitutionalist analysis, is once again discussed.

Thus, the debates of ‘economic science’ and a political economy coexist.


6 Peace and war factors revealed byeconomic science

Neo-classical theory ignored defence issues from the end of the nineteenthcentury, as if international security and even war were outside the field of eco-nomics. This caused a relative disinterest in defence economics and a lack ofdebate on the economic bases of violence and on conflicting interstate rela-tions. Economic studies focusing on economic variables of arms races, or moregenerally on the strategic decisions of national and international security, onlydeveloped at the beginning of the 1950s. Defence economics therefore estab-lished itself as an autonomous field of work, owing to modelling, statistics andeconometrics. Other questions have been studied with these mathematicaltechniques, and particularly the economic impact of military expenditures.Until the 1960s, economists had never thought about demonstrating that thesums allocated to defence could have a negative economic effect, exceptthrough the denunciation of their unproductivity, in a deductive reasoning.The fact that the defence budget can exert an autonomous economic role, as aseparate element of the economic policy, was not taken into account. Thedevelopment of empirical studies on war and military expenditures opened newperspectives to economic thought on these issues.

The economic analysis of defence strategies

The prevalence of neo-classical theory in the twentieth century entailed a rela-tive lack of interest of economists in defence issues or interstate conflicts.However, in the context of the Cold War, economic methods of formalizationand econometrics were used to study issues of national and international secur-ity. Arms race models, notably Richardson’s, opened up the way to numerousstudies underlining the interdependence of economic, political and strategicvariables in situations of interstate conflicts. The economy is then perceived asa factor of conflict ‘reduction’, as it has a ‘stabilizing’ effect.


The economic factor: an only weakly explicative variable of militarystrategies

Richardson’s model and its repercussions: the ‘stabilizing effects’ of economicvariables in the arms race

An arms race can be defined as a dynamic process of interaction and ofcompetitive increase of the quantity and/or the quality of armaments betweentwo or several States (or a coalition of States), resulting from conflicting object-ives or from mutual fears of nations. The first arms race model was developed byRichardson: it opened the way to a renewal of economic studies on defence andpeace issues, in the particular context of the Cold War. However, even if thereference to the competition between the Warsaw Pact and NATO seemedimplicit in many analyses of an arms race, the models contained no variablespecifying the type of economic organization (market or planned economies).The arms race models can be more generally used to explain phenomena suchas guerrillas, regional conflicts, but also international disarmament.

In Richardson’s model, the economy represents a constraint in the unlimitedincrease of armaments. Some analyses later tried to better integrate the eco-nomic constraint into the model. However, most of the literature on arms racesconcentrates on strategic issues, and the link with the economic theory is,above all, methodological. However, in his work of 1960, Richardson alreadyinsisted on the importance of studying the links between peace and inter-national trade development.

RICHARDSON’S MODEL (1960) AND ITS CRITICISMS

Lewis Fry Richardson was a British meteorologist. As a Quaker, he had strongpacifist convictions. His studies on ‘arms races’ aimed at showing their import-ance in the triggering of international wars, particularly since the beginning ofthe twentieth century. His first differential equations were published in a seriesof articles written in 1919, and then combined in a book in 1939. However, hiswork Arms and Insecurity, published in 1960, which resumed and enriched theprevious studies, is the one that became the most famous. On the eve of theSecond World War, Richardson called for the immediate spreading of his ideasin American newspapers in order to contribute to the governments’ awarenessof the perverse effects of their defence policies and to prevent a second worldconflict (Richardson 1960: ix). However, this call had no echo. Richardson’sideas only became more popular at the end of the 1950s, notably owing toAnatole Rapoport’s work (1957). However, the model became widely discussedand followed, mainly throughout the 1970s.

Richardson aimed to show that the process of arms accumulation had no paci-fying effect, although it implies a search for a strategic equilibrium. He does nottry to foresee the moment of war’s outbreak; he mainly aims at warning peopleabout the ‘antisocial’ character of the acts which their instincts or their deter-minist strategies (of Pavlovian type) would lead them to express (1960: 12).


With two simple equations, he describes an arms race process between twonations, which, according to the values of the parameters, may or may notdegenerate into an open conflict. The explanatory capacity of the model isimportant, because it expresses at the same time the political, strategic and eco-nomic constraints to which States are subjected when determining theirdefence budget.

Richardson’s model (1960) is based on the representation of an internationalsystem composed of two States (or homogeneous and allied groups of States)with divergent interests. It expresses three ideas.

• First, a country’s defence depends on the threats it is faced with. The armslevel of the opponent country has an influence on the domestic arms level.

• Second, the cost of armaments is taken into account: it exerts a stabilizingeffect over the international system. Nowadays, one refers to the ‘economicburden’ of armament. However, Richardson’s ‘fatigue coefficient’ doesn’tonly reflect the cost, but also the ‘social viscosity’: for its estimation, onemust consider the necessary delay between the changes in the relationswith the opponent and the perception of these changes by public opinion;the opposition of people working in defence industries must also be takeninto account. However, the main limit of Richardson’s model lies in thefact that it implies perfect information (notably on the military expendi-tures of the opponent) which may seem unrealistic.

• Finally, Richardson completes his model with a ‘grievance coefficient’,which includes specific political factors: as an example, he states that thearms race during the First World War had been generated by nationalistambitions of annexation or territorial conquest, and not only by anaction–reaction process on arms spending.

The standard representation for this model is:

dx/dt �ky��x� g

dy/dt� lx��y�h

with:

t: the time;x: the cost of national defence for the country x;y: the threats faced by the country x. To simplify, y is considered as thethreat of a single nation y;k and l are positive defence coefficients, often inequal.� and � are positive constants, representing respectively ‘economic fatigue’and defence expenditures;g and h are constants representing the grievances and ambitions of the twoStates (aggressive intentions).


The three terms of Richardson’s model therefore represent, respectively, thestrategic factor (national security), the economic factor (the problem of fatigue orthe cost of armament) and the political factor (grievances). According to thevalue of the parameters, these equations will characterize different patterns ofinternational situations. Indeed, the arms race can be stable (no war in the longterm) or unstable (likely to lead to a conflict).

The main results of Richardson’s model may be summarized in Table 6.1.Richardson pursued his study by modelling the relation between inter-

national peace and the development of ‘co-operations’ between States, notablythrough trade. The interactions between the defence policies of two countriescould therefore just as well lead to co-operation or to rivalry. Coefficients ofdefence equal to zero correspond to a peace situation; a negative value meansthat both countries co-operate, the development of international trade being inhis view the most significant type of co-operation (1960: 19). This part of hisresearch isn’t very well known, although it represents an important part of hiswork. The lack of relations statistically demonstrated between peace and foreigntrade can partially explain this. Richardson’s econometric results, based onregression analyses of least ordinary squares and their related tests, are generallyconsidered as little significant as well as weakly appropriate (Rashevsky andTrucco 1960; Schrodt 1978).1

Several other criticisms of Richardson’s model were developed. Some econo-mists (Sandler and Hartley 1995: 186; Luterbacher 1977: 204) notably under-lined the fact that it in no way explained the process of conflict outbreak. Intheory, an unstable arms race can lead to an infinite arms increase foreach party, without degenerating into a war. Other criticisms were developedon the linearity of behaviours, which did not necessarily square with thestrategic reality. For example, a stable situation can degenerate into an explo-sive situation; an unstable cyclical interaction between two nations can also sta-bilize in the long run. Besides, Richardson’s model presupposes perfectinformation on the opponent’s level of military expenditures, which doesn’tseem very realistic.2

Table 6.1 The main results of Richardson’s model

Results Signification

ky��x� g Arms racelx��y�hlk�� Stable arms race equilibriumlk�� Unstable arms race equilibriumg�0, h�0, x�0 and y�0 Disarmament and ‘permanent peace’g0, h0, x�0 and y�0 Unstable mutual disarmament: dx/dt� g

dy/dt�hx�0 and h �0 Stable unilateral disarmamentx�0 and h �0 Unstable unilateral disarmament

(and reciprocally for a unilateral disarmament of y)


Two other criticisms have been the subject of important developments,which have contributed to enrich the economic analysis of the arms race.

First, some studies considered that the way Richardson treated the cost con-straint, represented by the importance of the GDP, was insufficient. Indeed, themodel does not contain any other constraint of cost than the size of nationalrevenue. However, military expenditure has obviously never reached the levelof total national income. In 1967, Caspary (1967) introduced into the arms racemodel the idea of a maximum level of resources devoted to increase the militarypotential, which a country cannot exceed. In the 1980s, Luterbacher (1977)also sought to go deeper into the analysis of the cost constraint, which led himto build a model much more complex than Richardson’s. However, the analysisof the economic limit to the arms race has generally remained undeveloped indefence economics, which can seem regrettable.

Second, other studies criticized the overly superficial way Richardson treatedthe national policy, i.e. of the internal determinants of military expenditures.Thus, since the 1970s, models explaining military expenditures through anaction–reaction process have often been opposed to those insisting on theinternal determinants of arms increases, thus following the incremental analy-sis. Similarly, the ‘bureaucratic’ models insist on the importance of the pastlevels of military expenditure as explanatory variables of the current level; thisis called ‘bureaucratic inertia’ (Sandler and Hartley 1995: 193). Models of ‘stockadjustment’ have also been developed (Intriligator 1964; McGuire 1977): theyunderline the difference between wished and actual levels of defence budgets,therefore considering the socio-economic constraints. These models werederived from Boulding (1962), which presented the arms race differently fromRichardson, notably by using a graphic resolution method.

Besides, numerous empirical studies have been led to compare the internal-external causes of the level of national military expenditures. They generallyconsidered that both explanations of the levels of military expenditures equallyapplied: the ‘bureaucratic inertia’ and the interaction with the levels of militaryexpenditures of opponent countries. Indeed the internal groups in favour of oropposed to an increase in military expenditures would have more or less influ-ence depending on the action of the opponent country. (Lambelet et al. 1979;Williams and McGinnis 1992).

The theory of public choice was also used at the beginning of the 1980s tounderline the internal determinant of defence expenditures. According to thistheory, the State mustn’t be perceived as a simple entity. It is the sum of theparticular interests of the groups or individuals which compose it. State inter-vention can thus be criticized, as far as it doesn’t answer the general interest; itresults from the pressure of special interest groups, each trying to maximize itsutility. Therefore, public choice models aimed at showing how the action of thevarious pressure groups (voters, political parties, State bureaucracies, interestgroups of producers and consumers, the international community, internationalagencies) influences the national defence policy (Hartley 1987). Moreover,some studies showed the relation between the political cycles and the signature


of contracts with arms industries. Other studies denounced the ‘bureaucratic’growth, leading to problems such as an underestimation of project costs.However, the empirical tests of this type of explanation of military expendituredeterminers weren’t numerous or conclusive.

FURTHER DEVELOPMENTS OF ARMS RACE MODELS

Since the 1970s, the hypothesis of maximization under the constraint of thesocial utility has been introduced in almost all arms race models. This con-tinuation of the basic model led to a systematic presentation of the allocationprocess of economic resources to the military sector.

Richardson’s model describes the change in a country’s arms stocks in answer

Figure 6.1 Resources allocation in the Nation J (source: Charles H. Anderton, ‘Teach-ing arms-race concepts in intermediate microeconomics’, Journal of EconomicEducation, Spring 1990, pp. 148–166).

IIISupply quadrant

IIDemand quadrant

IVSupply quadrant

IStrategic quadrant

MArms stocks

CProduction of civil goods

C*

SC*

M*J

S

Security function

Line of militarygoods stocks-flows

MJ

Productionof military

goods

Se

Perceivedlevel of

national security

M*P

J

Security–consumption

frontier

Productionpossibilities

frontier(guns–butter

dilemma)

Indifference curveSocial utility functionPreference of society

between civilian goodsand security


Table 6.2 Some studies based on Richardson’s model

Study Method Link with economy Main conclusions

L.F. Richardson (1960) Military expenditure of each ‘Fatigue’ represents the economic This model allows the specification Arms race model between two country is represented by a burden and expenditure for the of several international situations. countries. System of two differential equation. maintenance of the same level of According to the value of parameters, equations representing military Three coefficients: defence. It is an element the reached equilibrium will be stable expenditure variations of each • ‘fatigue’ term (economic) restricting arms-race or unstable.country. • ‘defence’ term (strategic) development. The aim of the model is to show

• ‘grievance’ term (politic) Moreover, trade exchange governments the perverse effects of development between the two an arms race, and to incite them to countries (co-operation) exerts a co-operate.restrictive influence on an arms Empirical tests are rather race. satisfactory.

K. Boulding (1962) The hostility level, and not the The economic element disappears This model is less mathematical than Graphical presentation of an armament level, is taken into in this presentation. It may, Richardson’s. It defines the hostility arms race model of Richardson’s account. An initial level of however, appear in the reaction level rather than the armament level. type. It is then formulated as an hostility and a reaction term are coefficients (more or less flexible The idea of proportionality is equation. introduced in this model. economy). introduced: each term of the equation

is multiplied by a constant.

Intriligator (1964) and McGuire A system of two equations The relation with the economy This model is close to Richardson’s, (1977) representing the variation of the is not explicit, but economic but it underlines a specific problem: Stock adjustment models. An armament budget level of each constraints may partially explain the defence budget adjustment arms race is represented by country. The desired level the gap between actual and proportionally to the gap between variations of armament budgets depends on the initial armament desired levels of armament expected and real level.level of the two countries. level and of the reaction budget.

coefficient.continued


Table 6.2 continued


P. Schrodt (1978) Richardson’s model is used under The validity of econometric • R2 cannot be a reliable indicator of A study of statistical problems a ‘finite’ rather than ‘differential’ estimates based on Richardson’s • error variance.associated with Richardson’s formulation. model is questioned. • Almost all parameter estimates of model and of its empirical test’s The statistical models used for • the model are biased, which significance. an empirical application are • invalidates the determination of an

discussed. • equilibrium point of an arms race.

M.D. McGinnis (1991) The rational expectations The level of national economic The single study of military The superficial treatment of hypothesis is tested for the performance is taken into account, expenditure may lead us to wrongly national policy by Richardson behaviour of deciders on as well as the ‘fatigue’ term of conclude to the non-reaction to an limits the pertinence of his work. armament. Information access Richardson’s model. The adversary’s military expenditure.A model of rational expectations problems on adversary strategy ‘opportunity costs’ of each policy But the rational expectations model is used. and the internal political are evaluated. Individuals are able shows that military the expenditure

consequences of an arms race are to modify their behaviour, even of a rival State is not affected by past discussed. Decider’s anticipations if they make errors of perception. values of an adversary’s military of future external threat and of Owing to information expenditure. The rational domestic opportunity costs insufficiency about the adversary’s expectations hypothesis is then depend on the rival strategy and military expenditure, rational verified.of the economic system expectations models are more performances. ‘incrementalist’ than the

‘action–reaction’ type.

J.C. Lambelet, U. Luterbacher Analysis based on Richardson’s Mutual stimulation models must The dichotomy between models of and P. Allan (1979) type model of arms race. The introduce the limit raised by the action–reaction type (Richardson)Reconciliation of action- impossibility of constructing economic resources. and incrementalist models is artificial. reaction models and military expenditure adversary’s Socio-economic internal Internal and external determinants incrementalist models. models without considering constraints are not sufficient to are simultaneously taken into account

military expenditure, or, on the explain the choice on military in military expenditure contrary, the internal economic expenditure: the opponent action determination models.and political determinants, is always has an influence.underlined.


J.T. Williams and M. McGinnis Rather than study arms races, Even if empirical tests seem to States may use many foreign policy (1992) it would be more pertinent to demonstrate that internal instruments to ensure national Dynamic analysis of the study the whole ‘rivalry system’ determinants are more explicative security, besides an increase in interaction of two superpowers between two superpowers. than external ones, this does not armament levels. Empirical tests aim military expenditures. A general model of two rival invalidate the hypothesis of to show that foreign policy measures

Richardson’s model is widened, States’ foreign policy is set up. reaction to an increase of an of States are almost always determined so as to integrate the whole A one-factor, simplified model adversary’s military expenditure. by the rivality system. But ‘rivality system’ between the two is presented. Empirical tests try But one must consider the fact information insufficiency limits the countries. to demonstrate what proportion that this reaction may have validity of results.

of foreign policy is determined several forms, such as commercial by the rivality system. The sanctions, alliance membership, model is written under a etc.dynamic form.

K. Hartley (1987) The contribution of public Some groups within the nation Vote mechanisms are limited for the Analysis of military expenditure choice theory to United influence State action, which setting up of a defence policy which with public choice theory. Kingdom foreign policy is results from an arbitration corresponds to society’s preferences.

presented. The relation between between those groups. The Defence programmes are related to annual defence programmes and specificity of public decision political cycles. State action does not employment levels is tested. affects: correspond to the general interest.

• the conclusion of defence Econometric tests do not show the • contacts in the defence industry. relation between defence programmes • the underestimation of project and civil employment levels, contrary • costs. to government assertions.

U. Luterbacher (1977) • A resources threshold limits This model takes into account This model is composed of two An arms-race model, with a new • military expenditure increases. ‘natural’ economic limitations differential equations, allowing a formulation of the cost constraint. • Fatigue makes the limit of opposed to the continuation of better integration of internal

• social groups opposition to an arms race, with the economic and political limitations. • armaments increase. integration of a new cost Tests on the relation between the • Military expenditure increases constraint in the economic United States and the Soviet Union • are based on differences of growth rate equation. during the 1947/1965 period are • perception on their respective satisfactory.• levels.


to the evolution of the opponent’s stocks. However, it does not explain howthis country is led to adopt such a strategy, i.e. how it elaborates itsreaction curve. The hypothesis of the maximization under constraints of thenational utility function provides an answer to this question, by introducingthe population’s preferences into the model. This function is indeed constitutedby the aggregation of the individual indifference curves for two goods, namelysecurity and non-military goods. Security is considered as depending onboth the national and the opponents arms levels (even if this hypothesis isnot always demonstrated). Therefore, the model represents an arms race differ-ential game between both opponents (Chatterji 1992: 97). Owing to thisaddition, ‘normative’ analyses can be followed, based on the postulates ofrationality and of maximizing behaviour, which go beyond the ‘mechanical’character of Richardson’s equations (Brito and Intriligator 1995: 133). In1965, McGuire was the first economist to consider the hypothesis of utilitymaximization in an arms race model. His method enabled him to introducestrategic considerations, notably with the choice between weapons of attackor weapons of deterrence (McGuire 1965). However, the static character ofthis model is one of its limits. In 1972, Brito defined security as being a functionof both countries’ arms stocks. This model (Brito 1972) became the base of thestrategic dynamics analyses of the nuclear arms race developed by Brito andIntriligator during the 1970s and the 1980s (Sandler and Hartley 1995: 214).

In Brito’s model, the chosen allocation between civil and miltary goods isthe one which maximizes the following function (at any point in time ):

Ji()��

e�ri(t�)U(ci, D(wi, wj))dt

With:wi: the arms stock of country i;wj: the arms stock of country j;Di: the level of security of the country i, depending on the arms stocks of thetwo countries;Ui: the utility function of the country i, which represents the social welfare ofthe country i;ci: the level of civilian consumption;Yi(t): the net national product of country i;zi(t): arms expenditures at time t;�i: the depreciation rate of the arms stock;ri: the updating rate;t: the time.

And with two resources constraints:

Yi(t)� ci(t)� (t)� zi(t)wi � zi(t)��iwi


However, the problem of the indetermination of Richardson’s coefficientsremains. In other words, the analysis gives no information about the import-ance, the virulence or the inertia of each protagonist’s reactions.

The equations of arms race models can be graphically presented, in a ‘diagramwith quadrants’. With this presentation, introduced by Intriligator and also usedby Anderton (1990), one can visualize, at the same time, the strategic and eco-nomic problems with which a nation is faced when involved in an arms race.

In Anderton’s model, a nation, J, is involved in an arms race with a nation,L. It is presented as a unique and rational actor, maximizing its social utilityfunction, under constraints of resources and of stock adjustment with the rivalnation. National prosperity is presented as a function of civil consumption andof national security.

