The Reverend Mr. Opitz is a member of the staff of the Foundation for Economic Education.
Two fears fill us with dread. The first fear is that war will break out, killing millions of people, destroying billions worth of property, and wrecking what’s left of the institutions of a once free society. The second fear is that peace will break out and bring our vaunted material prosperity crashing to earth. There is an untenable assumption in this fear of peace, but if it be accepted, the dilemma is a cruel one. The desire for material well-being is legitimate, but the dilemma spells out into something like the following three stages: Material well-being depends on an arms race; an arms race is likely to eventuate in a hot war; a hot war is a device guaranteed to end prosperity and threaten very survival. Here is a series whose first term is a natural desire for well-being, but whose last term cancels out everything which precedes it. This hardly sounds like progress, but if—as many people believe—the vitality of the civilian economy is so dependent on military spending that a depression looms if this spending stops, this is the logic of events. Let us examine these two fears which have so many of us walking a razor’s edge, held in balance by the terrors on either side.
We are in the Cold War, we are told, and the Cold War is not war in the old sense. War used to be a thing of bombs dropping, tanks maneuvering, and infantry slugging it out in the mud; but war is now an engagement in another dimension—the psychological. The aim of war, then and now, is the same—to impose our will on the enemy, or at least to resist the imposition of his will on our own—but the means have changed. Formerly, we damaged his property or the bodies of his soldiers until the will to resist was broken; but now we are done with such crudities, having discovered subtle ways of getting at the will directly to bend or break it. In the old days, a victor nation or coalition was one which possessed a preponderance of military might, as demonstrated in the field. On the eve of a war the question of which nation actually had such a preponderance might be a matter of debate, to be settled only by fighting it out. But the matter of preponderance is now hardly ever posed. "Preponderance" has been overcome by "sufficiency." If several nations each possess a sufficiency of military might—armament enough to clobber rival nations no matter who strikes the first blow—the possession of a preponderance confers only the most dubious of advantages. The apparatus of civilization reduced to rubble, the victor nation stands astride a bone yard. The desire for mere physical survival is a primordial instinct which, in civilized man, may sometimes conflict with certain values which take precedence over it. But in the aftermath of the next war the civilized values may well be the first casualties so that mere animal survival may become the highest good.
Many Are Mistaken
The fear that war may break out appears to be well grounded. What about the fear that peace may break out?
The fear that peace will have a disastrous effect on the civilian economy is not a delusion of the unlettered. This fear, on the contrary, afflicts and is fostered by the sophisticated who have unlearned the capacity for taking a common sense view of things. Turn, for example, to an article in a recent issue of the Bulletin of the Atomic Scientists, a journalistic outlet for writers who stress the social responsibilities of scientists. The article is entitled "The Economics of Disarmament," and opens with a question: "Can the U.S. peacetime economy maintain its high prosperity without heavy governmental spending in the arms economy?" To which, the author returns a gloomy answer. "So long as armament is not used," he says, "it serves its economic purpose in an ideal way. The income created in the development and production of arms represents a clear net gain to the total purchasing power available to sustain the consumer economy."
Good Keynesian doctrine so far, but now the catch: An arms race, the author points out, heads nations toward a disastrous military conflict which must be avoided. It is equally necessary to fend off the economic collapse which threatens if the arms race slows. What is needed, says the author, is an "economic equivalent of armament"—some prescription which promises to sustain present levels of civilian prosperity without theatening to bring on World War III. The author’s remedy, increased government spending, has a familiar ring: "No stretching of the terms of this elementary discourse is needed to show that public works and public services provide the economic equivalent of armament."
Some industries are totally committed to military production while others are committed in part. The "prosperity" of these segments of society is irrevocably yoked to military spending. It is easy to imagine a factory for the making of an essential weapon, the Gismo, being erected in 1942 in the sleepy little village of Rural-area. The plant now employs 5,000 people, three times the number of citizens who responded to the town’s 1940 census. The plant payroll now sustains those who work there plus bankers, butchers, teachers, ministers, and one interior decorator. Peace breaks out, military spending stops, and it isnot hard to imagine what happens to Ruralarea. Admittedly, in this and similar situations, there will be hardships and some painful but necessary readjustments. But Ruralarea is not the United States, and it is not permissible to generalize its problems as if they afflicted a whole nation. The argument we are considering is that the prosperity of the society as a whole depends on national spending for arms.
Production Comes First
This argument is a modern version of the fable of the emperor’s new clothes. It contains a glaring fallacy which is easily grasped, but this fallacy in turn rests upon a faulty premise of a more subtle nature. The fallacy first: Prosperity is equivalent to an abundance of the things people consume and enjoy—houses, clothing, food, automobiles, recreation, gadgets, and so on. These items come into existence as the result of economic production. A few individuals here and there may live well on stolen goods, but society is provisioned in only one way—by human effort, augmented by tools, applied to raw materials. Thus, and in no other way, are produced the goods and services we now have in abundance and which constitute our prosperity. Our prosperity would cease if we stopped producing, and we can’t produce without working. Some 61 million people are presently at work to produce the things which make up our prosperity.
