War Socialism

The key thought that underlies Obama’s recovery plan is simple. The cure for severe recession lies in trying to “€œgrow the economy.”€ Spending and investment have fallen off; the government, accordingly, must take up the slack. By doing so, we”€™ll “€œget the economy going again.”€

Defenders of this view assail those who contend that government spending simply crowds out private spending, exerting little or no positive effect. Precisely the problem, say Keynesian economists like J. Bradford deLong at UC Berkeley, is that private spending has not sufficed to bring back prosperity. Is not a dollar spent by the government at least as good as a dollar spent by private enterprise? At least as good”€”because some economists of this persuasion allege a government spending “€œmultiplier.”€ A dollar spent by the government, the claim goes, generates additional spending by those who receive the money.

Economists like Ludwig von Mises and Friedrich von Hayek would challenge this argument at its central premise. In the “€œAustrian“€ view, what counts is not the level of total spending but how prices are related; in particular, the relation between prices of capital goods and consumption goods is of crucial importance.  As Hayek remarks in “€œThe “€˜Paradox”€™ of Savings“€: “€œIn principle, therefore, any portion, however small, of the total money stream ought to be sufficient to take up the consumption goods produced with the other portions, so long as, for any reason, the demand for consumption goods does not rise suddenly in relation to the demand for means of production.”€ This view seems to me entirely convincing; but, unfortunately, explaining it requires a venture into fairly difficult economic theory. And an escape from this venture lies ready at hand.

The key notion in the Obama plan can be exploded in a much simpler way, one independent of Austrian theory, though entirely consistent with it.

According to the “€œspending”€ theory, government spending adds to production. It does not crowd out private spending. In a recession, there are hypothetically unemployed resources; and these can be brought into production without causing a loss elsewhere.

As suggested earlier, Austrians would object to speaking of unemployed resources while omitting price. But even on its own terms, the spending argument fails. It wrongly moves from the claim that government spending need not lessen private spending and investing to the much stronger claim that it will not do so.

But the very fact that the government has engaged in extensive spending may deter private businessmen from investing. The problem is not that the government’s activity leaves no room for them as well: rather, the investors become reluctant to proceed. Even if money is available, they will shun it.

Why should what the government does affect them in this way? A recent incident exposes the answer. After the government’s massive bailout of General Motors, Obama pressured the company’s CEO to resign. With government money goes government control; and the danger of government control is not confined to businesses that directly benefit from the money. Given the sharp increase in the government’s interference with business, the inevitable accompaniment of government spending, investors become skittish. They do no know what the government will do next. Why then should they risk their money? Would it not be irrational for them to do so?

Exactly this phenomenon, which the distinguished economic historian Robert Higgs calls “€œregime uncertainty,”€ plagued the misguided New Deal efforts to rescue America from the Great Depression. In his Depression, War, and Cold War, Higgs cites a contemporary survey that lends evidence to the view that business anxiety about what the Roosevelt Administration planned to do inhibited investment. “€œIn May 1939, Fortune pollsters asked a national sample of business executives: “€œWith which of these two statements do you come closest to agreeing? (1) The polices of the administration have so affected the confidence of businessmen that recovery has been seriously held back; (2) businessmen have generally been unjustly blaming the administration for their troubles.”€ Of the executives responding, 64.8 percent agreed with the first statement, 25.6 agreed with the second, and 9.6 percent said that they didn”€™t know.”€

Higgs”€™ point echoed the contention of Benjamin Anderson, the chief economist of the Chase National Bank during the 1930s. In a weekly newsletter, Anderson often had occasion to note the deleterious effects of the government’s malign combination of uncertainty and hostility toward business. His great work of 1949, Economics and the Public Welfare, offers extensive quotations from these newsletters. He noted, for example, “€œThe impact of these multitudinous [New Deal] measures”€”industrial, agricultural, financial, monetary, and other”€”upon a bewildered industrial and financial community was extraordinarily heavy.”€

Uncertainty has become a hallmark of Obama’s policy today. He offers no carefully thought-out program. Instead, after perpetual “€œtown meetings”€ and speeches to mass audiences in the style of Fidel Castro or Hugo Chávez, he announces new initiatives. These, he tells us, must be approved immediately, lest the economy slide to disaster.

Those would stress the parallel between Roosevelt and Obama must here confront an objection. Even if regime uncertainty does operate to deter private investment in the way indicated, does it follow that the government’s plans are misguided? If private investment falls, maybe the government should take over even more of the economy than it had initially planned to do. James K. Galbraith, in every way the son of his father John Kenneth Galbraith, takes just this line in The Predator State. “€œMarkets distribute today’s production to consumers. This they do reasonably well … Planning, properly conceived, deals with the use of today’s resources to meet tomorrow’s needs. It specifically tackles issues markets cannot solve: the choice of how much in the aggregate to invest (and therefore to save), the directions to be taken by the new technology, the question of how much weight and urgency are to be given to environmental issues, the role of education, and of scientific knowledge and culture.”€

Government domination of investment, by the way, was exactly what Keynes wanted. In Chapter 24 of The General Theory of Employment, Interest, and Money (1936), he says: “€œ I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative.”€

But of course socialism of this type would arouse furious opposition; and were Obama and his associates to endeavor to push it through, they might be unable to do so. Unable, that is, under present conditions. Therein lies a grave danger. In the emotional arousal of a major war, political and economic measures can be secured that were in peacetime unthinkable. Dissenters from massive increases in government control of the economy can be damned as unpatriotic.

This is more than a nightmare conjured up by disgruntled Austrian economists. The great Old Right journalist John T. Flynn long ago noted that Franklin Roosevelt followed such a policy of military socialism. Faced with failure to revive the economy, Roosevelt sharply increased military spending. As Flynn explained the process, “€œWe have created a huge national debt to relieve poverty and idleness and produce recovery. With the money we have built schools, hospitals, playgrounds, roads, parkways. But now it is no longer possible to support such expenditures. Powerful resistance has developed. . . . But the spending must go on or the present government will face a collapse. And hence this one great imperious call to national defense is invoked.”

Of course, such an increase does not take place in a vacuum, and Roosevelt adopted a bellicose foreign policy both to provide a justification for his policy and to neutralize business opposition to government domination of the economy. It would be a mistake to explain America’s entry into World War II entirely through this process, but it clearly played an important role.

Might we not stand in a similar situation today? If Obama’s recovery plans fail, whether through the regime uncertainty described here or for other reasons, it is unlikely that he will stand idly by. To leave the economy in the doldrums would ensure political ruin. Faced with this prospect, will he not face a strong temptation to gear the economy up for war? Already he has indicated a desire to step up the action in Afghanistan; and if this does suffice, other targets are readily available. Would not, for example, continued bad economic news incline Obama to view Iran as the neocons wish him to do?

None of this is inevitable. Perhaps the economy will revive on its own, despite the deleterious effects of Obama’s policies on business confidence. And even if the economy does not recover, Obama may decline to take the road to military socialism”€”or prove unable to overcome resistance to it. The prospects of resistance to any such measures greatly increase if we study what may be in store for us. The books by Higgs and Flynn are an indispensable means to do so.



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