Se � f(Mj, ML, )

The shape of the ‘production possibility frontier’ (guns–butter curve) is:

T(C, MPJ, K�, L�)�0

The following variables, for a nation J, are:

C: the production of civil goods;K: the capital stock;L: the labour stock;MJ: the military goods stock of the current year;MP

J: the production of armaments of the current year (the author makes the dis-tinction between stocks and flows);MJ

t–1: the production of armaments of the previous year;ML: the quantity of military goods in the nation L;d: a coefficient of depreciation;Se: the level of national security perceived by the nation : a parameter reflecting the quality of military goods in J and L, and the state ofthe international environment. This parameter is not very homogeneous. It rep-resents all the other exogenous factors modifying the security of J.

Anderton then sets out the following equations.The security function has the form of a production function, as national

security can be analysed as a non-traditional economic good for which nationshave specific preferences:

Se � f(Mj, ML, �)

The ‘frontier of production possibilities’ (guns–butter curves) is of the shape:

T(C, MPJ, K�, L�)�0 (Quadrant III)


The society’s preferences between civil goods and security are represented bythe social utility function:

U = UJ(C, Se) (quadrant II)

The indifference curves of the society are used to represent these preferences.Anderton shows all the determinants of the arms race in the same graph

with quadrants. He first presents it statically, then dynamically. The staticrepresentation (see graph no2) shows the process of allocation of resourcesbetween civil goods and military goods in the nation J. From the choice by thenation of a level C* of civil goods and of level MP

J* of military goods, the currentstock MJ* and thus the level of security Se* can be deduced.

Anderton then shows the reaction of nation J to an increase in nation L’sarmaments. Ceteris paribus, any increase in L’s military expenditure leads toan increase in J’s military expenditure and stocks of armament, to a decreasein civil consumption and in the perceived level of national security for L.Any process of an arms race thus reduces the welfare function. When theequilibrium point of the arms race is reached, then the action-reactionprocess should stop. But Anderton quotes several factors which can revivethe arms race. One of the nations can boost its economic growth by allocatinga sufficiently important part of civil production to capital. The same resultmay be obtained through the reception of foreign aid, military or civil. Also,if one of the nations improves the quality of its armaments (at equivalentprices), then its security curve may move. Moreover, a stronger tension andhostility between both nations implies a reduction in the perceived level ofsecurity by both countries, thus provoking an acceleration of the arms race.Moreover, if a leader who favours military production comes to power in one ofthe countries, this would modify the strategic equilibrium between bothnations.

This simplified presentation of the arms race is then completed by an analy-sis of the behaviour of nations and notably whether they take into account thestrategic reactions of the opponents or not when taking a decision.

In summary, in an arms race process, the economic variables can be con-sidered to have both upward and downward ‘stabilizing effects’.

When the arms race develops, its increasing cost leads States to devoteimportant resources to military ends. As a result, on one hand the financing ofinvestments decreases in the civil sector (and thus limits the economic develop-ment potential) and on the other hand consumers and citizens express their dis-satisfaction more and more (which can only be overcome, in a democraticsociety, by the collective acceptance of the necessary financial commitments toface the international threats). The more the arms race accelerates, the morethe costs grow, until they go beyond the bearable economic limits; this (situ-ation) should lead to recession or to war.

When the arms race relaxes, and even more when a disarmament processbecomes effective, the inertia effects of capital, people or research-development


in the military sector limit the potential reductions of the national militaryexpenditures.

But most of the studies on arms races developed since the 1960s have in factrather neglected its economic aspects; strategic considerations have becomepredominant, all the more since progress in modelling techniques have greatlyimproved their formalization.

The ‘strategic’ analysis and the point of conflict outbreak

The use of optimization techniques led to a consideration of the arms race as aresult of the States’ rational behaviour. But why and under which conditions isthe conflictual option chosen among other possible strategies, even if the sameresult might have been reached through ‘less expensive’ strategies? The answerto this question implies a consideration of the strategic aspect of the actors’behaviour, by using mathematical techniques, which refer to duopoly theoryand game theory. The economic aspect isn’t put forward as a determiningexplanatory variable of a conflict. It only appears at the level of the economicconstraint, or as the expression of a population’s preferences for civil consump-tion rather than for security. Besides, arms race analyses can be used to revealthe profits arising from disarmament processes or arms control. However, even ifthey are developed by economists, these analyses tend to neglect economic con-siderations, for the benefit of strategic ones. Economy only represents a sec-ondary factor in most of the ‘strategic’ arms race models.

Brito and Intriligator (1995) analysed the conditions under which an armsrace could lead to war. Their analysis is above all strategic, and it is especiallythe methodology which is taken from economics. Using some aspects ofduopoly theory, they considerably improved the strategic analysis of arms races.The first model was presented by Intriligator (1975). It was based on Brito’s(1972) work on the optimal allocation of resources between civil and militaryexpenditures. Intriligator (1975) models an arms race between two superpowers(or two alliances), the respective armaments of which are given by the stocks ofnuclear missiles, which are the determining factors of the States’ strategies.Later, Brito and Intriligator brought numerous refinements to this first analysis.In 1995, they integrate into their model some elements of the analyses on asym-metric information and the reasoning on discreet time, to study the very topicalproblem of nuclear proliferation. These two authors aimed at creating modelswhich could determine under which conditions a nuclear arms race betweentwo countries leads to war, or on the contrary to peace through deterrence.Their main concern was thus to determine under which conditions a stable stra-tegic equilibrium could exist between two nuclear powers involved in an armsrace.

In his maximization model, Brito (1972) shows that, on the hypothesis of a‘myopic’ behaviour of the States, an arms race leads to an equilibrium. Intriliga-tor later used this development to elaborate an arms race model between twonuclear powers.


His model (1975) is based on the hypothesis that each nation follows a‘Cournot–Nash’ behaviour. Moreover, a nation’s arms stocks are supposed to bestocks of nuclear missiles (which amounts to considering that only theseweapons are decisive for defence strategies and excluding non-nuclear States).Besides, nations have two strategic objectives:

• guarantee their deterrence potential, this being effective if the estimateddamages for the opponent of a reprisal attack are regarded as unacceptable.

• have a sufficient level of armament to make a successful attack with com-plete impunity, i.e. without the reprisals of the target country being unac-ceptable.

Countries A and B can attack if their stocks of missiles respectively correspondto the following equations:

(. . .)

Graphically, the model is represented by a ‘cone of mutual deterrence’ (seeFigure 6.2).

B can deteror attack A.

A can neitherattack nor deter B

Mb

Zone of war initiationB can attack, but

not deter A (incentiveto a ‘preventativeattack’ against A)

A and B canattack but not

deter (Risk of a‘preventative attack’)

Zone of war initiationA can attack but

not deter B (incentiveto a ‘preventativeattack’ against B)

A can deteror attack B.

B can neitherattack nor deter A

B h

as e

noug

h m

issi

les

to d

eter

A, b

ut n

ot

enou

gh to

atta

ck Cone ofmutual deterrence

A and B have enoughmissiles to deter

the adversary

A has enough missiles

to deter B, but not

enough to attack

Neither A or Bcan deter or attack

the adversary

Ma

E

B’s deterrenceA’s

det

erre

nce

Attack by A

Atta

ck b

y B

Figure 6.2 Cone of mutual deterrence (source: D. Brito and M. Intriligator 1995).


Intriligator’s model formalizes the strategic interactions between two nuclearpowers, whether these have objectives of deterrence or attack. However, onemay have reservations about the following points.

The hypotheses on the State’s ‘myopia’ and the fact that the opponent’s pastlevels of military expenditures are not considered, are unrealistic. This criticismmay however be qualified, if the reasoning in terms of stocks is taken intoaccount.

This model insists on the strategic factors of a conflict, but not on itseconomic factors. The only link with the economic field regards the hypothesisof social utility maximization, i.e. the arbitration between military and civilsectors in the process of allocation of national resources. In fact, Brito andIntriligator use analytical methods that have been developed by economists,but they do not develop an economic approach of conflict determinants.Indeed, in this short-term analysis, economic variables do not have much inter-est. But, in fact, rather than explaining the whole mechanism of an arms race,this model presents the various possible strategies in view of the available stocksof missiles.

Brito and Intriligator carried out numerous improvements to the 1975 modelduring the 1980s (see Table 6.3). Economic considerations were furtherdeveloped, notably with the idea that a country may prefer to defuse a conflictthat would be at its disadvantage, and agree on a transfer of resources in favourof the opponent. Their model of 1995 synthesizes all of these developments; itis also improved by an analysis in discrete time including the notion of informa-tion asymmetries.

Richardson’s model is implicitly based on the hypothesis that the State willbase its decision about military expenditure on a ‘static’ conception of the oppo-nent’s military expenditure: he considers its current level, without taking intoaccount the fact that the opponent will readjust its stocks of armament accord-ing to its own reaction. It is Cournot’s hypothesis of the State’s myopic behavi-our. Brito and Intriligator introduced the concept of information asymmetries(only one of the countries knows the opponent’s utility function). Referring toduopoly theory, and directly linked with game theory, the leader–follower prin-ciple is then used. This principle takes into account practices of ‘disinforma-tion’, so frequent in the economic and military strategies.

Therefore, Brito and Intriligator’s model (1995), which reaches a highdegree of complexity, almost exclusively explains war through imperfection ofinformation. Thus, because both countries do not have all the information, warmay occur, even when a transfer of resources would have been preferable.However, the importance given to the insufficiency of information as an expla-nation of wars may seem exaggerated. Economic aspects are not muchexpounded, although they remain present, with the fatigability factor and theoptimization method of social utility under constraints. In fact, Brito andIntriligator’s model is especially intended to reveal the strategic implications ofan arms race between two nuclear superpowers. Because of the specificity ofthese weapons, the fact that the analysis of strategic aspects prevails over (the


Table 6.3 Brito and Intriligator’s ‘strategic’ analyses and the point of conflict outbreak


Intriligator (1975) • Each nation adopts a Cournot– Equations specifying the different The notion of ‘acceptable damages’ Nuclear arms-race model • Nash behaviour. possible strategic situations in an threshold is introduced. The ‘fatigue’

• The deterrence potential and arms race are formalized. term does not appear in the four • the reprisal potential are Graphically, these results appear equations of the model.• introduced in the model. in the cone of mutual deterrence.

Brito and Intriligator (1980) Model of a game of two periods: The method of social utility The model allows s presentation of A deepening of the former model, 1 each country chooses between maximization under constraints is different possible international with the introduction of the consumption and investment; used. situations. Several cases are studied, hypothesis of social utility 2 each country chooses A country resources level is especially that of imperfect maximization under constraints, between the use of force or of essential for the decision of information (Cournot–Nash solution)and of the possibility of a the threat of force. The whether to enter into conflict. or the one of asymetric information resources transfer between the possibility of a redivision of War is explained mainly by (Stackelberg solution). The different two countries. resources constitutes a information insufficiency. This types of equilibrium are then

stabilizing factor. situation prevents countries from explained.choosing the transfer of resources, which would have been preferable. Wars initiated for economic ambitions do notappear in the model.

Brito and Intriligator (1995) The consequences of the new Deterrence weapons are In a disarmament, it is better to Analysis of the stability of the strategic context after 1991 are relatively more costly than diminish the level of first-attack arms post-Cold War world, with the studied. Probabilities are used, to destruction arms. Economic cost rather than of deterrence arms.phenomenon of nuclear determine the possibilities of a of nuclear armaments is a factor But this choice is risky (quick proliferation. The probability of a nuclear war outbreak. of the contemporaneous world. obsolesence, risk of agreements non nuclear war is studied. But the credibility of nuclear respect) and costly (relatively to

deterrence is reduced by the risk destruction arms). The relative factor associated with its use. importance of nuclear armaments in From now on, competition will comparison to conventional be on conventional arms with armaments is reduced. There is a advanced technologies. return to the ‘policy of power’, led

with conventional armaments.


analysis of) economic aspects makes sense. One advantage of these arms racemodels lies in the fact that they are not ‘historically dated’, although theirdevelopment was favoured in the context of the Cold War between the UnitedStates and the Soviet Union. Most of the models built in the 1980s could applyto any confrontation between two nations, whatever their economic or politicalcharacteristics. These studies are thus still relevant today.

However, the analysis of a particular example of an arms race implies theconstruction of a specific model, reflecting the specific economic and politicalcharacteristics of each of the countries in conflict. Such models are more empir-ical than those previously studied. For example, Manas Chatterji (1992)developed an arms race model between India and Pakistan, based on Richard-son’s differential equations.

Since the end of the Cold War, only a few studies have used action–reactionmodels to analyse the disarmament process. The interaction process would thenexert towards a decline of military expenditures. Such analyses had already beenconducted before 1991 to analyse the effects of a possible disarmament processbetween the United States and the Soviet Union. Our purpose here is not tomake an exhaustive presentation of these analyses. For example, we can quotePastijin and Struys’ study (1986), on the dynamic interaction between the mili-tary expenditure of NATO and of the Warsaw Pact. Their statistical testsshowed (with suitable reservations as to the available information on theWarsaw Pact’s military expenditure) that the Warsaw Pact’s behaviour did notcorrespond to an action–reaction process, whereas NATO’s did. The militarysector was considered to be playing a too-important part in Soviet foreign policyfor military expenditure to be sensitive to economic fluctuations. The authorsreveal the instability of a disarmament process: a reduction of NATO’s militaryexpenditures could increase international tension. The authors conclude that itwould be dangerous for NATO to decrease its defence expenditures, thus accel-erating those of the Warsaw Pact. This conclusion was very close to Lambelet etal.’s (1979), who showed that international agreements on disarmament wouldonly be effective if the arms race was ruled by the ‘mutual stimulation’ principleand not by ‘self-stimulation’. This problem has been more recently studied withagency theory, applied to the study of the technological arms race between theUnited States and USSR. Hirao (1994) analyses how the arbitration betweenthe quality and the quantity of armaments is determined by the internationalarms race as well as by the national characteristics of the organizational struc-ture of the government and of the military sector.

Thus, Richardson’s model can’t easily be used to analyse disarmament.Besides, this model is linear, and does not take into account discontinuities,such as breaks in political order at the level of a single nation. Yet a disarma-ment process can modify in an irreversible way the balance of power betweenthe various national groups, and engender political breaks which deeply modifythe conditions of the interaction between the military expenditure of the‘former opponents’.

As well as disarmament, other strategic concerns of the post-Cold War


environment have been studied, including the risk of nuclear proliferation andthe new instability of international relations.

Richardson’s basic model has been improved, notably by taking into accountthe fact that armaments are not homogenous (conventional, nuclear, offensive,defensive or dissuasive weapons), thus refining the reflections on internationalsecurity, especially in the new context of disarmament and nuclear proliferation.

Brito and Intriligator’s analysis proved once again to be particularly interest-ing. From an extension of their model (1995), they warn against negotiations onarms control which would aim at decreasing the arms of deterrence. Only thearms of first attack should be limited by an international agreement, otherwisethe system would become even more unstable. The reduction of deterrentweapons is possible, however, if it stays within the limits of the cone of mutualdeterrence. However, to favour the weapons of deterrence rather than those ofdestruction entails a risk and a cost. Brito and Intriligator also consider that thenuclear proliferation of the post-Cold War years, as well as the greater world eco-nomic interdependence, tend to decrease the credibility of nuclear deterrence;the competition on conventional weapons becomes more and more determining.

Non-linear analyses have been developed in the 1990s to describe the newinstability of international relations and the uncertainties ensuing from the endof the bipolar system. New mathematical theories seem particularly appropriateto translate this uncertainty, notably the catastrophe theory. For example,Wolfson et al. (1992) presented a non-linear dynamic model of internationalconflict. The formalization of the arms race here reaches a high degree of com-plexity. Their model takes into account the ‘chaotic’ pattern of the arms race.The authors predict that this (kind of) application of the non-linear dynamictechniques to the study of international relations should have a bright future.Other analysts are more sceptical, and believe that the high level of complexityof these models considerably limits their interest.3

Many other studies based on arms race models have been developed since thebeginning of the 1990s, too numerous to be evoked here. In their abundance andvariety, they deal with several issues of international relations. However, theseanalyses do not take into account some realities of interstate relations, such asthe possibility of co-operative strategies or the existence of alliances and inter-national institutions. The integration of these specific issues has become possibleowing to the development of a particular method of analysis, game theory.

Game theory: a key instrument of the analysis of conflicts and security

The fact that conflict issues weren’t taken into account contributed to fuel thecriticism about the unrealistic character of neo-classical theory (Varoufakis1990). But the development of game theory provided an answer to this objec-tion. The solution of a game is obtained by the study of the actors’ behaviour,specified by a few hypotheses. Numerous concepts used in the analysis of duopolyor oligopoly directly apply to the study of interstate strategic relations. The appli-cations of game theory to defence economics are not limited to the study of arms


races, nor international conflicts. They also extend to the issues of disarmament,interstate co-operation and the role of the international institutions.

1 Some studies develop a matrix presentation (or normal). The possible strat-egies of the various actors are represented in a matrix, each being estimatedby a specific value. The analysis is particularly well suited to ‘political’analyses and systematized presentations of various international situations.

2 Other studies develop mathematical models. The ‘games’ are expressed inthe form of differential equations. Very complex studies of interstate stra-tegic interactions can then be developed.

Our aim is not to make an exhaustive presentation of the various contributionsof game theory to conflict analysis; this has already been the purpose of otherstudies (Leitzel 1993; O’Neil 1997). We shall try here to show to what extentthese contributions represent progress in the understanding of the relationsbetween security and the economy.

ECONOMIC COSTS AND BENEFITS OF STATE STRATEGIES ON THE

INTERNATIONAL SCENE: THE PRISONER’S DILEMMA

Richardson’s model shows that two countries involved in an arms race couldreach an equilibrium which was not a Pareto optimum, in so far as the samelevel of security could have been obtained at a lower level of military expendi-ture for each country. This seems to justify common initiatives of disarmamentor arms control. This paradox of sub-optimality is well explained by the pris-oner’s dilemma model, one of game theory’s basic models.

Plous (1993), for example, analysed Israelo-Palestinian relations. He estab-lished the following matrix, from the results of a questionnaire sent to thevarious members of the Knesset.

Country ADisarm

Arm

Disarm Arm

Country B

3 , 3

4 , 1

1 , 4

2 , 2

The retained principle is that the strongest values are those that are pre-ferred. Thus, this model shows that the solution of mutual disarmament wouldhave been more profitable for both countries; in other words, internationalsecurity would have been better ensured in that case. However, in a situationwhere there is no information about the other party’s behaviour, both countrieschoose to arm themselves rather than to disarm. They thus adopt the non-co-operative solution. The paradox that is inherent to the prisoner’s dilemmagame is that it results in a solution which is optimal for neither countries. Othermatrix analyses have been developed, for example that of Jervis (1978).


A priori, such a matrix presentation is directly linked with the economy onlyif the actors’ preferences are considered as depending on the expected costs orprofits of the different strategies. However, a matrix is more an instrumentwhich helps to understand international strategic interactions, than a realinstrument of economic analysis. Unlike the arms race models previouslystudied, this presentation is too abstract to include all the different aspects ofspecific international situations. For Luterbacher and Allan (1985), theproblem is that game theory considers that decisions are taken by equal and notdifferentiated actors, with fixed preferences. Such models are thus unable to rep-resent the dynamic interactions between ‘uneven’ States, which do not have allthe same priorities or objectives. It would notably be necessary that game theorymodels take into account the improvement or the decrease in the military oreconomic potential of countries, because these changes affect their structure ofpreferences. Some mathematical game theory models, which will be presentedlater, dismiss, at least partially, this limit of the matrix analysis.

The prisoner’s dilemma model may also be used to underline the hindrancesto a disarmament process. Indeed, a nation can take advantage of anothernation’s disarmament to increase its own level of armaments, so as to get afuture advantage. Yet, the fear of a non-co-operative attitude of the opponentcan prevent a nation from adopting a co-operative attitude. An agreement onarms limitation can fail, if the fear that the opposite nation will ‘cheat’ prevails.Moreover, the longest negotiations always concern procedures of verification.In the same way, the participation to an international peacekeeping institutioncan lead to ‘free-rider’ behaviours, even if all countries would gain in strength-ening the deterrent power of this institution.

Besides disarmament issues, the prisoner’s dilemma model can be applied to allsituations in which two States are in strategic interaction, and notably an armsrace (with the concept of ‘security dilemma’) or strategic alliances (Snyder 1971).