Alongside this abundance of consumer goods which constitute the civilian economy are jet fighters, aircraft carriers, tanks, rockets, and the like. There is no civilian market for these items; Uncle Sam and his satellites are the only customers. Even though you and I are not in the market for military hardware, some six million of our people are engaged in producing it according to the same old economic equation—by the application of human effort and tools to raw materials. While thus engaged they cannot produce goods for their own consumption. They must be supported, in this respect, by the rest of society. Furthermore, there are large quantities of machines, tools, and other capital tied up in defense projects which otherwise might be employed to make things for consumers.
Putting these two segments together, it is obvious that the total active labor force in the country is roughly 67 million people. Is it not self-evident, in the first place, that 67 million workers—other things being equal—will produce more than 61 million? Therefore, the present level of prosperity is
lower than it might otherwise be by the amount of civilian goods which the 6 million would produce if they weren’t engaged in producing arms. If the withdrawal of six million is the cause of the high level of civilian prosperity, why not withdraw 60 million and have a real boom? Thus, we would defeat our old enemy Work, that built-in curse of every economic system of the past.’
The 6 million now engaged in armament production are not simply off to one side, a neutral factor. They are consumers of civilian goods without producing any themselves or even producing things which might be exchanged for them. Millions of producers of food, clothing, housing, and other services work to provide these necessities for the 6 million engaged in armament production. Far from the arms race sustaining the civilian economy, the reverse is true; it is the incredible productivity of the civilian economy which makes it possible to spend our substance so prodigally in military hardware! Not so many centuries ago, in subsistence days, nations called off their wars so the folks could get in the harvest. Our present mastery of economic problems is so nearly complete that the productive sector of our economy can maintain a high level of civilian prosperity even though it is forced to support a swollen governmental structure along with its bureaucracies and its military establishments. Prosperity supports the arms race, not vice versa!
Despite Keynes, the "Law of Markets" Stands
When things are put in straightforward economic terms without introducing the complicating factor of money, the glaring fallacy of the thesis that Americans are prosperous because their government is spending so much on armaments is obvious. It is equally obvious that such an inversion of the facts would hardly find general acceptance if men based their conclusions on primary observations of the facts. At this level fallacies are relatively easy to detect. The detection of fallacies is more difficult if the discussion is conducted at the secondary level of inferences. An inference may be incorrect, and that’s that. But an inference may be correct and still conceal a fallacy if the inference is drawn from an unsound premise. The unsound premise in the present instance is based upon the supposition that the late Lord Keynes had refuted Say’s Law—a supposition shared by the master himself. Keynesians acknowledge this as a critical question and admit that if the validity of Say’s Law be conceded much of Keynes’ theory becomes untenable. So let’s argue this fallacy out in terms of Say’s Law—although a matter so complex can hardly be thrashed out in any space short of a book or a series of books.
Crudely put, Say’s Law of Markets—named after the French economist who advanced it in 1803—holds that aggregate supply creates aggregate demand, that purchasing power grows out of production. Benjamin M. Anderson in his Economics and the Public Welfare opens his chapter 60, "Digression on Keynes," with this description of what he calls "the equilibrium doctrine":
"The twentieth century world consumes vastly more than the eighteenth century world because it produces vastly more. Supply of wheat gives rise to demand for automobiles, silks, shoes, cotton goods, and other things that the wheat producer wants. Supply of shoes gives rise to demand for wheat, for silks, for automobiles, and for other things that the shoe producer wants. Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium."
Keynes’ alleged success in disposing of Say’s Law consisted in ignoring the qualification; he "refuted" a proposition which had never been seriously advanced. "Say’s Law of Markets," writes Henry Hazlitt, "is based on the assumption that a proper equilibrium exists among different kinds of production, and among prices of different products and services. And it of course assumes proper relationships between prices and costs, between prices and wage-rates. It assumes the existence of competition and free and fluid markets by which these proportions, price relations, and other equilibria will be brought about."
Say’s Law is not regarded as a central doctrine of classical economics, but by disposing of a fallacy it paved the way for the establishment of what Adam Smith called "the liberal plan of equality, liberty, and justice." This is the system of liberty, one of whose facets is the free market. Economics, ostensibly the study of market operations, is really concerned with the stewardship of the earth’s scarce goods, such as human energy, time, material resources, and natural forces. These scarce goods are our natural birthright. Use them wisely, as natural piety dictates—that is, providently and economically—and human well-being is the result. Turn a blind eye to them and one consequence is the promulgation of such nonsense as that the arms race which makes us billions of dollars poorer is actually the cause of our prosperity! Men act upon their beliefs, even when beliefs are fallacious, and acting upon this one we careen ominously toward the
A tiny leak in the dike, if not plugged, can open up and let the flood through. What begins as a simple economic fallacy can end with a bang or a whimper.
The fallacies of John Maynard Keynes have been fully orchestrated and demolished in a recent book by Henry Hazlitt, The Failure of the "New Economics" (D. Van Nostrand, 458 pp., $7.50). More recently he has compiled an anthology containing Say’s original statement together with critical essays on Keynesian economics, The Critics of Keynesian Economics (D. Van Nostrand, 427 pp., $7.00).
1 This is not to deny the need for military hardware nor to minimize the importance of our defense establishment. Perhaps we should divert twice as much manpower and capital for these purposes, but that is another argument. The only point at issue here is the fact that manpower and capital devoted to military purposes are not available for civilian production and diminish the latter by that much. Every dollar spent for guns is a dollar less that might be spent for bread, housing, travel, and the like.