INFORMATION: A CENTRAL ISSUE FOR INTERSTATE CONFLICTS

A State decides to co-operate or not at the international level from a subjectiveevaluation of the relative costs/benefits of co-operation and defection. Itsinformation on the behaviour of other countries is thus a determining elementof its choice. Imperfect information sometimes explains that a conflict occurs,even if in most cases States would have gained more by co-operating. Gametheory shows that conflicts can arise from the rational behaviour of agents (afact which neo-classical theory did not consider), in a situation of imperfectinformation, and in the absence of ‘convention’.

The concept of the Nash equilibrium is used to characterize the various out-comes of a game. It defines a combination of strategies such as, given the decisionsof the other players, no party would have been able to increase its gain by imple-menting another strategy. During an arms race between two countries, the equi-librium point at the intersection of both reaction curves is a Nash equilibrium:indeed, this situation represents the best possible choice for each country, given


the choices of its opponent. However, this implies that both countries simultan-eously make up their mind in an irreversible way, which is only possible in thecase of a lack of information about the opponent’s behaviour. Such a hypothesisdoesn’t apply to the analysis of international relations (Nicholson 1989). Gametheorists show that, if the interactions between players continue in the long term,then the prisoner’s dilemma model no longer applies. The notion of ‘repeatedgames’ is introduced, and the game is presented under an ‘extensive’ or ‘iterative’shape (graphically, under the shape of a ‘game tree’). There is a repeated game (orsuper-game) when a game, J, always the same, is played either several times orindefinitely. The interest of a repeated game is to show how non-co-operativebehaviours can result in a co-operative solution (provided that the game outcomeremains unknown), which is generally the most profitable outcome. The solutionof the game will thus be different from the one of the prisoner’s dilemma, which isnot optimal. In a repeated game, the strategies are conditional: the threat of thefuture defection of the other party encourages a State to co-operate. With perfectinformation, an iterative game can result in several Nash equilibriums. The limi-tation of the information (because of its imperfection, of its asymmetry or of itscost) leads to a unique equilibrium. The multiplicity of Nash equilibriums underperfect information is demonstrated by Brams and Kilgour’s (1988) iterative con-flictual game applied to deterrence. It is a classic example of the use of ‘game trees’(iterative game) for strategic analysis. To determine a unique equilibrium, it isnecessary to ‘refine’ the hypotheses of Nash equilibrium, by considering situationsof incomplete or asymmetric information. ‘Sub-games with perfect equilibrium’are then used: they describe the various possible outcomes of an iterative game.At the end of the 1960s, Harsanyi developed the study of games with incompleteinformation. For the economics of security, it represents considerable progress:indeed, the hypothesis of complete information about the behaviour of an adver-sary State is not very realistic. Conflicts can result from insufficient or asymmetri-cal information. Hargreaves-Heap and Varoufakis (1995) have shown the interestof the sub-games concept applied to the theory of arms races, with an analysis ofNATO’s and the Warsaw Pact’s strategies during the Cold War. NATO’s strategytowards the Warsaw Pact was based on the MAD (‘mutual assured destruction’)system. In a ‘normal’ game, the strategic interaction between the two sides leadsto two possible equilibriums. With the extensive form (sub-games), a single equi-librium is retained, which does not imply the application of the MAD strategy.This choice results from the fact that NATO’s threat to initiate a process ofmutual assured destruction is not credible enough. By reasoning in terms of sub-games with perfect equilibriums, one can exclude strategies implying excessivethreats. Therefore, NATO was led to change its MAD strategy in favour of a‘gradual reprisal’ strategy.

Thus, the credibility of a threat is essential for the game outcome, because ina situation of imperfect information, i.e. uncertainty, States will determine theirstrategy by allocating a probability to each strategy. Nicholson (1989) appliedthis method to a situation of nuclear deterrence under a normal form. In addi-tion, the ‘reputation’ of a player will be determining for the game outcome.


In a situation of asymmetric information (one of the players has the informa-tion but not the other one), the non-informed party can deduce its informationfrom the action of the informed party at the previous stage. Learning games arethen used. In addition, signalling games raise the problem of informationrevealing. They are used to study war situations: the parties in conflict can try tosignal or mask their information. The question of information revealing is alsocentral for the theory of contracts, in particular contracts concerning defenceand security (Leitzel 1993). Contracts can be renegotiated as the information isrevealed. Besides, political representatives can benefit from their privateinformation, even at the expense of voters.

Game theory can bring about other refinements to the analysis of inter-national relations. Notably, Dixit and Nalebuff (1991) have shown that, insome games, misperceptions must be taken into account. A party can believethat the other one does not co-operate, while it cooperates, or vice versa. More-over, uncertainty decreases as the game develops, because of the establishmentof conventions, or even of democratic institutions (Kuenne’s theory of‘mature–rivalry conflict’ 1989).

Moreover, some developments of the game theory have shown that only thestronger power of international institutions can lead to a lasting internationalpeace (Wagner 1983). Indeed, it decreases the risk of not detecting the oppo-nent’s armament. In addition if an arms race results in several equilibriums, pre-liminary negotiations can make individual strategies coherent. However, theequilibrium will only be stable if there is a threat of the international commun-ity against all non-co-operative individual behaviour (‘opportunism effect’). Inthe arms race, a higher level of security could be reached with a co-operativestrategy; however, this solution is not a Nash equilibrium, because the agents’interest would be to deviate from this point, i.e. to defect. International institu-tions must enforce the agreements, notably by developing co-operation bymeans of a delegation, which already exists at the national level (with the Statesupplying security) and which can notably avoid free-rider behaviours. Suchinternational institutions can also favour information sharing, which oftenfavours co-operation and the coordination of the various parties’ actions.Indeed, the United Nations now supplies information on military expenditure,voluntarily given by States, and on weapons sales.

Game theory helps to explain how co-operative actions can be followed in anon-co-operative environment, notably with the notion of a repeated game,and thus to clarify the mechanism of an alliance (a game with n countries). The‘free rider’ concept is used to analyse the sharing of defence burdens within amilitary alliance. These studies, though carried out by economists, place a greatdeal of importance on economic aspects of conflicts.

The theory of alliances

Richardson’s model represented the strategic interactions between two nations.Other models have studied the interactions between two alliances, such as NATO


and the Warsaw Pact. However, the issue of a strategic alliance was the object ofparticular theoretical developments. The co-operation in defence notably implies asharing of costs: economic aspects are thus important in these models.

The alliance can be formalized by game theory. However, a major part of thevast economic literature on strategic alliances resorted to a standard neo-classicmodel, so as to study its economic consequences, or the issue of cost sharing.The founding model was developed by Olson and Zeckhauser (1966) . Usingthe instruments of public economy, it shows that the financial contribution of acountry to an alliance is more or less important according to the relative size ofits GNP. Therefore, the wealthiest countries are induced to support a greaterpart of the alliance expenditure than the average, and the relation is reversedfor the poorest countries. ‘The hypothesis of the exploitation’ of the rich by thepoor is thus revealed. This disparity in the sharing of the defence burden withinan alliance is explained by the fact that the demand for national defence tendsto increase with GNP. Olson and Zeckhauser tested the hypothesis of a positivecorrelation between the countries’ participation in the alliance and the level oftheir national income, measured by the ratio military expenditures/GNP.However, the empirical results with regard to the members of NATO weren’tconclusive (with a positive but declining relation).

The alliance can be analysed as a collective good, of which it possesses allthe characteristics. Notably, the construction of an alliance model requires theconsideration of the allocation of costs between the alliance members, and thusthe ‘free rider’s’ allocation. Game theory seems particularly appropriate to thisstudy, as it determines the conditions of the allies’ co-operative or non-co-operative (‘Nash’) behaviour. The members’ decisions on defence areanalysed in relation to the policies led by their allies.

More than arms race models, the theory of alliance explicitly links the fields ofstrategic and economic analysis. Some analyses notably focused on the issue oftrade relations between countries belonging to the same alliance, or the develop-ment of new armament technologies through common programmes. The theory ofalliance thus opens a vast field of research with regard to the analysis of defenceand peace, notably in the current context of the discussions about NATO’s future.

The ‘standard’ model of alliance is generally a ‘pure public good model’. Itspurpose is to determine the conditions under which a country, i, takes part in analliance of n countries. The variables of the model are the following (Sandler,T. and Hartley, K. 1995: 21–24):

Ui: utility of the ally iIi: national income of the ally i, shared between:qi: military activity of ally i, that is the defence supplied by i, at the

unitary price pyi: non-defence private good of iT: threat measure that may be represented by the enemy’s collective

military expendituresQ~ i*: resources allocation to defense of i’s allies.


It is then necessary to solve the following Nash problem:

max{Ui (yi,qi �Q~ i*,T)/Ii �yi �pqi}

yi,qi

The economic aspect appear mainly at the level of choice of resource alloca-tion to defence, aiming at maximizing the welfare function.

The fact that the analysis of alliance doesn’t take into account the strategicinteractions between the allies and their opponents is one of its weaknesses.The ‘threat’ is indeed considered in an exogenous way, because of the staticcharacter of this model. Several attempts were made to reinsert the threat intothe model (Bruce 1990; Hilton and Vu 1990). Another criticism of the stan-dard model of alliance (as well as of the classical arms race model) is that it isbased on the hypothesis of a Cournot–Nash behaviour. Yet, the existence ofstrategic interactions enables the allies to anticipate their mutual reactions. Animprovement was carried out to the model with the hypothesis that allies had a‘Lindhal’ co-operative behaviour (conflicting with the ‘Nash’ non-co-operativebehaviour) (McGuire and Groth 1985). Numerous studies aimed at determin-ing whether the behaviour within the alliances was co-operative or not. But theinterpretation of the empirical tests carried out on this subject has raised severaltheoretical difficulties.

Other improvements have been carried out to this standard model of alliance,directly connected with economic considerations. They notably concerned theissue of the various comparative advantages for alliance member countries inmilitary production (Boyer 1989) or changes in the terms of trade between thesecountries, because of the increase in defence production by certain members(Wong 1991). Other models of alliance insisted on the distinction betweennuclear and conventional weapons, at the level of the demand for defence(Hansen et al. 1990). Public choice theory can also be used to focus on theinternal determination of each ally’s level of defence (Jones 1992).

A second model, called the ‘model of joint production’, has also been used todescribe the fact that the defence supplied by an alliance can, in the case ofconventional armaments, be considered as an impure public good (Sandler andMurdoch 1990). Indeed, the rejection of the non-rivalry hypothesis of thiscollective good is justified when the number of users (or the level of use) of thealliance causes a decrease in available profits for the other users. Thus, thedeployment of conventional forces can favour the protection of an ally at theexpense of the others. Defence can also be considered as exclusive, if somedecisions in the alliance are made in the absence of one or several allies. Somebenefits of defence can also be privatized by allies, notably the protection ofcoastal resources, the maintenance of domestic order, the fight against terrorismor the preservation of a control over other territories.

The sharing of costs within an alliance is therefore directly connected withthe issue of internal economic choices within each nation. Game theory, in thetheory of alliance, refocuses strategic analyses on economic issues.


The reintegration of economic considerations in models of defenceeconomics

A new analysis of the economic bases of arms-race models

Economic issues don’t play an important part in the models analysing thenuclear arms race. However, during the 1990s, several studies refocused on theprocess of resource allocation to the military sector. Other economic aspects of‘strategic models’ have also been widely discussed.

The arms race begins, like all economic problems, with a particular choice ofallocation of rare resources under economic (and technological) constraints. Inarms race models, the choice of resource allocation between the civil and mili-tary sectors is called the ‘choice between the butter and the guns’. Once the‘strategic’ choices of military planners and specialists of international relationsare made, the defence budget is determined by taking into account the eco-nomic constraint. The final decision is on the curve of the frontiers of produc-tion possibilities between civil goods and military goods, i.e. the ‘guns versusbutter’ curve. A higher level of investment in armaments can increase thefeeling of security and thus welfare, but it also means that there are fewer avail-able resources for consumption in the private sector; another constituent ofwelfare therefore decreases.

Game theory better explains the government’s choice between civil or mili-tary goods, in the process of social utility maximization. For example, Van derPloeg and de Zeeuw (1990) criticized the lack of economic foundations in armsrace models. They therefore underlined the importance to the ‘guns–butter’dilemma. The process of resource allocation between the military civil sectorsdepends on the way the opponent’s behaviour is perceived. In fact, theseauthors used game theory to show that, according to the hypotheses formulatedon the States’ behaviour, the conclusions with regard to the benefits which canbe gained from an interstate co-operation policy in armaments were very differ-ent. Their model represents two different economies, a decentralized one(West) and a centrally planned one (East), under the hypothesis of differentutility functions. There is a ‘guns–butter’ dilemma because supplementary taxesare necessary to increase armaments, at the expense of consumption and leisureactivities. The model concludes on the advantages of co-operation and disarma-ment. It is interesting because it stresses the importance of the economic ele-ments of the arms race model, and notably Richardson’s coefficient of‘economic fatigue’.

For their part, Deger and Sen (1984) presented a model of military expendi-ture in less-developed countries, based on a non-co-operative differential gamebetween two countries. They take into account the different size of each LDCinvolved in the arms race, and thus consider the asymmetries in the way threat,security awareness, military reaction curves and economic costs are perceivedby both agents. Other game theory models which emphasize the economicaspects of an arms race have been developed (notably Garfinkel 1990). Other


Table 6.4 Some studies on the theory of alliances


M. Olson and R. Zeckhauser Hypothesis of a positive Central point of the model: the For NATO, the correlation between (1966) correlation between the problem of costs allocation the level of GDP and the financial Economic Study of an Alliance. participation of each country to within the alliance. The financial contribution to alliance (ratio of Problem of the Alliance’s Cost the alliance and the level of their contribution of a country is more military expenditure/PNB) is tested: Sharing. national income. or less important depending on results are conclusive for 1964, but,

the relative size of its GDP. It is later, other studies have shown a ‘the exploitation of the rich by positive but declining relation.the poor’ hypothesis and the underlining of the ‘free rider’ problem.

Standard study of the alliance. Defence is considered as a pure The economic dimension The model is a Nash problem. The Discussion of the conditions of public good. appears at the level of resource utility function depends on civil participation of one country to Two constraints: resources allocation to each ally’s defence, private goods and of national military an alliance. constraint and first order under resource constraints. activity, and of the enemy’s global

constraint. Maximization of the utility military expenditure.The global level of deterrence function, that is resources

is a function of the military allocation between civil andactivity of each ally and of military goods such that eachdefence spillovers. ally maximizes its welfare

Problem of each ally’s utility (under resources constraint).maximization (hypothesis of a Cournot–Nash behaviour).


N. Bruce (1990) The basic model is the pure The model lies on the choice, at In opposition with the conclusions of The model aims at studying public good model of alliance of each country’s level, between Olson and Zeckhauser, a treaty of relations between national Olson and Zeckhauser. It is built civil and military goods. The cost co-operation to increase defence security and military for three countries, with an of an arms race is introduced in expenditure within an alliance may expenditure of the allies or initial country, an ally country the alliance model. decrease its efficiency. Even if the adversaries. The question’s aim is and an adversary country. Increase of military alliance situation is improved by this to introduce the enemy threat in expenditure within an alliance treaty, it may lead, at the the alliance model. can deteriorate its strategic international level, to a prisoner

situation, or weaken the strategic dilemma, and to a worse situation equilibrium at the international than if they had co-operated.level, and then decrease alliance members’ security.

B. Hilton and A. Vu (1990) The reference model used is Social utility maximization is The model allows the demonstration The question is to test the McGuire (1982/1987). The made from a middle function, that one country’s ‘defence is not relation between the defence military expenditure of each representing each citizen’s negatively related to allies’ expenditure of one country and NATO member is represented utility. For each NATO ally, the expenditure and positively to enemy’s those of its allies and adversaries. by a Stone–Geary function. resource allocation between expenditure. The public model of The standard model of alliance as Non-defence public expenditure civil and military goods depends alliance is naive and inappropriate to a pure public good is not and private expenditure are also on income per capita, investment represent NATO. Allies adopt a applicable to NATO, as shown estimated by this kind of level (which indicates the competitive behaviour towards each by this analysis following the function. confidence level of the private other.MacGuire model (1982/1987). Warsaw Pact military sector in the future), of the The threat constituted by the expenditure is integrated into population, of the defence Warsaw Pact is introduced in the the model. expenditure of the Warsaw Pact, model. and total NATO defence

expenditure.continued


Table 6.4 continued


J. Fontanel and R. Smith (1998) Definition of a national welfare Introduction of the cost of Threats are supposed to be To understand the difficulties in function, depending on the level production of two types of exogeneous, but military the settlement of a common of security, civil expenditure and defence, which can differ from expenditure within alliance European defence, the study of population. To define security, one country to another. determine the reaction of the hypotheses of the allies’ behaviour threat must be taken into Distinction of two types of adversary. An excess of military is fundamental. account, as well as two kinds of behaviour: non-co-operative of expenditure decreases the alliance’s

This is a study of a Lindhal- defence provided by the national Cournot–Nash type and security.type behaviour. armed forces: common protection co-operative of Lindhal type.

for the whole alliance or specific The internalization of national protection. externalities of the alliance will

be made only if allies adopt a co-operative behaviour. Co-operation allows a decrease of national military expenditure.

K.Y. Wong (1991) A model is built to analyse the The increase of defence If there is a threat leading to an Analysis of the influence of evolution of trade and military production generally leads to a increase of defence expenditures foralliance existence on the relations between two countries deterioration of the terms of the allies, then the terms of trade orientation of international which have a common enemy. trade for the other ally which between these allies would be trade. The questions of the There are three countries, does not produce defence goods. modified.burden division between two three sectors, three factors. However, numerous particular allied countries, and of its The question is to determine cases exist. Depending on the consequences on exchanges, are how defence production can hypotheses on the trade studied. affect consumption, production orientation between the two

and trade in the private sector. allies, the alliance’s impact on A defence function to optimize the terms of trade would be is derived for one country, and different.the impact of a defence increase of the allied country is analysed.


Hansen, Murdoch and Sandler The model is of joint production. Military expenditure estimates are Different behaviours are distinguished (1990) ‘Strategic’ and ‘non-strategic’ made from GNP, but also from inside the alliance, depending on the Analysis of defence goods expenditures are distinguished strategic and conventional nature of the good produced by the coproduction within NATO in within the alliance, from 1970 to spillovers. alliance. The free-rider behaviour is 1972/1985. A distinction is 1985. appropriate only for purely public made between nuclear and non- strategic spillovers, but not for nuclear allies. conventional spillovers, with private

benefits.

P. Jones 1992 NATO is used as a reference. This analysis refers directly to Alliance membership allows a Test of the hypothesis according Bureaucratic inefficiency effects public choice analysis. The reduction of bureaucratic inefficiency to which alliance membership are represented in a quadrants failure of government may at the national level. Alliances such allows a reduction of bureaucratic diagram, representing the military provoke a demand of as NATO are more efficient when inefficiency at each State’s level. expenditure of two countries and supranational structures. These defence institutions suffer from great

their relative defence price. This permit a reduction of bureaucratic inefficiencies.presentation allows an evaluation government failures, while they of the respective benefits of are not efficient to the palliation mutual assistance. of market failures.

T. Sandler (1977) Some benefits of alliance defence The problem of cost allocation Defence does not have the Study of joint production. may be privatized by some allies. within an alliance is reconsidered. characteristics of a pure public good.Defence is an imperfectly pure An ally military activity produces good. a defence public good but also a

defence private good.


interesting models using different economic concepts have also been developed,such as Seiglie’s (1988; 1996b): in the context of an arms race, the opponent’sarmament should be considered as exerting ‘negative externalities’ over thedomestic economic situation.

All of these examples, which of course are not exhaustive, show that themodels derived from neo-classical theory can be indefinitely improved to betterunderstand interstate strategic interactions and the part played by economicconsiderations in decisions of foreign policy.

Other interesting models were developed, such as Seiglie’s: in the context ofan arms race, the opponent’s armament exerts ‘negative externalities’ on thedomestic economic situation. Besides, the process of resource allocation to themilitary sector is once again reviewed from a more economic perspective thanin the initial arms race models.

The economic foundations of conflicts

During the second half of the 1980s, Wolfson, in association with Farrell (1987)and then Shabahang (1991), used Brito and Intriligator’s arms race model tostudy the ‘economic war’, this one referring to the economic dimension of thearms race (as an attempt towards economic exhaustion of the opponent), aswell as to the fact that international conflicts can have economic causes.

Wolfson and Shabahang (1991) base their model on the idea that economiccauses can lead to a disruption in the military balance. Their model applies toconventional armaments. They underline the direct relationship between theconcepts of ‘economic war’ and of ‘arms race’, for two reasons:

1 the term ‘economic war’ can be used when the armament of a nationcompels a rival nation to increase its armaments so much that it erodes itscapital, to maintain its deterrent capacity. The consequences of economicwar are a reduction in the enemy’s production capacity (and thus of itscapacity to arm itself), of its consumption, welfare and economic growth.

2 military conflicts often have an economic source. Most of the time, they arethe result of a change in the global balance of international relations,because of uneven rhythms of national economic development.

In a previous article, Wolfson and Farrell (1987) applied their model of eco-nomic war to the confrontation between the United States and USSR; theyanticipated the collapse of the Soviet Union if the ‘economic war’ continued atthis rate. The authors’ demonstration was based on the representation of adiagram with quadrants. To test the possible outcomes of the American–Sovietarms race, they distinguished high-technology military equipment (capital-intensive) from low technology equipment (labour-intensive). They thusstudied the characteristics of the arms race according to the factor endowmentof both countries. The fact that the conflict requires weapons that are moresophisticated or, conversely, more ‘labour-intensive’, has completely different


implications for each country, because of their particular factor endowments.Wolfson and Shabahang (1991) have applied their model (by adding a functionof social utility to the one of 1987, on Walter Isard’s proposal) to the arms racebetween Germany and the United Kingdom on the eve of the First World War.Their model aimed at testing the hypothesis that the escalation of this armsrace, until the war’s outbreak, would be explained by the differences in theirrespective structures of economic development.

The importance of economic factors for explaining military budgets

The instruments of the theory of collective goods can be applied to the analysisof defence. The defence budget is decided outside the market, through a collect-ive choice procedure. The creation of models allows a systematic presentationof the economic factors of military expenditure.

DEFENCE AS A PUBLIC GOOD

Defence, like all public goods, raises the problem of cost allocation. It is difficultto estimate the ‘production of security’. Indeed, the notion of ‘security’ implies(at least partially) the consideration of non-market values, the quantification ofwhich gives rise to important definition and approximation problems. Itrequires assessing the ‘confidence’ in the national defence or diplomacy, to pre-cisely estimate the relative military forces, to envisage different strategies. It istherefore very difficult to determine the level of military expenditures necessaryfor a sufficient level of security.

Defence is an indivisible collective good, as far as no citizen can be excludedfrom its consumption, notably by the price system. In this context, it is betterto speak in terms of collective good/individual good rather than publicgood/private good, this latter typology exclusively referring to the institutionalcontext. Thus, with the characteristics of non-rivalry and non-exclusion,defence has the characteristics of a pure public good and it had indeed been pre-sented as such. Certainly, some kinds of defence could include trade relations,with personalized payments. But the modern forms of national defence policies,notably for States possessing the nuclear weapon, imply a concentration of thestrategic power which eliminates the intervention of markets. The determina-tion by the State of a desirable level of military expenditure, through a collect-ive choice procedure, then turns out to be particularly delicate, considering thedifficulties in defining the optimal level of national security. In the field ofdefence, the economist faces the difficulty of estimating the ‘product ofdefence’. In this respect, French nuclear deterrence has probably been efficientwith regard to its purpose of avoiding conflicts, notably nuclear ones. However,it does not answer the question as to whether a similar result would have beenobtained with lower military expenditures.

The majority of the contemporary studies of defence economics is based onthe theoretical concept of efficiency in resource allocation; decisions can be


Table 6.5 Some studies on the economic foundations of arms-race models


Van der Ploeg and de Zeeuw Game theory is applied to an The problem of the allocation of Demonstration of the benefit of arms (1991) arms race between East and resources between civil and control.Differential game theory study. West. Several games are military sectors is studied. A The objective is to improve the successively studied: perfect distinction is made between the theoretical study of strategic bases equilibrium subgames or Nash economic systems of the two of Richardson’s model and to equilibrium. The hypothesis of actors.show the opportunity of an arms a behaviour as Stackleberg control. leadership is also studied.

Deger and Sen (1984) The optimization method and The question of resource The choice of one of the two methods Differential game theory study. the dfferential game method allocation between civil and is made according to the more or less

Analysis of strategic (Nash solution) are successively military sectors is studied. important interaction between interactions between two used. defence the expenditure of the two developing countries. adversaries (game theory is well

adapted in the case when there exists a tradition of antagonism between the two countries).

M. Garfinkel (1990) Two models are successively The question of resources There are numerous relations between Insisting on the role of strategic used: a one period non- allocation between civil and armaments levels and the strategies considerations in an co-operative game; repeated non- military sectors is studied. The followed by the actors. But, also, there international conflict economic co-operative games. economic cost of the is a link between the strategies model. participation in an international followed, economic activity

conflict is also taken into account. variations and military expenditure Investment in armaments allows level.a promotion of economic interests.


C. Seiglie (1996) A minimum armament level is A production function is The author tests his model on pairs Improve the analysis of the maintained, even if there is no introduced into the arms-race of countries, and he shows the allocation resources process threat. The part of the adversary model; it depends on the level of existence or not of Granger causality between civil and military goods, armament stock which decreases consumption, of investment and relations between their military insisting on the economic the national security is armaments stocks. expenditures. All results are not dimension. considered. A production satisfactory.

function is defined.

M. Wolfson et al. (1987; 1991) The presentation is made in a The allocation process between The rupture of military equilibrium The economic war is introduced four quadrants diagram: civil civil and military sectors is may come from several economic inside Brito and Intriligator’s goods, military goods, adversary’s analysed (production factors:model (presentation of the arms military goods, investment. The possibilities frontiers and social • a rise of military expenditure race in a diagram of four diagram represents the choice utility curve). • induces a too-important decrease quadrants). The problem is to between civil and military goods, The relation between saving • of civil consumption;demonstrate that economic the relation between saving and and investment depends on this • some divergences in arms demand causes may cause the rupture of investment, the mutual resources allocation. • elasticities. military equilibrium. deterence cone and the Economic war stems from the Economic growth may then generate

economic war. relation between investment of military equilibrium ruptures.one country and military • asymmetries in economic growth acquisitions of adversary. • rhythms.

• a consideration of population • knowledge, physical resources • stock, etc.


subject to the same efficiency criteria as private goods. We can, however, con-sider that the determination of the necessary defence capacity is subjective,because it can only be tried out in wartime for the strategies of conflict (or, inthe permanence of a ‘non-war’ situation, for strategies of mutual deterrence).Often, political concerns overshadow, at least in the short term, economic con-cerns. The economic analysis of defence implies a measurement of the costs ofvarious solutions of national defence, with regard to their opportunity costs.The main difference between the supply of private goods and that of publicgoods is at the level of cost allocation, several Pareto optimums being possible.No choice is more justified than another along the curve of contracts. The inde-cision is ended when a price is fixed outside the market, through a collectivechoice procedure, because it corresponds to a unique point on the curve of con-tract. It is thus necessary to avoid ‘free-rider’ behaviours. If both parties reactaccording to the prisoner’s dilemma principle, then they are likely to reach anequilibrium which is not optimal. Even for the supply of a collective goodwhich seems as consensual as defence, conflicts of interests appear (Wagner1975). Under these conditions, the modalities of optimal security State inter-vention are difficult to define. The individuals concerned have very differentfeelings about their national membership, as well as about the advantages anddisadvantages of conflicts with other States. Moreover, some groups withinsociety can find their own advantage in manipulating the information or in pro-pagandizing to try to influence individual demands for defence in favour of theirincrease.

Another difficulty in the analysis of the demand for defence is that nationaldefence mustn’t be considered as equivalent to military expenditures. The lattercan indeed be devoted to the purchase of goods which don’t exclusively servedefence purposes; besides, some forms of civilian defence have no military char-acter. Moreover, there is no simple relationship between the increase in militaryexpenditure and the reinforcement of security, given that the ‘probability ofnational survival’ is only assessed in a subjective way, because the plans of theopponent cannot be objectively defined. The fact that the political leaders’decisions with regard to the defence policy are themselves not only taken inrelation to foreign policy, but also to the domestic policy as well, must also betaken into account (this question has already been mentioned about arms racemodels).

THE MODELS OF MILITARY EXPENDITURES

The economic explanation of the level of military expenditure gave rise tonumerous hypotheses, generally tested by models. Several variables are thustaken into account, notably:

• the commitment of the country in an arms race, or its participation in amilitary alliance, by the integration into the model of the opponent’s andthe allies’ military expenditure. At first sight, national military expenditure


can be considered as varying positively with those of the opponent andnegatively with those of the allies; however, agreements between allies cancontradict such an evolution. For example, NATO decided at the begin-ning of the 1980s to ask its members to increase their contribution up to atleast 3 per cent per year. This type of agreement leads to a questioning ofthe economic reasons for the constitution of alliances partially based oncost reduction.

• the national economic situation, as well as the impact of military expendi-ture on the great macroeconomic variables, as investment, inflation orexports.

• the evolution of technical progress, which can increase the costs of equip-ment and modify the strategic context, through the effects of obsolescence.

• finally, governmental changes can modify the level of military expenditure,every political party sharing its own conception of desirable defence policy.However, a particularly unfavourable economic situation can lead to adecrease in military expenditure, and thus limit the choice of defencepolicy for the government. It is also necessary to take into account the factthat the vote process can be influenced by the perception the citizens haveof the foreign threat.

Nevertheless, the economists who wish to create a model of military expendi-ture limit their model to a few variables which they consider particularlyrepresentative. They create their model according to a pre-established concep-tion, which determines the choice of the variables and hypotheses. Such amethod could be criticized for its subjectivity; however, some models are basedon a rigorous preliminary reflection on the best way of estimating the variousvariables. Thus, Fontanel and Smith’s model (1989) shows that, according tothe way the variables are integrated into the model, and the way the availableinformation is used, the results will differ. Besides, the results of the economet-ric tests of such models are rarely clear.

Neo-classical theory supplies many instruments to formalize a more ‘general’model of the economic factors of military expenditure. In this respect, Smith(1989) constructed a ‘standard’ model of the demand for military expenditure.It is based on the method which consists in maximizing the social welfare func-tion under budgetary constraints. Other theoretical considerations would leadto an underlining of other key factors of military expenditure. Indeed, from aMarxist point of view, military expenditure represent above all an elementwhich ensures the stability and permanence of the capitalist system. Besides, theconception of a society divided into social classes, each trying to hold power,implies a particular conception of the way military expenditure is determined.

Nevertheless, neo-classical theory is the one which inspired the considerabledevelopment of the literature on defence economics since the 1960s, thus bene-fiting from its hegemony on economics.

Several other models have been created; it would in fact be impossible tomake an exhaustive presentation of the various types of models of military


expenditure. A good review of the literature on this subject was presented in1989 by Smith.

A new perspective of conflicts analysis

In conclusion to all these studies, it is necessary to mention the most originalperspectives which have been developed in recent years on the issue of integrat-ing the study of conflict into economic analysis. In this way, Hirshleifer (1995)considers that the economic analyses of conflicts and trade must be treated onan equal footing. In this respect, he follows Boulding (1962) who had previouslyunderlined the importance of the concept of conflict for economic analysis. Inhis work published in 1962, Conflict and Defense, Boulding had adapted themodels of price war and spatial competition to explain the balance in the con-figuration of interstate borders or the absorption of one nation by another. Henotably formalizes Richardson’s arms race model with game theory. In thisanalysis, international conflict is considered an economic process. Moreover,different categories of conflict are distinguished, evolving according to thecharacteristics of the society. But one of Boulding’s main contributions to thetheory of conflict was the idea that a country’s capacity to control othersdeclines with the distance from its centre of power. He thus stresses the effectsof the geographic distance on the emergence of conflicts. However, such asocio-historical analysis is not directly linked to economic issues; besides, ithardly explains systemic or nuclear conflicts.

Like Hirshleifer, McGuire (1995) considers that the analysis of the choicesof ‘production versus aggression’ and ‘offence versus defence’ presents amethodological potential that is still poorly exploited by economic analysis.Besides, according to McGuire, game theory must be used to pacify inter-national relations, notably by applying it to international institution mechan-isms and international trade relations, which can help to contain a nation’saggressiveness.

These various calls to deepen the economic research around the theme ofconflict show the involvement of numerous contemporary economists in peaceeconomics. Several economists, in particular Boulding, Schwartz and Tinber-gen, stressed the particular part the non-economic international institutionsmust play to maintain peace among nations.

Conclusion

Arms race models were of great interest during the systemic struggle betweenthe United States and USSR, or NATO and the Warsaw Pact. Today, theirinterest seems reduced for at least three reasons:

1 none of these models has given indications anticipating the events that ledto the destruction of the Warsaw Pact. Even when economists underlinedthe ‘internal’ factors of the arms race, they limited this idea to the study of


industrialized market economies. The lack of reliable information on themilitary expenditures of the Warsaw Pact countries can explain the absenceof studies on the long-term effects of these expenditures on the Sovieteconomy.

2 the disarmament process doesn’t lend itself to a symmetrical analysis of a‘disarmament race’, since downward inertia effects are powerful and the‘exogenous’ (political) character of military expenditure seems to prevail, atleast for some time.

3 for an arms race to take place, there must be at least two avowed enemies.Yet, in the current geopolitical context, it is difficult to explain decisions toincrease military expenditure with the concept of an arms race, except in afew cases (India–Pakistan for example). The issue of international terrorismraises specific problems, that have notably been studied by Sandler in somerecent studies (Sandler 2002).

Nevertheless, these models still have a great explanatory power, even if newvariables should now be considered. It is very likely that they will inspire futuretheoretical constructions, which might deal more clearly with the economicfoundations of conflicts.

Econometric and formalized analyses of military expenditureand disarmament

Econometric analyses of military expenditure

The development of studies on the economic consequences of armament anddisarmament contributed to the thought on economic policy after the SecondWorld War. The defence budget represents an important part of public spend-ing, and a whole area of the national economic activity depends on the militarysector. Defence economics has been mainly developed as an autonomous field ofwork since the 1960s, because of the new international strategic order. Withthe increase of Western military budgets during the Cold War, the argument ofthe unproductiveness of military expenditure has been renewed. New math-ematical and quantitative methods have then been used to conduct empiricalanalyses on the economic impact of the military sector. However, despite thesescientific methods, the theoretical or ‘ideological’ debate didn’t disappear.Indeed, in economics like in all social sciences, no conceptualization or instru-ment of analysis is totally neutral. The analysis of the economic effects of arma-ment, and thus, symmetrically, of disarmament, represented a new economicfield of work. Specific studies have dealt with several questions, such as:

• should the military budget be used as an instrument of a reflationary policy?• what part does the military sector play in an industrialization process?• in the long run, can excessive military expenditure check economic

growth, and thus, paradoxically, contribute to weaken national security?


Topics, statistics and methods regarding military expenditure

The study of the concepts, hypotheses and methods underlying the analyses ofmilitary expenditure based on econometric tests or on modelling requires, first, adiscussion on the pertinence of the information, and then of the methods andhypotheses.

THE STATISTICAL INFORMATION

The selection of the information used in empirical studies of military expendi-ture raises several questions. First, the collection of information on militaryexpenditure raises a problem of definition. The main international sources, suchas SIPRI (Stockholm International Peace Research Institute), USACDA(United States Arms Control and Disarmament Agency) or IISS (InternationalInstitute for Strategic Studies) don’t consider the same elements in their stat-istics. In addition, the military budget is almost never equivalent to militaryexpenditure, because some defence costs are borne by other ministries. The eco-nomic evaluation of the conscription is tricky, as is evaluation of some half-civil, half-military expenditures, or the distinction between police forces andmilitary forces, etc. In addition, the secretive nature of the military makes thequality of information debatable. Moreover, intertemporal comparisons comeup against the difficulty of estimating military inflation. International compar-isons of military expenditure are also problematic, as the exchange rate does notrepresent, at least in the short run, the purchasing power of currencies. Finally,the use of statistical information requires a conversion in constant currencies;yet, the construction of indexes for adjusting the data is delicate.

Another difficulty for statistical studies on military expenditure lies in thechoice of the type of information used. Regression equations such as thosedeveloped by Benoit (1978) or Frederiksen and Looney (1986) are based oncross-information, i.e. information for one specific year and for a representativesample of countries. Time series, or longitudinal information, concerning asingle country, over several years, could also have been used. The question ofthe most relevant choice between both kinds of information for models on mili-tary expenditure gave rise to an important debate (Chan 1985; Martin et al.1987; Mintz and Stevenson 1992; Chatterji 1996). The choice depends on thetheoretical orientation of the study.

Various methods are used to study the macroeconomic impact of militaryexpenditure:

• statistical estimates of the relations between military expenditure and othermacroeconomic variables;

• modelling and econometric tests;• the use of big macroeconomic simulation models.

Synthesized presentations have already been made on the quantitative methodsapplied to defence economics (notably Chatterji 1993; Fontanel 1995b).


SIMPLE STATISTICAL ESTIMATIONS OF THE RELATIONS BETWEEN MILITARY

EXPENDITURE AND MACROECONOMIC VARIABLES

Owing to econometrics, one can confirm the appropriateness between a theo-retical hypothesis on the economic impact of military expenditure, and theavailable information. It is also an instrument of empirical validation of a theo-retical model. Several instruments have been employed to estimate the eco-nomic impact of military expenditure, in particular the relation betweenmilitary effort and the main economic variables: simple linear regressions,analyses of direct causality and VAR models.4

A first simple statistical technique consists of testing the correlation betweentwo variables, military expenditure (as an exogenous variable) and economicgrowth, represented, for example, by GNP (as an endogenous variable). Thepoint is to make a linear adjustment, i.e. to estimate a linear regression byOrdinary Least Squares. The correlation tests can also include several variables,as well as ‘dummy’ variables to account for the impact of a precise event duringthe studied period. The linear regression method was used in a famous study byBenoit (1978): its conclusion was that the relation between military expendi-ture and economic development for forty-four developing countries was ratherpositive or neutral. However, this study has been strongly criticized, notablybecause of the too-empirical choice (without any preliminary theoreticalmodel) of the explanatory variables and because of the lack of adequate statisti-cal tests (Deger and Smith 1983).

The Granger causality test determines the direction of a causal relationbetween two variables, expressed as a time series. It has often been used to studythe links between military expenditure and other economic factors. But severalanalyses have shown the limits of this method. (Chowdury 1991; Majeski1992). One of the problems cited is the use of the same number of lags for allvariables, with the risk of rejecting or omitting significant variables.

A more accurate analysis of causality implies the creation of a system ofequations. The VAR (Vector AutoRegressive) models are one of the methodsused (Kinsella 1990; Dunne 1993; Payne et al. 1993). VAR analyses of militaryspending take into account variables other than economic growth. However,the upholders of econometric models, such as Hartley and Sandler (1995),denounce the ‘arranged’ character of these empirical estimate techniques, ifthey are not at first underlain by a solid theoretical model.

The econometric tests of model validation are numerous and more or lesscomplex. Notably, some very recent developments in econometrics refine theanalysis of non-stationary series, by distinguishing short-term from long-termcharacteristics. If both studied series are trending, they can be co-integrated ifthey fulfil certain requirements, i.e. if they have the same rate of increase. Co-integration tests are henceforth often used in defence economics.


ECONOMETRIC MODELLING: A THEORETICAL SUPPORT TO THE ESTIMATION

OF THE ECONOMIC EFFECTS OF MILITARY EXPENDITURE

The economic analysis of military expenditure gave rise to three types ofmodels, each focusing on specific economic effects (Sandler and Hartley 1995:205–213).

‘Demand-side’ models analyse the crowding-out effect of military expenditureson investment. There are fewer Keynesian models on the relations between mil-itary expenditure and growth than neo-classical models. At a first level of analy-sis, the Keynesian mechanism of effective demand seems to back up thehypothesis that defence expenditure stimulates economic activity in times ofcrisis, like all public spending, notably because of the existence of a multipliereffect. This argument is characteristic of ‘military Keynesianism’ (Mosley 1985).But it is, above all, another Keynesian argument on the link between militaryexpenditure and growth which was developed after the Second World War andwhich contradicts the previous one: defence expenditure could crowd outpublic or private investment. Military expenditure would thus represent anopportunity cost with regard to investment.

Ron Smith (1980) was one of the first economists to formalize crowding-outeffects of military expenditure on investment. It is the most classic economicargument in the analysis of military expenditure through the theory of growth.This model highlights the crowding-out effects of military expenditure oninvestment. It has been used in numerous studies.

‘Supply-side’ models study size effects and externalities generated by the mili-tary sector. Smith’s analysis is made from the ‘demand side’, in a rather Keyne-sian perspective. Another type of model has also been developed, in a moreneo-classic perspective, from the ‘supply-side’. This analysis of the relationbetween the defence budget and economic growth is based on the formulationof an aggregated production function for each economic sector (generally themilitary sector and the civil sector, but also the public sector without defence),specifying externalities and size effects of military expenditure on the totaloutput. After derivation, an equation of economic growth is obtained. Thismethod was used by Feder (1983) and Ram (1986). These models are, in fact,used to highlight certain macroeconomic impacts of military spending, inparticular the positive effects of the military sector on the entire economy(modernization and development of new technologies and new products whichcan benefit the civil sector). These are some of the conclusions drawn by Ram(1987; 1989). But Biswas and Ram (1986) concluded that military expenditurehad a negative effect on economic growth. In fact, these models focus on thepositive economic consequences of military expenditure; however, if the rela-tive productivities of military and civil sectors are taken into account, this maylead to inverted conclusions if the relative productivity of the military sector islower.

Several economists used this approach. Criticisms have, however, beenraised against these models, notably by Sandler and Hartley (1995): in their


point of view, one of the problems is that investment is considered as an exoge-nous variable, and thus that its interactions with military public spendingcannot be taken into account. Furthermore, only the impact of military expen-diture on economic growth is considered, but not the reverse relation; Granger’scausality tests could then prove to be useful. However, several economists usedthis type of model to analyse the economic impact of military expenditure, inparticular Atetsoglu and Mueller (1993), Adams et al. (1992) and Ward et al.(1995).

Deger, Smith and Sen contributed to the development of a more generalmodel of the relation between military expenditures and economic growth,which considers both the ‘demand side’ and the ‘supply side’. Economists haveoften returned to Deger and Smith’s model; the 1995 version of Deger andSmith’s model explicitly mentions the previous contributions and distinguishesthe supply-side from the demand-side. The authors refer to the works of Harrodand Solow.

Deger and Sen (1995) consider that their model is more Keynesian thanneo-classical, given that it takes into account a ratio of capital use. Howeverthey believe that it would be an illusion to try to determine the impact of mili-tary expenditure on the long-term steady state. The long-term growth willdepend mainly on the qualitative and quantitative increase of the labour factor.On the other hand, in a shorter term, i.e. in a transitional stage towards a stabi-lized economy, military expenditure influences economic growth, either in anegative way, for example by decreasing the available resources for workerstraining, or in a positive way by accelerating technical progresses with import-ant civil spin-offs.

In conclusion, all the models presented above generally end up demonstrat-ing one of the following hypotheses:

• defence expenditure exerts a negative effect on the economy, by monopo-lizing resources which would have been better used in other sectors; theythus hamper economic growth.

• the military sector exerts a positive effect on the economy. It generatesexternalities for other economic sectors, and therefore improves theirresults.

Each interpretation has been corroborated by various studies, which will be pre-sented later. But it already appears necessary to distinguish short-term fromlong-term effects.

The analyses of the relation between the military sector and growth or eco-nomic development have also been renewed owing to theoretical develop-ments. As an example, Berthélemy et al. (1995) developed a model analysingthe link between military expenditure and economic development based on thetheory of endogenous growth, where military expenditure exerts externalities inthe same way as other expenditures.

Moreover, as well as ‘simple’ models, macroeconomic simulation models


have also been used to estimate the economic impact of military expenditure, oreven the gains expected from a disarmament process (Kollias and Refenes1996).

The most famous models of economic growth rarely integrated militaryexpenditure as an endogenous variable. Nevertheless, several regional, nationalor international macroeconomic models have been developed to test the eco-nomic impact of a change in military expenditure. The most common analyticalmethod is to test various scenarios. However, numerous reserves have beenexpressed against such simulations using great pre-established models. Accord-ing to Adams (1992: 13), econometric models often fail to represent the struc-tural economic changes which should result from a disarmament process.Fontanel (1980) considers it is necessary to develop empirical tests on the con-clusions drawn from the simulation model, which could lead to a surrender ofsome theoretical hypotheses. Besides, the analysis of the effects of militaryexpenditures must be refined by taking into account the nature of the spending(staff, conscription, R&D, investment) and of the supplier (domestic, multina-tional, foreign company), as well as long-term effects, which are difficult tomeasure.

These simulations study several issues, notably that of the economic impactof disarmament, at the international, national or regional level. Most of theseanalyses lie on input–output analyses (Chatterji 1992: 262; Braddon 1996: 495).General equilibrium models can also be used to simulate the effects of a reduc-tion in military expenditure. These models provide information on the con-sequence of a decision (of armament or disarmament) on equilibrium prices andquantities. The general equilibrium models consider long-term perspectives,whereas macroeconomic simulation models consider short-term perspectives(Baum 1993). The general equilibrium models, however, have their limits,notably the fact that they are based on unrealistic hypotheses: technologieswith constant scale economies in all industries, a perfect substitutability ofinputs and the non-consideration of monetary and financial variables.

These hypotheses are important when considering the issues of the conver-sion of the military industries, the characteristics of the competition within themilitary sector and the influence of monetary variables on domestic economies.

THE THEORETICAL HYPOTHESES

No instrument of economic analysis is neutral. The choice of one model ratherthan another and the selection of the explanatory variables is based on a spe-cific idea of the relations between military expenditures and these variables(Majeski 1992). Research on the relation between military spending and eco-nomic growth has often led to contradictory results; this can notably beexplained by differences in theoretical approaches, in the definition of eco-nomic growth and by the variety of concrete economic situations. From a Key-nesian point of view, one of the hypotheses can be that an increase in defencespending has an impact on the total aggregated demand. But other theoretical


methods could have been chosen as well. The macroeconomic model MULTI-MOD of the IMF illustrates these theoretical difficulties. This model, whichevaluates the consequence of a reduction in military expenditure, rests onprecise theoretical hypotheses, based on the general equilibrium. Bayoumi et al.(1995) used it to estimate the impact of a 20 per cent reduction in militaryexpenditure over five years. Their results were later criticized by Uno (1995)who denounces the lack of realism of the model’s hypotheses, which could onlycorrespond to a perfect economy.

Another criticism expressed against models of military expenditure is thatthey are used by economists who do not know the economies they are studyingand are consequently unable to select the relevant variables and gather theappropriate information. Besides, the methodology of ‘ad hoc’ models has beenquestioned. It consists in expressing by equations the presuppositions regardingthe direction and various characteristics of the links between economic growthand military spending, and then in validating them in an empirical way.Lebovic and Ishaq (1987) criticized the excessive simplifications and the lack oftheoretical support of these studies. Nevertheless, econometric results remainparticularly interesting, even if not enlightening.

The main results of the analyses of the macroeconomic impact of militaryexpenditure

Many studies have dealt with the impact of military expenditure on greatmacroeconomic variables, in particular economic growth, other public expendi-ture, investment, employment, inflation, research and development. Thesestudies have often led to divergent results, according to the period and economyconsidered.

THE IMPACT OF MILITARY EXPENDITURE ON ECONOMIC GROWTH

The numerous models on the economic effects of military expenditure haveoften led to contradictory results; this can be explained by the diversity of thehypotheses and empirical techniques that have been used.

The interpretation of a positive relation between the level of the defencebudget and economic growth remains delicate. What part does the direct andindirect effects of military expenditure play in domestic economic perfor-mances? For example, the advantages gained from maintaining a high level ofmilitary expenditure, in terms of domination on the international economy,should be taken into account (trade agreements, markets opening, diplomaticinfluence, etc.). The issue of the long-term economic consequences of an exces-sive militarization should also be considered. Thus, the analysis of the linkbetween military expenditure and economic growth is not simple.

A work published by Benoit (1978) gave rise to a vast debate about the eco-nomic impact of defence spending. From a regression equation, he indeedshowed that military expenditure had a rather positive effect on the economic


growth of developing countries, by playing an important part in economic mod-ernization, notably with the construction of infrastructures, the introduction ofnew technologies and the development of human capital. Weede (1983) drewsimilar conclusions from his work. From this point of view, domestic militaryexpenditure would benefit development. But this argumentation has been criti-cized. Deger and Smith (1983) notably underlined the fact that Benoit’s studywas based on a simple regression with a single equation, thus distorting theresults. Their own model of simultaneous equations, with a separate analysis ofthe impact on each macroeconomic variable, led to the opposite result. Othereconomists also criticized the statistical methods used by Benoit (see forexample Adams et al. 1992).

Besides, several studies have shown that the negative effects of militaryexpenditure on the domestic economy were difficult to analyse in the shortterm. But, in the long term, militarization gradually weakens the domesticeconomy, by limiting its competitiveness. Thus, one of the paradoxical con-sequences of an arms race is that an increase in defence spending can lead to adecrease in national security. The analyses of Brandt (1988), Palme (1982) andThorsson (1982) all concluded that military expenditure had a negative effecton economic growth, and therefore on tomorrow’s security.

Nevertheless, several arguments have been used to show that military expen-diture exerts a positive effect on economic growth. Thus, military expenditurehas sometimes been analysed (in the perspective of the Keynesian multiplier) asa temporary remedy for under-consumption, i.e. demand insufficiency (CBO1983). However, this under-use of productive capacities can result from other,more structural factors; it isn’t therefore necessarily resolved by an increase inmilitary expenditure. Other, longer term factor, on the supply side, should alsobe analysed, and in particular the opportunity cost of military expenditure.(Ram 1983). Indeed, for the developing countries, where the demand fordefence is mainly satisfied by imports, economic resources are allocated to theunproductive activity of defence at the expense of other uses. It notably exerts acrowding-out effect on investment or consumption, whether public (health,education) or private (research-development), even if military expenditureitself generates consumption and investment. The issue of positive externalitiesfrom the military sector to the civil one (notably, with technological spin-offs)has also often been studied (Payne and Sahu 1993). Ram (1993) identifies thevarious types of externalities, positive or negative, which can be generated bythe military sector: technological spin-offs, training of human capital, infra-structures, militarization of the society, negative effects on the environment,arms race mentality, etc. In fact, a cost–advantage analysis is often necessary.

The numerous global analyses of the impact of military expenditure on eco-nomic growth developed since the 1970s didn’t lead to consensual results. Itseems that there are, in fact, as many different relations between these variablesas there are economies, because of the differences in socioeconomic structuresand political systems. Besides, the studies carried out in the 1980s on the eco-nomic impact of military expenditure were notably improved by reducing the


number of countries studied, or even by focusing on a single country (Chowdury1991), over a given period. In the same way, Ward and Davis (1990) insisted onthe dangers of hasty generalizations on the issue of the links between militaryexpenditure and economic growth: according to the case studied, conclusionscan totally differ.

Neo-classical models seem to be better adapted to underline the existence ofpositive effects of defence spending on economic growth (Weede 1983; Alexan-der 1990; Atesoglu and Mueller 1990). However, these models also proved theopposite, notably in the work of Biswas and Ram (1986) or Ward (1991). Withregard to demand-side models, Deger and Sen (1983a) created a model of threesimultaneous equations, presenting the interactions between growth, invest-ment and defence. Their tests for fifty developing countries show that the rise inthe military burden resulted in a decrease in the rate of economic growth. Adecade later, Mintz and Stevenson (1992) presented an analysis of 103 coun-tries, based on Huang and Mintz’s model: only 10 per cent of the studied coun-tries benefit from a positive relation between the level of the military budgetand economic growth. As for the other countries, the impact of military expen-diture on growth was not significant, unlike the other governmental expendi-tures. Biswas and Ram (1986) drew similar conclusions, as did several otherstudies (Fontanel 1980; Smith 1980; Faini et al. 1984).

It therefore appears that the arguments of ‘military Keynesianism’ raise manyobjections, supported by numerous studies. The opportunity costs of militaryexpenditure as regards other public expenditures or productive investment havenotably been underlined. Paul Samuelson (1954) thus stated that civil publicspending was more favourable to economic growth than defence expenditure,which exerts a neutral multiplier effect. The United Nations has also insistedon the idea that public outlays would be better used in health and education;the arms race represents a waste of resources and thus hinders economic growth(Thorsson Report 1982). Several econometric studies have, in fact, dealt withthe relation between defence expenditure and other public ones, particularlyhealth or education (Ames and Goff 1975; Hicks and Kubisch 1983, Mosley1985; De Masi and Lorie 1988; Hewitt 1991). In this way, with a model repre-senting the several positive or negative economic impacts of defence spending,Berthélemy et al. (1995) showed that the crowding-out effect between militaryexpenditure and education has a negative impact on economic growth. Previ-ously, Souls and Goff had obtained more qualified results.

MILITARY EXPENDITURE AND INVESTMENT

Following Smith’s model (1980), numerous econometric studies have tended toshow that military expenditure exerted a crowding-out effect on investment;however, other studies drew opposite conclusions.

A key issue is to determine if an increase in military expenditure will ratherlead to a decrease in consumption or in investment. Some studies have shownthat, whenever the defence effort is accepted, then the population agree to


Table 6.6 Examples of studies of the effect of military expenditure on economic growth,concluding on an absence of relation between economic growth and militaryexpenditure

Author(s) Country – Method ResultPeriod

Joerding Developing Granger causality test. No Granger causality (1986) countries Two different measures of for military

military expenditure. expenditure on growth. Endogeneity of military expenditure.

Alexander 9 developed Model of Feder–Ram type. No significant impact of (1990) countries, 4 sectors. military expenditure on

1974–1985 Estimates of temporal growth. The under-transversal series. consumption hypothesisNo consideration of is not validated. aggregated growth but of However, the defence real non-defence product sector is less productive growth. than the rest of the

economy.

Huang and United States Model of Feder–Ram type. No trade-off effect of Mintz (1990, 1952–1988 A ridge regression defence on growth 1991) equation is used to (even if indirect effects

prevent multiple may exist). Military correlation errors. expenditure do not Three sectors. exert significant For the study of 1991, externality effects on disaggregation of growth, to the externalities effects and difference of other civil productivity effect. public expenditures

(1991).

Adams, Pays en Modèle de type Feder–Ram Aucun effet de la Behrman and développement, Trois secteurs défense sur la croissance. Boldin (1991) 1974–86 Estimations de séries Les exportations ont des

temporelles transversales effets positifs.

Mintz and 103 countries, Feder–Ram type model. No strong short-term Stevenson varied periods, Longitudinal estimates for relation between (1993) around each country. Three military expenditure

1950–1985 sectors. Use of ridge and growth. No regressions. externality effect of

military expenditure.

Aben and France, Use of an input–output The contradictory Daurès (1993) prospective. model to test different results obtained lead to

disarmament scenarios. a conclusion that there is no structural specificity of military expenditure concerning their influence on economic growth.


sacrifice its consumption, whereas investment doesn’t decrease, and is evenstimulated. On the other hand, if the threat isn’t perceived as being imminent,an increase in military expenditure would cause a decrease in the general levelof investment. Boulding (1973) thus shows that during the period 1929–1969,military expenditure was carried out at the expense of private consumption,whereas gross investment only underwent a slight decline. Weidenbaum (1990)confirmed this result.

Some economists, however, have shown that during other times, militaryexpenditure has exerted a negative effect on the investment of developed coun-tries: the debt engendered by the rise in military expenditure exerts an upwardpressure on interest rates, or even a tax rise, or a hoarding of production goodsnecessary in the short-term for civil investment or even a close substitutabilitybetween military and investment goods. These arguments have also been criti-cized. It seems in fact that the substitutability between military expenditure andinvestment is not the same for developed countries as for developing countries(Fontanel 1990: 86). Developed countries seem to confirm this relationship,when the private sector considers that the foreign threat is weak. On the con-trary, the economies of developing countries often suffer from under-consump-tion and this relation of substitution is not always verified. The theory ofunder-consumption therefore considers that military expenditure uses resourceswhich otherwise would have remained unused. However, many controversiesstill exist on this point.

Finally, it is necessary to point out that certain forms of military expenditurecan be considered as productive investments, for example with the installationof infrastructures, which benefit the civil economy. Besides, when the militarysector plays an important role in the domestic economy, the comparisonbetween the respective efficiency of civil or military investments turns out to bedelicate.

Table 6.6 continued


Payne, Ross United States, VAR model. None of these variables and Olszewski 1960–1990 Comparison of has a significant impact (1993) macroeconomic effects of on economic

governmental defence and performances.non-defence expenditure. The adverse relation is

no more verified.However, the price levelinfluences both defence and non-defence expenditure.


Table 6.7 Some studies concluding on a negative relation between economic growthand military expenditure


Lim (1983) 54 developing Growth model of Harrod– Defence has a negative countries Domar type. effect on growth.

Deger (1983; 50 developing Demand-side and supply- The direct effect of 1986) countries side model (ad-hoc defence on growth is

equations). positive but the indirect Three equations, for effect is negative. The defence, saving and growth. net effect is negative.Cross-section estimates by ordinary triple squares.

Faini, Annez 69 countries Demand-side model. The effect of defence on and Taylor (mostly Estimate of a single economic growth is (1984) developing equation. Cross-section negative (except for

countries) temporal series. some developed 1952–1970 Grouping by region and countries).

income.

Biswas and Developing Feder–Ram type model. Most results are non-Ram (1986) countries, Estimates of temporal significative, or rather

1960–1970 and cross-section series. negative.1970–1977

Lebovic and 20 nations of Production function. The effects of military Ishaq (1987) Middle-Orient, Keynesian demand. Three expenditure on

1973–1982 equations of the economic growth are Deger–Smith type. clearly negative.Pooled temporal cross-section series.

Ward and United States, Feder–Ram type model. Net negative effect of Davis (1992) 1948–1990 Temporal series estimates. military expenditure on

Separation of externality economic growth, even and productivity effects. if the externality effect Three sectors. is positive.

Fontanel Morocco, Regression model. Double If short-term effects of (1980) France least squares. Distinction military expenditure

between military are sometimes positive, expenditure and military in the long-run effect equipment expenditure. are rather negative,

especially for current expenditure and for developed countries.


Table 6.8 Some studies concluding to a positive relation between economic growth andmilitary expenditure

Author Country – Method ResultPeriod

Benoit 44 developing Ad hoc equation. Positive and significative (1973/1978) countries, Estimation by correlations seffect on growth for

1950–1965 and ordinary least squares. many countries. For the others, no relation.

Ram (1986) 115 countries Feder–Ram type mode. The government sector Estimation of cross-section has a positive impact on time–series and for each economic growth.country.Defence is not distinguishedfrom the whole governmentsector.

Landau (1986) 65 develping Ad hoc function of Feably positive or nul countries, production. effect of defence 1960–80 Estimatation of time–series (military expenditure/

cross-section by ordinary GDP) on growth least squares. (income per capita

growth).

Atesoglu and United States, Feder–Ram type model. Feably significant and Mueller 1949–1989 Production function with positive effects on growth.(1990) two sectors. Small elasticity with

Estimation by the military expenditure Cochran–Orcutt method. (military expenditure/

GDP), which encourages a reduction of military expenditure.

Ward et al. India, Feder–Ram type model. Positive effect of (1991) 1950–1987 Time–series estimates. military expenditure on

Externality and India’s economic growth. productivity effects are In another study, the separated. opposite result is obtained Three sectors. for Brazil.

Stewart (1991) Developing Keynesian demand Military expenditure countries function. generates economic

Use of simulations as growth, but to a smaller estimates, equations are level than other not under a reduced form. governmental

expenditure.

Mueller and United States, Feder–Ram type model, Positive and significant Atesoglu 1948–1990 with the introduction of effect of defence on (1993) technological change. growth.

Single equation estimate. But the externality Two sectors. Non-linear effect of military regression method. expenditure on the civil

sector is not significant.


Table 6.9 Some studies concluding to different impacts of military expenditure on eco-nomic growth on each country


Szymanski 18 countries Correlation analysis. Negative correlation between(1973) military expenditure and

economic growth for the six greater economies.For the 12 smaller countries, the relation is feably positive between military expenditureand economic growth.

Chan (1984) OECD Correlation analysis. Countries with the highestcountries military expenditure level per

capital (mature industrializedcountries) have a smaller growth; countries with a strong increase in military expenditure (new industrialized countries) havea higher growth (hypothesis compatible with Keynesian analysis).

Chowdury 55 developing Granger causality test 30 countries: no causality(1991) countries, between defence 15 countries: negative

different periods measured by military effects on growth.for each country. expenditure/GDP and 7 countries: defence ‘caused’

growth. Time–series by economic growth.estimates for each 3 countries: double causality country. between defence and growth.

Landau (1994) 71 developing Ad hoc equations. The effect of military countries Study of three types of expenditure on growth is not

impact of military linear: under a specific expenditure on threshold of military resources uses, security expenditure it is positive and policy efficiency. and negative upper. But a Non-linear regression special study of the three method. geographical blocks shows

that, in most cases, this resultis not verified, and that it is impossible to conclude to a continued relation between military expenditure and economic growth.


MILITARY EXPENDITURE AND EMPLOYMENT

Governments often hesitate to reduce defence spending (which thus exerts aninertia effect), because such a decision would increase the unemployment rate.Indeed, military expenditure is, above all, staff expenditure. But on the otherhand, an overly important military sector exerts a crowding-out effect onlabour, notably skilled labour, which could lead to a slow down in growth andthus increase unemployment. As an example, Dunne and Smith (1984) con-sider that disarmament represents an economic opportunity rather than aproblem for the United Kingdom.

In fact, the influence of military expenditure on employment is difficult toestimate, and the various studies conducted on different cases have led to diver-gent results. Moreover, the answers differ depending on whether the rise in mil-itary spending is used to increase the number of employees or not. It seems, infact, impossible to draw a definite conclusion from the available studies on therelation between military expenditure and employment.

MILITARY EXPENDITURE AND INFLATION

In the 1980s, numerous studies dealt with the issue of the link between militaryexpenditure and inflation. Two types of inflation caused by military expenditureare generally distinguished:

• the inflation resulting from the fact that the price index of the militarysector evolves more quickly than the civil sector’s (because of the specificcharacteristics of military production);

• the increase in military expenditure would also exert macroeconomiceffects on inflation. Indeed, military expenditure would increase nationalincome without increasing the supply for goods and services available forcivil consumption; this creates an additional demand, thus leading to a fulluse of production capacities, a decrease in unemployment and a priceincrease if these adjustments are not sufficient to meet the additionaldemand.

It seems, however, that the impact of military expenditure on inflation differsaccording to the general economic situation. For Thurow (1982), in 1981, theAmerican defence effort could only be financed by an important deficit of thepublic budget, which led to an instability of financial markets and inflationarytrends, provoking forced savings or ostentatious consumption. In fact, the effectof military expenditure on inflation depends on their financing, on the reactionof the private sector with regard to the tax system, the national debt or thereduction in other public expenditure. Several economists have concluded thatmilitary expenditure has a positive impact on inflation, notably Percebois(1986), Fontanel (1980) and Hébert (1993), in relation to France, and Dumas(1986) with regard to the American economy. Other authors have shown a lack


Table 6.10 Some studies of the relation between military expenditure and investment

Author Country – Method ResultsPeriod

Russett United States Economic analysis of Negative effect of military (1969, 1970) military expenditure expenditure on investment.

and private expenditure properties, in relation to GDP.

Smith (1977) Marxist interpretation The underconsumption of military hypothesis is rejected. expenditure. Military expenditure has an

eviction effect on investment. It is a necessary element for capitalism’s stability as it maintains order, but in the long term, it undermines the economic bases of the system.

Smith (1980) 14 OECD Keynesian demand Military expenditure has a countries, function. negative impact on 1954–1973 Estimates of cross- investment.

section time–series and time–series.

Smith and 15 OECD Correlation analysis Strongly negative relation Georgiou countries, of time–series. between military (1983) 1960–1970 and expenditure and investment.

1973–1978. The relation of military expenditure/economic growth is a priori negative, but the result is unclear for the second period (especially for the United States, United Kingdon and Western Germany in the period 1954–1978).

De Grasse 17 industrialized Cross-section Military expenditure has a (1983) countries, regression. negative impact on

1967–1980 investment and then on economic growth.Relation feably negative between military expenditureand GDP growth.

Raster and Hegemonic Demand-side model, Demonstration of an Thompson leaders of the following Smith opportunity cost between (1988) nineteenth and (1980). military expenditure and

twentieth investment.centuries


Table 6.10 continued

Author Country – Method ResultsPeriod

Mintz and United States Model of flexible Military expenditure Huang (1990) accelerator, demand- discourages investment (and

side. then economic growth).Three equations.Estimates with ordinary least squares.

Scheetz Chile, Model of Deger type, Negative effect of military (1991) Argentina, Peru, on the demand and expenditure on investment

Paraguay, supply sides. (as well as on economic 1969–1987 Estimates by cross- growth, current account

section time–series balance and saving).estimates and time–series estimates.

Gold (1997) United States Demand-side model, Low opportunity costs of after1945 following Smith military expenditure. There

(1980) is no trade-off in the long Study of an eventual run between military cointegration between expenditure and investment. military expenditure On the contrary, a long-run and investment. tradeoff exists between

military expenditure and consumption.

Fontanel and OECD Presentation of • Eviction effect of Smith (1985) countries military expenditure • investment by military

effects on investment. • expenditure.• The centralization of arms • purchases leads, in case of • military expenditure • increases, to a competition • between civil and military • demand, inducing • inflationist tensions and • bottlenecks impeding • investment.• Industrial contraction • effects.• Social consumption effects.• Owing to consumption and• low threat, all military • expenditure increases are • made at the expense of • investment.


Table 6.11 Study of the relation between military expenditure and employment


Szymanski The 18 richest Correlations between Governmental (1973) capitalist military expenditure expenditure is

countries and economic negatively correlated to performances. employment. Military

expenditure is the most efficient governmental expenditure to reduce unemployment.

Smith (1977) 8 OECD Correlation analysis. Military expenditure countries, 1973 and unemployment are

positively related.

Dunne and United States Dynamic simple The importance of Smith (1990) and United regressions under reduced military expenditure in

Kingdom: long- form. the economy has no term time–series influence on the level of since 1945 unemployment. No

Granger causality is demonstrated.

Wing (1991) Indonesia, Input–ouput model. Military expenditure is 1978–1980 Model adjusted by imports less labour-intensive

(each industy imports in a than other public fixed proportion relative to expenditure. However, global internal production). military activities’

conversion towards private activities would have raised unemployment in the short-run.

Dunne (1993) 14 OECD Aggregated level: Dunne– Aggregated level countries, Smith level regression analysis: no 1962–1985 (1990) demonstration of

military expenditure influence on unemployment at the macroeconomic level.

Aben (1981) France Input–output model. Rather positive effects of military expenditure on employment. Negative effects of DM reduction on employment.

Dumas (1986), United States Regressions. Le fardeau militaire Boulding affecte la productivité, (1979) and de et à terme l’emploi.Grasse (1983)


Table 6.11 continued


Anderson United States Input-output analysis. Military expenditure is(1975) rather negative for

employment.

Leontiev- World World model. Disarmament is rather Duchin (1983) positive for

employment.

Mintz, Huang United States VAR method. Military expenditure and Heo (1992) may in the short-run

have positive effects on employment.

of effect. Aben and Maury (1987), who study the case of France, state that thedifficulties in estimating these effects prevent a clear link between militaryexpenditure and inflation being found.

COMPETITIVENESS, TECHNOLOGICAL PROGRESS AND THE MILITARY SECTOR

Jean-Baptist Say considered that the military spirit and the industrial spirit wereantithetic. But historical evolution has shown that both could, in fact, coexist,without hindering the development of economic relations. The twentiethcentury was widely dominated by the conviction that the military sector gave adecisive impetus to sciences and technologies. Moreover, several economistshave underlined the influence of this sector over economic and social changes.One of the arguments is that the diffusion of the military culture, notablyorganization and discipline, would benefit the whole society. Besides, some mili-tary techniques have been used to rationalize industrial production, in particularthe coordination of transport and supplies, labour division and mass production.Machine tools and spare parts were also first developed in the army. Wars haveoften represented an opportunity to experiment new technologies; thus, theFirst World War accelerated the diffusion of radio and aviation. But the realscientific change occurred at the end of the Second World War, with nuclearweapons and the implementation of numerous advanced technologies in themilitary sector.

The issue of the spin-offs of military research and development on the civilsector has been much debated. Because of the increasing sophistication of arma-ments, governmental investment in military research and development is essen-tial to insure national defence. In fact, in arms-producing nations, scientificresearch has been closely linked to the military sector, with the implementationof prestigious research organizations, such as the Rand Corporation in theUnited States. Benoit (1978) opened the debate on the economic impact of


military expenditure in developing countries. He particularly insisted on thepositive influence of the army on the economic modernization process. Otherstudies have dealt with the spin-offs of the military sector on the civil sector, inthe field of technologies or human capital (Atesoglu and Mueller 1993). Thesize effect of the defence sector on the relative productivity of factors in bothsectors (civil and military), as well as the positive impact of military expendi-ture on the technological progress of both sectors have been taken into account.These studies generally conclude that these effects are positive.

However, the ‘scientific secret’ and ‘defence authorizations’ have often hin-dered the diffusion of military technological innovations to the civil sector.Several economists therefore consider military technological spin-offs on thecivil sector as non-existent, notably because only a few patents interest theprivate sector. This idea has been much developed since the 1970s. Melman(1974) notably stated that the military/civil technological spin-offs were non-existent or expensive, a conclusion which was confirmed by Maddock (1983)and many other studies. Mary Kaldor’s theory of ‘baroque arsenal’ (1982) showsthat military research and development is only rarely applied to the civil sector;she considers that weapons are henceforth too sophisticated and that they havea negative impact on civil technology. However, several recent technologicalprogresses, notably in the field of information and communication technologies(the development of which is partially linked to the military sector), have led tothe development of opposing arguments.

THE ROLE OF THE MILITARY SECTOR IN LONG-TERM ECONOMIC

DEVELOPMENT

During the 1980s, some developing countries chose to develop their arms indus-tries, thus more or less following the argument of the ‘industrializing industries’.Investments in the military industry would generate a supplying effect (back-ward linkage effect), i.e. an increase in demand in upstream sectors, and anoutlet effect (forward linkage effect), i.e. an increase in demand of downstreamsectors. Such ideas have been criticized, notably by Ball (1988), who considersthat the military sector competes with the civil sector for skilled labour andinvestments, creating important opportunity costs; a policy of military invest-ments could only produce multiplier effects in countries with an industrydeveloped and diversified, i.e. generally in great developing countries. Deger(1986) and Ball (1988) also considered that military expenditure aggravateseconomic underdevelopment. In the long term, the growth of military expendi-ture is likely to undermine the possibilities of national economic development(Fontanel and Saraiva 1986). Ward showed that, although military programmesin Brazil and India have had positive effects, other public expenditure wouldhave contributed even more to growth. Ward and Lofdhal (1994) show thatratchet effects are higher in the civil sector than in the military sector, theincrease in military expenditure being generally a consequence rather than acause of economic development. Besides, arms imports negatively affect the


savings of non-producing developing countries, because they substitute for otherproductive imports. They generate currency outflows and an increased indebt-edness. Other analyses have drawn opposing conclusions: Looney (1988) showsthat the negative impact of military expenditure on economic developmentonly exists for arms-importing countries, although this point of view has alsobeen criticized. Finally, Schmidt (1987) insisted on the role of defence spendingin the indebtedness process of the developing countries.

THE ECONOMIC CONSEQUENCES OF ARMS EXPORTS AND IMPORTS

Arms production is both an economic and a political issue, and raises the ques-tion of national strategic independence. This notably depends on the degree ofautonomy of arms purchases, on the domestic technological and productivecapacities, on the diversification of supplies, on the confidence granted to coun-tries exporting spare parts, or on imperatives of maintenance (Fontanel 1998).In the short run, arms imports seem to have a negative effect on the tradebalance. But the choice of arms imports can favour the development of othernon-military national industries, the exports of which could increase. Besides,in times when military expenditure decreases at the international level, arms-importing countries are not subjected to conversion problems. In contrast,arms-exporting countries must consider necessary imports of intermediate con-sumptions and the interval of payment, which can destabilize the national cur-rency. Smith et al. (1985) thus suggested that arms exports don’t always benefitindustrialized nations. Moreover, the most specialized military productions aregenerally adapted to the buyers’ specific needs, preventing an extension of thescale of production (and thus from realizing scale economies). Sometimes,buyers even get favourable terms of credit. Certain exports can therefore turnout to be pauperizing, all the more so as the system of countertrade is often veryexpensive. However, arms exports generally play an important part in nationalforeign policy. This relative foreign power strengthens power at the domesticlevel.

A total independence in arms production is imaginary, especially since thedevelopment of manufacture agreements under licence in the 1970s, whichmeans a penetration of foreign capital and an internationalization of militaryindustries. Quick technological changes in armaments weaken developingcountries, which often purchase foreign licences which are more expensive thandirect arms imports.

THE SPECIFICITY OF MILITARY PRODUCTION AND PURCHASES

The concept of the militaro-industrial complex has previously been evoked.Not all defence economists have used this term. For example, Hartley prefersthe term ‘defence industrial base’. For his part, Aben (1992) insisted on the dif-ficulty in obtaining empirical results showing the MIC’s responsibility in mili-tary wasting. On the contrary, Serfati (1992) considers the military sector as a


meso-system, i.e. a set of interpersonal and interinstitutional relations rulingproduction, with its own rules and an organization outside of all real economiccontrol. One of the military sector’s specificities is to be a monopsony, the Statebeing the only buyer. Moreover, the State depends on a few leading firms;competition with foreign producers being difficult to implement. However,changes have recently appeared in the regulation of the defence industry; withregard to France, Hébert (1993) thus mentions the ‘end of the administered reg-ulation’. Another characteristic of the arms industries is to tend towards con-centration (quick technological changes, scale economies, increasing budgets ofresearch-development, etc.). Uncertainty is also an important characteristic ofthe arms market, notably because of information asymmetries, favouring oppor-tunism and strategic calculations from both contracting parties. Game theoryhas been used to represent their behaviour on the arms market.

The theory of agency has also been used to underline the specificity of mili-tary contracts (Sandler and Hartley 1995: 138–140). These contracts (withfixed, incentive prices or ‘cost – plus’) are characterized by significant trans-action costs, a limited rationality because of information insufficiency, oppor-tunism, and incomplete specifications. Therefore, business in the defence field ischaracterized by uncertainty and moral hazard. The theory of ‘public choice’shows that the bureaucratic organization of military administrations leads to anoverestimation of the needs and underestimation of the costs. Thus, the govern-ment has only a weak capacity to control costs and performances, once a projecthas started (Hartley 1991). For Sandler and Hartley (1995: 122), the analyseson costs in the defence industries have been insufficient; notably, they haven’tunderlined the inefficiency due to an excessively important arms industry. Yet,this issue is central in the actual context of industrial restructuring.

The estimation of the economic consequences of disarmament: atheoretical and political issue

At the beginning of 1990s, in the post-Cold War context, with a decline ofworld military expenditure and a diffusion of democracy (Eastern Europe, LatinAmerica), numerous economists dealt with the economic conditions of disar-mament. However, because of the theoretical and technical difficulties ofeconometric simulations, empirical studies on the economic consequences ofdisarmament have been rare. Disarmament economics became a specific field ofdefence economics, with an attempt to insert such concerns into a larger reflec-tion on the objectives a society must aim at. Numerous famous economists haveindeed dealt with issues linked to disarmament and international peace. Theyconfirmed the conviction developed in the nineteenth century, according towhich economists should contribute to convince governments about the use-lessness of wars and of excessive military budgets.


The difficult estimation of ‘peace dividends’

The liberal economists of the nineteenth century didn’t show concern forany advantages of disarmament other than the direct economic profits gainedfrom the cessation of an unproductive economic activity. However, a dis-armament process raises economic and strategic problems that economists mustconsider. The 1970s and 1980s were characterized by increased economic andstrategic interdependencies, with a growing cost of armament (which created adependence towards foreign suppliers or towards an alliance) and the -American–Soviet arms race, which seemed to jeopardize the world security.Moreover, a new idea was developed according to which underdevelopmentalso represented a threat for international security. The United Nations notablyinsisted in 1986 on the idea that security was henceforth economic as well asmilitary. Numerous studies tended to link the objective of disarmament to thatof development. The huge sums allocated by developed countries to militaryactivities have often been perceived as a waste, contrasting with the non-satisfaction of primary needs in developing countries. The UN developed theidea of coupling disarmament and development, and of using the sums spared indeveloped countries as aid to the poorest countries.

The studies on disarmament developed in this context have generally beenbased on econometric simulations from macroeconomic models of nationaleconomies. These models are based on hypotheses concerning relationsbetween great macroeconomic variables. To give only an example, the decreasein the military budget following a process of disarmament should, according toSchultze, lead to a reduction of the American budget deficit, with a savingupturn, a fall in the interest rates and an investment increase. The renewedconfidence of financial operators would also contribute to improve theexchange rate. These effects of disarmament would benefit not only theAmerican economy but all Western economies, because of economic inter-dependencies.

There are several forms of disarmament, each having different economicimplications. One is the destruction of military stocks; it’s an expensiveactivity and its initial effect is to increase the defence economic burden.The cost of arms control agreements must also be taken into account.Besides, the ban on the production of specific weapons can be consideredas equivalent to a disarmament process, although the conversion can berealized in other military productions. A reduction of military expenditureis another type of disarmament. As military expenditure exerts a stronginertia effect, a reduction can cause a regional economic recession in the short-run. This negative effect can partially be offset by other types of publicspending.

The concept of peace dividends has been used in several studies bythe United Nations and UNIDIR, which tended to show the positive con-sequences on development and growth which would result from a reduction inmilitary expenditure. The UN therefore considered that military expenditure


represented an economic waste, hindering the socio-economic developmentprocess. But the expression of a peace dividend was later contested by aUNIDIR report (1992). This emphasised that disarmament did not meanimmediate profits. Indeed, in the short run, costs can result from employmentlosses or the risk of a regional recession (for example, a decrease in the activityof garrison towns and arsenals). Conversion implies a time of adjustment. Thecosts generated by a disarmament process (for example, the cost of weapondestruction) can explain why the level of military expenditure remains con-stant. Thus, in spite of all the previous disarmament agreements between theUnited States and USSR, world military expenditure only significantly declinedfrom the 1990s. The 1992 UNIDIR Report for the United Nations GeneralAssembly therefore suggested the use the expression ‘peace investment’ ratherthan ‘peace dividends’, disarmament being necessarily expensive (Intriligator1996).

In addition to the technical problems of revealing the ‘peace dividends’, stra-tegic problems arise. Indeed, disarmament is unacceptable if it means a loss ofindependence of national defence. Yet, the high complexity of internationalstrategic balances is such that any change is likely to annihilate them. More-over, a reduction in the number of weapons through an international agreementwon’t necessarily imply a decrease in military expenditure at the national level.Countries can try to improve the quality of the remaining weapons or increasethe production of the weapons which the agreement makes no provision for.These strategic imbalances resulting from a disarmament process could also becoupled with an economic imbalance, with increased trade competitionbetween industrialized nations on civilian markets and greater technologicalgaps with developing countries.

The diversity and contradictions of the formalized analyses on disarmament

The debate on the economic consequences of disarmament didn’t cover thetraditional theoretical cleavages of defence economics. Thus, some ‘Marxist’economists criticized the idea of a ‘hypocritical’ disarmament under the aegis ofthe UN; others are favourable to a decrease in the economic and social influ-ence of the MIC. If some Keynesian analysts present military expenditure as aninstrument of economic policy, others consider that they are not as effective asother public spending, and thus that disarmament will have a positive economiceffect. Most of the time, econometric analyses of disarmament are based onKeynesian macroeconomic models, even if models of general equilibrium havesometimes been used.

The simulations of a disarmament process have generally been based on oneof the following scenarios:

• a ‘simple’ disarmament,• a disarmament with an increase in other public spending,• an international disarmament with a transfer to developing countries.


The reduction in military expenditure releases resources, but the question is toknow how they will be used. Adams thus suggests distinguishing the peaceresource dividend from the peace product dividend, the latter being the onlyone that concerns consumers. Disarmament will benefit economic growth if itresults in an increase in investment (symmetrically to the crowding-out effect ofmilitary expenditure). However, most models recognize that a disarmamentprocess entails short-term economic difficulties (notably a fall in demand), butthat adjustments are possible, owing to economic policy (fiscal or monetary).Thus, according to Adams and Huang’s (1992) macroeconomic simulations, inthe absence of any offsetting demand policy, a gradual and continuous reduc-tion in military expenditure would generate a fall in economic activity, with anincrease in unemployment. Adam shows the advantages of adjusting interestrates and/or prices, to favour an increase in private demand; the State can alsohelp in solving microeconomic problems of conversion.

From a long-term perspective, several studies have underlined the positiveeconomic impact of disarmament. Klein (1993) thus stated that a reduction inmilitary expenditure would benefit the American economy. His argumentationis based on the difference between military products (which do not generate anyeconomic return) and civilian capital goods (which generate new incomeflows). With a model of endogenous growth, Berthélemy et al. (1995) showedthe benefits that could be gained from a decrease in military expenditure inIndia and Pakistan. Their simulation shows that, the part of military expendi-ture in GNP being excessive, their reduction would increase the level of pros-perity. Several other studies focusing on other economies reached similarresults, notably those of Dunne and Smith (1984) and Barker et al. (1991) con-cerning the United Kingdom.

Military expenditure has been analysed in terms of opportunity cost, notablyif one considers that these sums could be allocated to other public expenditures.For example, Kennedy (1987) recommended a reallocation of the sums sparedowing to a reduction of military spending to the civil sector; this would enablethe United States to finance social programmes and improve the productivity oftheir economy. Some models aimed at showing the benefits of such a realloca-tion of the resources released by the military sector, notably for the healthsystem (Harris et al. 1988).

Financial aid to developing countries has sometimes been conditioned by aweak level of military expenditure, notably by the World Bank. In addition, theidea of transferring the sums spared through the disarmament of developedcountries towards the developing countries has often been mentioned. In aclassic study based on an input–output model, the World Model, Leontief andDuchin (1980) have shown the implications of such a transfer. The estimationof their model incorporated more than two-and-a-half million data pieces. It isbased on several scenarios of reduction in military expenditure, with possibletransfer of resources towards the developing countries. Unlike the hypothesis ofa fall in the demand for raw materials due to a reduction in military expendi-ture, the model shows that the new growth which results from this disarmament


does not endanger the economies of raw-material-producing countries. Theirresults show that developing countries could gain very important benefits fromsuch measures. However, these results are estimated at a very general level. Thisstudy doesn’t take into account the specificity of each national growth path.Moreover, the quality of the (official) information used in the case of Easterncountries is questionable.

Other models simulated a reduction in military expenditure with transferstowards Third World countries (Fontanel 1995b). For its part, the MULTI-MOD of the IMF was used in 1993 to evaluate the impact of a 20 per centreduction in world military expenditure, but also in military aid and arms trans-fers. It showed that this process should lead to long-term profits amounting to45 per cent of world GNP (10,000 constant 1992 US dollars). In developedcountries, this measure would increase private consumption and investment; if,moreover, a policy of interest rate reduction and public purchases was followed,then the temporary reduction of GNP resulting from this measure should beovercome as soon as the second year. According to this scenario, the benefitsgained by developed countries after eleven years would amount to 60 billion USdollars (with 11.5 billion US dollars for developing countries).

But it is, in fact, difficult to make exact forecasts on this issue, given thatmodels do not integrate the changes resulting from such measures, at the levelof the terms of trade, interest rates and international debts. Moreover, all thecriticisms usually associated with aid to developing countries apply here (such asthe risk of monopolization by certain groups, induced costs, inflationary pres-sure).

The conversion of military industries, after a disarmament process, has beena widely studied issue since the end of the Cold War. These empirical analysesuse both macroeconomics and industrial economics. The specificity of militaryproduction hinders its conversion, with a lack of commercial culture. Besides,the civil markets entry barriers are very high. The conversion of the arms indus-tries in the former Soviet Union has been a particular area of study in recentyears.

The peace movement in economics

Several organizations have promoted peace research, such as UNIDIR orECAAR. These initiatives have been supported by several famous economists.Their contribution on this subject generally aimed first at convincing politicalleaders and public opinion of the advantages of disarmament. Thus, Boulding(1987) denounced the harmful economic influence of the war industry of theUNDO (Unilateral National Defence Organizations), which remains out ofeconomic culture, producing large diseconomies, therefore endangering thesecurity of neighbour countries. Tinbergen (1987) also showed his concern withpeace issues, and advocated the development of new institutions promotingworld peace: a real-world police force should be organized and financed by aworld Treasury. Aid to developing countries should be increased, economic


difficulties remaining the main causes of conflicts. For his part, Galbraith(1987) called on economists to show how to use the available resources effi-ciently and intelligently. He criticized the silence of current economic thoughton the development of the military sector out of all democratic control; heseemed particularly concerned with the influence of the military sector on poorcountries. Arrow, Isard, Klein and Schwartz are some of the illustrious econo-mists who have denounced the arms race logic and called for disarmament aswell as for aid for developing countries. Many famous economists, mostly in theUnited States, have taken part in conferences or in works which aim topromote the idea of disarmament and world peace. Thus, Eisner (1996) dealtwith the relationship between disarmament and employment, and Tobin(1996) focused on American military expenditure with regard to the budgetdeficit.

Defence and peace economics therefore cover two different but complement-ary aspects: a vast scientific literature is devoted to the study of the economicconsequences of armament and disarmament, with the development of math-ematical models and statistical tests. Besides, the tradition of pacifism in theeconomy has experienced an unexpected renewal during the Cold War, withpublications developing more general and philosophical arguments. The associ-ation between disarmament and development was, however, a novelty.


7 The strategic dimension ofpolitical economy and the conceptof ‘economic war’

During the post-war years, numerous formalized and empirical studies on theconditions of war or peace were carried out. While these analyses remainedglobally apolitical, a whole part of the economic research on conflicts anddefence was also developed in the field of ‘political economy’. Two currents canbe distinguished here. First, some Keynesian–Marxist analyses were focused onthe role of the military sector in capitalist systems; these studies have been pre-viously mentioned. But at the same time, a new kind of analysis appeared,dealing with interstate power relations, the economic dimension of foreignpolicy and the political dimension of governmental economic measures aimingat promoting national interests at the international level. The concept of ‘eco-nomic war’ has often been used in these analyses.

The economic weapon: what efficiency?

The idea of economic war is not a new one, even if this expression wasn’t muchused before the mid-twentieth century. This notion (but not the expressionitself) was already present in mercantilist texts; it was later used by several econ-omists, such as List, Marx and Hirschman. The expression itself appears inmany recent economic texts. Nevertheless, in the absence of a clear definitionof economic war, this notion has had different meanings. According to apresent widespread conception, it refers to an exacerbated international eco-nomic competition, with the use of unfair measures by governments, notably‘beggar-thy-neighour’ strategies. The difficulty in this definition is that it doesn’tdistinguish economic war from economic competition. The issue for the Statesis to improve their relative positions in the world economic hierarchy. Thematter isn’t a war with the wish to destroy enemies, it is simply an economicconflict in which States intervene to favour their own economies, owing totheir influence in international organizations or to the implementation ofappropriate trade or industrial policies.

A stricter conception of economic war limits the use of this expression todescribe acts of violence against another country: measures taken by a countrywhich aim at weakening the other party, even at the expense of its own eco-nomic advantages. Thus, a situation of embargo causes important economic


damage to the target country, but it also represents an expensive operation forthe country which initiates it. It is a negative-sum game, henceforth comparableto a real war.

The economy as an instrument of power, security and war

If the use of the expression ‘economic war’ to describe situations of intense eco-nomic competition is questionable, on the other hand it is justified to charac-terize the measures States take to damage an opposing economy, in aneconomic, political or military purpose. A few analyses on power policies usingthe economy have been developed since the end of the Second World War.They give a view of all international economic relations from a strategic angle,resulting from the complex game of the international balance of power.However, very few studies have considered the ‘economic weapon’, compared tothe frequency of its use.

List (1841) was the first economist to insist on the economic dimension ofnational security. The neo-mercantilist discourse developed at the end of the1980s also extended the analysis of national security to the economic sphere.The relationship between a country’s industrial capacity and its ability to influ-ence the standards of the international system and to widen its sphere of influ-ence, notably through policies of trade and technical aid, has been underlined.On the other hand, this perspective leads one to consider the issues of depen-dence and the vulnerability of national economies. A.O. Hirschman (1945)published a founding analysis in this field, entitled Foreign National Power andthe Structure of Foreign Trade. In the presentation of his book, he distinguisheshimself from the liberal and imperialist analyses of international relations andhe often refers to mercantilist theory. His theory focuses on an issue still unex-plored by the economists of his time, i.e. the relationship between foreign tradeand national power. Hirschman is today considered as a ‘political economist’. Inhis work, he develops an analysis on the economy’s vulnerability to the use ofthe economic weapon (quotas, trade controls, capital investments and otherinstruments of economic war) by one or several countries. With regard to histheoretical affiliation, he aspires to go beyond the divisions between the tradi-tional economic analyses. Hirschman only claims his affiliation to a generalcurrent accepting the idea according to which nations lead ‘power-minded pol-icies’ (1945: XV). First, he shows that the issues of State ‘economic strategies’have never been well put; he notably regretted that Machiavelli hadn’t under-stood the close links between the economy and politics. The key issue is then todemonstrate the potential of foreign trade (foreign aid, capital flows or tradenegotiations) as an instrument of political pressure. As the real author of thecoefficient today known as the ‘Gini coefficient’, Hirschman developed ameasure of trade concentration which measured the dependence of a countrytowards foreign countries, i.e. its vulnerability. He thus underlines the prefer-ence of large countries for the smallest and weakest countries, when choosingtheir sources of imports. His analysis also shows that ‘laissez-faire’ is an


exception: controls, protections and unequal exchanges being the rule. Underthese conditions, States exert their influence so as to modify trade flows to theiradvantage.

A few authors pursued Hirschman’s ambition to study policies of power. Inhis work entitled International Economics (1958), Thomas C. Schelling insists onthe necessity of studying the relationship between a nation’s political objectivesand the instruments of its foreign economic policy (protectionism, economicsanctions, control of strategic products, etc.). His aim was to integrate theanalysis of these measures into a unified economic theory.

More recently, David Baldwin (1985) studied, in his work EconomyStatecraft, the various economic techniques likely to be used as instrumentsof foreign policy. This analysis thus focuses on the economic instrumentsgovernments use to exert pressure on other countries, so as to make them actin a specific way. Referring to the ambition of the first economists, Baldwinconsiders that it is a matter of ‘helping the Prince’, in a context of increasingeconomic interdependence. From his point of view, the theory of globalizationand Marxist theory both share an erroneous conception of the State’s role.The first doesn’t give enough importance to it, whereas the second reduces it toa simple reflection of the dominant class interests, without any collective objec-tive.

All of these analyses reveal the real meaning of the concept of economicwar: economic power or vulnerability has a direct influence on the level ofnational security.

Economic weapons and their efficiency

The use of the economic weapon is not a zero-sum game, because it implieslosses not only for the target country but also for the initiating country. In thecase of multilateral sanctions, the whole world economy is in a sub-optimal situ-ation. Several strategies have been used, which don’t aim at national prosperityor development but, rather, at the decline or subjection of another economy.The efficiency of an economic sanction can be assessed by comparing losses ofeach party; it therefore follows some principles of war.

The strategies

Relatively few economic analyses have analysed economic war. With regard totheir typology, all the economic weapons used during the Second World War orin former conflicts have been listed in several works, notably by Paul Einzig(1942), or Wu (1952). It is impossible here to make an exhaustive presentationof these various techniques used in wartime. We shall rather focus on the econ-omists’ contribution to the analysis of economic instruments used even inpeacetime to promote interests of national power.

In this respect, Baldwin’s analysis (1985; see chart 12) is particularly inter-esting. He distinguishes negative economic sanctions (such as embargoes,


boycotts, import restrictions, assets freezing and aid suspension) frompositive economic sanctions (such as financial aid, investment guarantees,favourable tariff discrimination). Many other presentations of the economicweapon have been made. Most of them are not formalized and are mainlybased on case studies. This methodology has notably been used by Klaus Knorr(1984; see chart 13), who wished to reveal the interest of internationaleconomic sanctions. In his work, he develops an analysis in terms of cost-efficiency, even if he admits that estimations are difficult to carry out. Helists the different uses of foreign economic relations as a mean of political pres-sure, notably the supply of goods and services, markets opening, loans exten-sion, financial donations, technological transfers and assets freezing. Theseeconomic instruments are not only used to exert coercion, but also to reinforcethe structural power, to support allied countries or to weaken foreign countries.While recommending the use of the resources of economic power at the level ofinternational policy, he explains that the numerous failures of the United Statesin this field can be explained by an insufficient preparation and bad estimates.The fragmentation of political and economic expertise between variousbureaucracies would thus largely be responsible for the relative failure of thesemeasures.

Table 7.1 Positive and negative economic sanctions for David Baldwin

Negative sanctions Positive sanctions

Trade Embargo Favourable tariff discriminationBoycott Guarantee of the most favoured

nationTariff increase Tariff reductionUnfavourable tariff discrimination Direct purchaseWithdrawal of the most favoured nation Export or import subsidiesBlack list Licence guarantee (exports or

imports)Promise of the above measures

Import or export quotasLicence refusalDumpingPreventive purchaseThreat of the above measuresLess obvious measures: purchases, free trade, tariffs.

Assets Freezing of assets Aid supplyControl of capital import or export Garantees of investmentAid suspension Incitation to private capital export

or importUnfavourable taxation Favourable taxationSuspension of the payments to an international organizationThreat of the above measures Promise of the above measures


Table 7.2 The application of economic values as power resources, according to KlausKnorr (1984)

Type of measure Description Objective

Structural power Fixation of international trade If it has a structural power, a rules by a State or group of States. country may influence

international economic relationsfor its profit (dependency theory). An agreement with other great powers may be necessary.

Support of foreign Aid of more developed countries To help the recipient to survive, countries in favour of less developed in exchange of a submission to

countries, bilateral aid or aid the donor will.through an international Objectives are difficult to define: organization. humanitarian, power, etc.

Voluntary • Withdrawal of goods and To weaken enemy’s economy. weakening of • services, of assets or freezing of To prevent imports of goods foreign countries • foreign assets. which would increase the

• Economic war during a conflict. enemy’s strength.• Commercial embargoes, total or The cost of these measures may • partial. be important. It was notably the • Exports restrictions of a good case for the COCm and the • (COCm or CHINACOM: CHINACOM, owing to the • American embargo on strategic imperfect co-operation of allies.• products towards China or • USSR).

Coercion through Threat to withdraw all economic Will to influence the behaviour economic means values from one country, or the of one country in a direction

execution of the threat. which is favourable for the initiating country.It is confirmed by severalexamples. Success depends onthe application context of thismeasure.

Positive Gifts and/or promises of gifts Will not influence the behaviour economic relative to an economic value. of one country in a direction sanctions favourable to the initiating

country. Success depends on the context. Efficiency must be analysed.

Pseudo-sanctions Economic sanctions taken Objective: vengeance or ripost.without former sufficient Impossible to conduct an reflection to ensure their success. analysis in terms of efficiency.


With regard to the field of economic analysis, studies on economic weapons arealso quite rare. However, two kinds of economic theories seem particularlyadapted to the study of economic sanctions: public choice theory and gametheory. The former has been used to show how economic sanctions can have apolitical impact on the target country, even if they do not create decisiveeconomic damages: indeed, they send a signal to the groups opposed to theruling regime in this country. Game theory can also be used to analyse eco-nomic sanctions, as all situations of incomplete information are concrete casesof the application of economic variables for politico-strategic purposes.However, this method encounters several limits, as shown by Lisa Martin(1992) (such as hypotheses of simultaneous decisions, of the players unity andrationality).

Yet, there are still very few studies on economic weapons, compared to theimportance of their use in the history of international relations. The difficultyraised by the estimation of their economic and political consequences probablyexplains this.

Some examples of the use of the economic weapon

The examples of the use of economic weapons have been numerous since theend of the Second World War, in particular by both superpowers during theCold War. If most of the time the United States have used it against countriesout of their sphere of influence, such as USSR, Cuba or Nicaragua, the SovietUnion used it against East European countries which did not follow the dogmaimposed by Moscow, such as Yugoslavia at the end of the Second World War,Albania or Mao’s China. The United Nations also used the economic weapon,by imposing economic sanctions against Rhodesia, South Africa, Iraq andSerbia.

The issue of the efficiency of economic sanctions remains very controversialtoday. The retaliatory measures imposed by the Soviet Union against China,Yugoslavia and Albania have certainly contributed to limit the industrial capac-ity of these countries, but they did not succeed in weakening their systems; onthe contrary, they have probably reinforced them. Only military interventionhas been effective in reducing political dissent, like in Hungary or Czechoslova-kia. In the same way, by implementing an embargo on cereals against the SovietUnion, the Carter administration aimed at creating social problems in thiscountry; this strategy also failed. The examples of failures of economic sanctionsare numerous. Besides, the cost of these measures for the initiating countries isoften high, economically as well as politically. For example, numerous estima-tions have revealed the important cost of the use of the economic weapon bythe United States, with export (and thus job) losses, and a decrease in Amer-ican firms’ competitiveness in international markets. For example, theCOCOM (created in 1949 and abolished in 1994), which controlled the exportof strategic products (ultramodern technologies, not exclusively military) to theUSSR, would have benefited European more than American industries.


The American sanctions against Cuba in 1960 are a good example of the dif-ficulty in using economic weapons, because of the possible ‘boomerang effects’that would make the cost of economic sanctions more important for the initiat-ing country than for the target country. The United States imposed an embargoon all American exports towards Cuba (with the exception of pharmacy), witha withdrawal of the sugar quota in favour of Cuba, which meant the loss of itsmain customer (with high guaranteed purchase prices) and technical and finan-cial aid supplier. These measures aimed at sanctioning Castro’s policy, whichaffected the interests of American firms by nationalizing the big agriculturalproperties, in particular in the sugar sector. The nomination of Che Guevara aspresident of the national bank, then the visit of Soviet citizens to Cuba in 1960,further damaged American–Cuban relations. In answer to American measures,the Soviet Union suggested buying sugar from Cuba, in exchange for products,notably oil. The opposition of the refinery companies present on Cuban terri-tory led to their nationalization, along with the one other American interest inCuba. American sanctions were then increased but the United States succeededneither in imposing a vote on collective sanctions against Cuba nor in inter-rupting the other OECD countries’ trade with this country. American sanctionswere gradually reduced from the end of the 1960s, but were later reinforced.This use of the economic weapon by the first world power against a small nearbyState has failed, and has strengthened rather than weakened the Cuban govern-ment, in spite of the impoverishment of the Cuban population. It also con-tributed to the development of a strong anti-American culture in the country.This example shows that economic sanctions are only effective if there is noalternative source of trade appears, which has never been the case for Cuba(which benefited from the Soviet support but also from the questioning of theUnited States’ policy by their allies).

Similarly, the sanctions voted by the international community from 1991 toweaken the Iraqi leader Saddam Hussein weren’t sufficient to create the con-ditions of his deposition.

Like all wars, the economic one has a cost, all the more important as eco-nomic relations interrupted by the conflict were already developed, and thedegree of trade concentration between both countries was high. But beyond asimple comparison between the losses of each party in conflict, an assessment ofthe economic weapon’s efficiency is difficult to achieve; indeed, it must takeinto account different parameters, economic but also political.

The concept of economic war: support for a new definition ofnational security

In recent years, the concept of economic war has often been used to character-ize international economic competition, exacerbated by economic ‘globaliza-tion’. If its definition remains relatively vague today, this expression appears intexts in which the authors wished to go beyond the traditional division betweenthe Marxist and the liberal analyses of international relations, and to provide an


alternative theory. Their common feature is a reference to the mercantilist doc-trine and the importance given to the interaction between economic and polit-ical objectives at the world level. However, several arguments raise the questionof the excessive use of the expression of ‘economic war’ in studies of inter-national political economy.

The development of a globalization theory

Recently, the concepts of ‘globalization’ and ‘economic war’ have been used inparallel. Both expressions suffer from a lack of consensus on their definition. Inthe first analysis, they may even seem contradictory. The characteristics of glob-alization can be interpreted as being fundamentally peacemaking, in a liberalperspective. This is the case for the development of cross-border flows and theincreasing interdependence of national economies, the increasing liberalizationof international trade under the aegis of the GATT, then of the WTO (real, inspite of an important non-tariff protectionism), the creation of regional tradeunions which accelerate the process of trade liberalization within borders, or theimplementation of international trade laws limiting ‘unfair’ trade measures . . .Moreover, at the beginning of the 1990s, many analyses dealing with the idea ofthe ‘end of history’ widely took up the liberal optimism regarding the pacifica-tion of international relations through economy, which had already beenexpressed at the end of the nineteenth century, in the context of an unprece-dented opening of national economies.

The expression of ‘economic war’ during the last decade also referred tothe often painful economic changes caused by globalization, which wouldjustify State intervention to limit their negative consequences. Thus, Reich(1992) in the early 1990s stated that the unavoidable disintegration ofnational economies is likely to increase insecurity and pauperization, with,notably, a modification of the nature of jobs which increases inequalities.He then recommends an appropriate policy for the United States, a State heconsiders to be designed for being the only leaders of a henceforth globaleconomy.

Economists are, however, far from giving the concept of ‘economic war’unanimous support. As early as 1942, it was directly criticized by J.A. Schum-peter. More recently, P. Krugman (1994) denounced the negative views linkedwith the idea of economic war, especially the analyses encouraging a certainobsession with competitiveness. According to him, some policies followed inthe name of economic war and competitiveness are likely to be harmful for thenational economic interest. Calls for national patriotism don’t aim at improvingthe economy’s competitiveness, ‘a country not being a company’ (1996);indeed, the State’s power of influence on the economic structures remains weak.Krugman also questioned the efficiency of the ‘strategic trade policy’, notablybecause of the risk of trade war associated with it.

The use of the concept of economic war therefore seems to imply a bias. Andin fact, it refers to a specific current of today’s economic analysis.


The contemporary analyses of economic war

Neo-mercantilism and geoeconomics

The concept of economic war has rather vague theoretical origins. The RussianMarxist, N. Boukharine, is the economist who developed this subject the mostexplicitly, in his work published in 1915. However, the evolution of inter-national economic relations did not confirm the forecasts of most Marxist theo-reticians of ‘imperialism’, according to whom economic and political tensionsbetween major powers always increases. The development of international tradeagreements and laws, the fact that several markets are today dominated by a fewbig firms, the control of which is unquestionable, all constitute characteristicsshowing that the idea of an economic war isn’t enough to describe the currentworld economy. Moreover, the pertinence of this concept in characterizing situ-ations of strong trade antagonisms between rival economies can be questioned;in fact, it has only rarely been used in the history of economic thought.The term ‘war’ implies the acceptance of losses, ‘deaths’, a will for destroyingthe opponent: yet such elements cannot come into a description of economiccompetition, however intense it is. The mercantilist analyses certainlyshowed that power benefits from the economy and recommended aggressivetrade measures to generate a trade surplus. However, the great majority ofthese texts show that their authors aimed both at wealth and power. The term‘neo-mercantilism’ has sometimes referred to contemporary analyses insistingon international economic rivalries and on the use by governments of indus-trialized countries of a new kind of economic interventionism. The theoreticalfoundations of these analyses remain vague, even if they can be associatedwith the ‘neo-realist’ current, as well as with the legacy of mercantilists, ofList and of institutionalist economists. The neo-mercantilist analysis is empiri-cal and descriptive; it claims its ‘realism’ in contrast with the lack of realism ofthe orthodox theory’s hypotheses. Moreover, the expression of internationalpolitical economy is often used to distinguish itself from the field of inter-national economics dominated by the orthodox theory. However, even ifmany of these authors aimed at developing a new theoretical field, apartfrom the liberal and Marxist analyses, the debate remained very scattered,notably because of the great variety of studies. One of the distinctive features ofthese analyses is to have revealed the interdependence between the States’political and economic objectives on the international scene. Besides, theseanalyses generally reject the idea of a progressive evolution towards an economywithout borders, and identify new fields of interstate confrontation, at anational as well as a regional level. Thus, Robert Gilpin (1987) presentshis ‘structural’ theory as an alternative to the three ‘classical’ ideologies ofinternational relations: liberal, Marxist and nationalist. Referring to mer-cantilist theory, he recommends a ‘realistic’ interpretation of internationalrelations; he therefore deals with the structural evolution of the world systemand with the contradictory game of the various national ambitions during


international negotiations on monetary, trade or investment issues, in ageneral context of unemployment and development inequalities. Protectionismand trade wars between large regional blocks would then be likely toreappear. Other economists expounded, in the early 1990s, the scenario ofthe regional rivalry within the Triad. Multinational firms participate inthis process of economic regionalization, because they remain committedto their country of origin. In this system of near blocks with ‘admin-istered trade’, competition is no more military but economic. The role of theState is then central to overcome the weak competitiveness of the domesticeconomy.

Once again, the use of the concept of economic war must remain cautious.‘Neo-mercantilist’ policies only aim at protecting national industries and atdeveloping international market shares, rather than at harming competitornations. Therefore, this expression doesn’t seem to be appropriate to a rigorousanalysis of current international economy.

The economic role of the military sector: a key issue

Since the beginning of the twentieth century, the issue of the link betweencivilian and military sectors within capitalist economies and of its impact ontheir respective performances has been widely discussed. The results of theseanalyses have differed with time. While, in the 1980s, most economic studiesdenounced the insufficiency of military technology spin-offs on the civiliansector, this tendency reversed during the 1990s, notably with the renewedsuccess of the American economy owing to the information technologies, par-tially developed in the defence sector. Yet the idea that a link exists betweenthe performances of the civilian sector and the military sector contributed toreinforce the conception of international economic relations in terms of eco-nomic war. The military sector being widely subsidized by the State (it is eventhe main channel of the American industrial policy), policies in favour of themilitary sector (notably research and development) have been considered asnew elements of ‘geoeconomics’. In the same way, the involvement of certainelements of the defence sector in civilian activities, notably through ‘economicintelligence’, a central issue of the current competition, has contributed to rein-force the debates in terms of ‘economic war’. But again, this concept can seeminappropriate, as far as nothing distinguishes economic war from internationalcompetition.

Some economists, who believed there were different types of capitalisms,more or less adapted to economic war, also developed the thinking on the rela-tions between the civilian and military sectors. These analyses, which weredeveloped in the 1980s, pursued to a certain extent Veblen’s thinking, based onthe analysis of historical facts and political sociology. They more or lessdefended the idea of a decline in the Anglo-Saxon capitalist model (and thus inthe American economy). Thus, Galbraith (1993) links his concept of techno-structure to the importance of the military sector in the American economy.


In his work published in 1993, he considers the problems of American society aspartially resulting from its excessive militarism. The decline in the internationalpower of the United States is directly linked to the climate of contentmentwhich prevails, inherited from the 1945 victory. On the other hand, Germanyand Japan led their post-war development with the typicial ambition ofdefeated countries. Thus, the United States seem to be disadvantaged inthe economic war which brings them into conflict with their main competitors.In addition J.K. Galbraith denounced American capitalism’s tendency to self-destruction, because of the general commitment to laissez-faire andmarket freedom. From this point of view, military expenditures represent a‘security margin with great inertia’, partially designed to control the growth ofthe economic surplus. In this way, this analysis is close to that of Baran andSweezy.

Thurow’s study, published in 1992, is another interesting work. The authoridentifies two types of capitalism: Anglo-Saxon and Rhenish. He considers thatthe competition between them has replaced the one between communism andcapitalism. The differences between the two models of capitalism are notablyexplained by the different part played by the military sector in the industrializa-tion process. Anglo-Saxon capitalism is thus strongly influenced by the tradi-tion of State non-intervention in the economy, because of the privilegedconditions for productive accumulation during its development. For Japan andGermany, the search for economic development was closely linked to nationaldefence; economic elements have always been determining in national politicalindependence, industry being considered at least as important as the army. Thisconquering spirit in the economic sphere has been perpetuated up to thepresent time, supported by an active state policy. This contributes to modifynational comparative advantages through industrial and economic policies, in a‘neo-mercantilist’ perspective, in contrast with the neo-classical conception ofspecialization through comparative advantages. E. Luttwak (1991) alsodeveloped similar ideas, with the concept of ‘geoeconomics’. Thurow (1992)also considers the military sector’s role in the economy, different in each type ofcapitalism. In the Rhenish capitalism, production imperatives prevail; thissystem creates products that are directly marketable and competitive, includingin the military field. On the other hand, in Anglo-Saxon capitalism, theimportance given to profit and finance leads to an autonomous development,out of all market constraint, of the military sector, which is considered a presti-gious activity. This resulted in the implementation in the concerned countriesof strong militaro-industrial complexes, which have their own dynamics andwhich are little concerned with economic constraints. Thurow’s analysis thuspresents economic war as being the main characteristic of current internationalrelations. It contributes to the wish to assert national existence and power atthe international level, and in this way has the same nature as an armedconflict.

Similar issues have also been discussed in Väyrynen’s analysis (1992). In aUNIDIR study, this author develops a detailed analysis of the historical role of


the military sector in the industrialization process; his conclusions are similar toThurow’s. Väyrynen shows that the first countries to have had a clear percep-tion of ‘economic war’ have an advantage in the current international eco-nomic competition. His study analyses the role of the military sector in theindustrialization process of four countries: Japan, England, Brazil and theUnited States. In Japan, military industries have had positive effects on thecivilian sector, during the industrialization process, notably because theyencouraged State interventionism, in favour of the development of technologiesand heavy industries. However, the continuation after the Meiji era of a policybased on military programmes and a significant bureaucracy and centralizationhave had negative long-term consequences. Therefore, the idea according towhich the military sector is economically necessary is not always confirmed.Besides, according to Väyrynen, countries in decline, such as the United Statesand Great Britain, which traditionally allocate important resources to the mili-tary sector, can no longer rely on important technological spin-offs from themilitary sector towards the civilian economy. For structural reasons, high tech-nologies can no longer be initiated by military research and production. TheJapanese example shows that a strong basis in civilian and dual technologieswill later generate important potentialities for arms production. However, themilitary sector never stimulates economic growth. On the contrary, thedomestic military capacity depends on the strength of the civilian economy andon the global technological basis of the nation.

These ideas, developed by Väyrynen in the early 1990s, are very representat-ive of the views most economists had on the link between military and civiliantechnologies; these are however less widespread today, notably because ofrecent technological developments, which are closely linked to the defencesector. Moreover, all these theories (Galbraith, Thurow, Väyrynen and others)developed at the beginning of the 1990s believed in the ‘American decline’, theRhenish social-corporatist model being considered as more effective. Recenteconomic trends tend to contradict this opinion.

The concept of economic war has thus been widely used recently to describethe exacerbation of international economic competition in the context of glob-alization, with numerous offensive strategies led by States or firms on foreignmarkets, which could imply the use of ‘unfair’ measures. Nevertheless, thisconcept doesn’t include all the characteristics of the contemporary worldeconomy. Besides, its use may appear excessive, the term ‘war’ referring to anidea of destruction, opposed to the trade logic.

The permanence of an old debate: is the economy pacifying?

During the 1980s and the 1990s, several studies have specifically analysedthe issue of the relation between economy and international conflicts, in amore political, rather than strictly economic, perspective. For example, Buenode Mesquita (1981) and Siverson (1991) show that governments wage warsif they consider them to be useful. However, economic variables are only


poorly represented in their models. Besides, studies of ‘international politicaleconomy’ have developed a great deal during this period. They are based on thepresupposition that international trade relations are first determined by politicalfactors, and that economic factors exert a weaker influence. The neo-realisttheory of international relations gives considerable importance to the dis-tribution of power. In this respect, Conybeare (1990) develops the idea thateconomic incentives don’t encourage the dominant powers to follow aliberal trade policy, but rather to try to influence the terms of trade to theiradvantage by different means. Therefore, the neo-realist movement doesn’tconsider wars to result from a decrease in international trade, but ratherfrom trade expansion. Many specific analyses have been conducted onthese issues. One of them was made by Mansfield (1994), who aimed at pursu-ing and improving the realist analyses of international relations, by studying therelation between power, trade and war. The power of a State is assessed by itseconomic, demographic and military capabilities, which can change the waroutcome and modify trade flows. Mansfield’s analysis concludes that war isdetermined by power and economic factors. In the same way, power, war andeconomic factors influence international trade. This complex study thus ends ina truism.

Besides these analyses of ‘international political economy’, several empiricalstudies have been carried out to analyse the relations between trade and con-flict; they have led to contradictory results. The underlying stake is the confir-mation or the rejection of the liberal hypothesis that the development ofinternational trade favours international peace. These studies developed consid-erably from the beginning of 1980s to the beginning of 1990s. S.W. Polachek’sanalysis (1980) is a good example; by using a model, he empirically tests thehypothesis of a negative link between armed conflicts and trade development.The results confirm the hypothesis that causality runs from trade to conflict,which means that the development of trade between two countries decreasesthe possibilities of mutual conflicts. These results have, however, been ques-tioned by Roemer (1977) and Pollins (1989). The latter shows that bilateraltrade flows are differently distributed depending on whether the two countriesbelong to the same political sphere of influence or not. If it is the case, then thedominant country’s trade with the country under political influence willconcern the sectors of production for which the dominant country is the leasteffective. Reuveny and Kang (1998) also conducted their own study on theconflict–trade relation, without making any preliminary hypothesis on thedirection of causality. Their results show that causality between conflict andtrade runs both ways, therefore indicating a mutual dependence. If causality isstronger in the case of strategic products (such as raw materials or oil), on theother hand, the existence of a political rivalry within a dyad only weakly influ-ences causality.

All of these studies show the topicality of the idea that conflict probabilitiesdecrease with the development of international economic interdependencies.However, given the difficulties inherent to the creation of an appropriate


model, and to their empirical verification, this liberal hypothesis, whichdeveloped at the same time as international trade, can’t be definitivelyaccepted. Since the end of the Cold War, however, economists are less inter-ested in this issue. However, new fields of investigation appeared, supported byempirical analyses, notably on the link between the diffusion of democracy andinternational peace (Ward 2000).


8 Conclusion

One may wonder whether the situation at the end of the twentieth century isnot, in a way, similar to the one at the end of the eighteenth century, whenseveral radically conflicting theories coexisted. Indeed, the old dichotomybetween two opposed conceptions still exists, with:

• a liberal theory, which today, in the field of economic policy, asserts itsfaith in economic globalization and its refusal to hinder free-marketmechanisms;

• an interventionist theory, which supports State intervention to strengtheneconomic power and which uses the argument of national defence and ofthe fight against the different effects of domination.

However, the current theoretical context differs from that of the end of theeighteenth century. It has indeed been enriched, since the First World War, byseveral analyses dealing exclusively with defence economics issues. The applica-tion of microeconomic and macroeconomic analytical methods allowed defenceeconomics to become an independent field of work. The concept of an armsrace certainly represented an important novelty in the post-Second World Wareconomico-strategic reflections; arms race models have reached a high level ofsophistication in the explanation of the level of military expenditure in a situ-ation of strategic interaction between two countries (enemies or allies). But,finally, their capacity to explain the reality turned out to be limited. Indeed, nomodel had predicted the collapse of the Soviet economy, maybe because theeconomic determining factors in an arms race haven’t been given enoughimportance. Yet, this arms race was also considered as an economic war, with astrategy of ‘impoverishment’ through the military burden. Besides, no decisiveconclusions have been drawn from the studies on the economic impact of mili-tary expenditure, because of the wide range of concrete situations and of theimportance of extra-economic factors. They have, however, succeeded in iden-tifying the multiple problems generated by a disarmament process, thus qualify-ing the optimism which generally develops at the end of all wars on the profitswhich could be gained from a decrease in military expenditure.

However, this current of defence economics does not include all studies on


peace and war issues developed since 1945, which have remained scatteredamong several theoretical movements. The diagram above shows a kind of sym-metry between the dominant theories of the end of the 18th century and thoseof the end of the 20th century.

In other words, after two centuries of important economic research ondefence, peace and war issues, the question of the warlike or peaceful nature ofthe economy is still debated. These debates have certainly been renewed, butthey always lead to the same uncertainties, as if the economy could not, byitself, deal with all war and peace issues. This leads us to raise objections againstMichel Serres when he denies the learning of sciences through history (1974).The economic analysis cannot develop without the help of history and withoutthe support of its own history. Economic research specializes, it opens new hori-zons, it uses new methods, it expounds behaviours and relations regarding eco-nomic issues, it provides the information necessary for political action. But theprice of precision is sometimes represented by important simplifying hypotheseson the economic system, necessary to deal with complexity, such as a peacefulcontext. Under such conditions, the reading of former texts reminds us that theeconomy is inserted into a social field. It refers to a certain conception ofmankind in both its individual and social nature. If humanity is a product ofhistory, then history helps to understand our economic and social organization.Keynes presented economics as a moral science in which the ‘values’ exerted an

Economy as a sourceof conflict

Economic warWAR

PhysiocratsRespect of the natural order

Wealth protectionRise or maintaining

of States

Capitalism

Maintainingof Marxistthought

Peace resulting from free tradeClassicals

Cosmopolitan economy Globalization as afactor of peace

Cosmopolitan economy

War, anon-economic

problem

Economy as a sourceof conflict

MercantilismEconomy serving war

WAR

Socialism

Arms race

Disarmament

Figure 8.1 Simplified comparison of the debates on the warlike or peaceful nature of theeconomy at the end of the eighteenth century and at the beginning of thetwenty-first century.


influence at least as important as the scientific methodology. For Rawls, itcannot avoid ‘value judgements’, in spite of its permanent attempts to apply rig-orous methods. The history of economic thought provides an irreplaceable‘mine of information’ on human nature, notably because the first great econo-mists were also great philosophers. After a period marked by excessive expecta-tions from mathematical reasoning and econometrics, the return of the‘economists philosophers’, who base their analyses on a certain conception ofmankind, necessarily subjective, seems likely to occur. Peace and war issuesshould become important again, and economists should refer to their predeces-sors’ analyses. It is certainly still possible today to write a fundamental text ininternational economics without referring to the military or strategic balance ofpower. But it is no longer possible to assert, without other explanation, that themarket economy, today dominant, leads to peace. One should rather try tounderstand the part played by the economy in human conflicts; it is also essen-tial to analyse economic relations in terms of power and conflicts. It may be animportant field of research for the economists of the twenty-first century.


Notes

1 National power benefits from the economy

1 At the borders of mercantilism, John Law has put forward the central role of money asan instrument of circulation, and as stimulating trade and production.

2 However, Heckscher (1955: 14) considers that it is erroneous to say that mercantilismwas influenced by nationalism, as this concept only developed during the eighteenthand nineteenth centuries.

3 See for example L. Roberts (1641: 262).4 This text, published in 1580, is generally ascribed to William Petty.5 List speaks here about the English classical school.

6 Peace and war factors revealed by economic science

1 Wagner et al. (1995) undertook to find the complete solution to Richardson’s equa-tions. However, their study shows that no data series on the European military expen-ditures before the First World War confirm Richardson’s model, because nationalself-stimulation is more important than the mutual stimulation of rival or enemyStates.

2 Pastijin and Struys (1986) considered that the lack of information on Soviet militaryexpenditures during the Cold War hindered the empirical estimation of Richardson’smodel applied to the American–Soviet arms race.

3 See also Saperstein (1991).4 For a more complete analysis of these often very empirical and positivist studies, refer

to Manas Chatterji’s publications.


economic theories of peace and war 5

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