Planning for a ‘War Economy’

July 10, 1950

Its dramatic collapse on the news of the Communist invasion of South Korea reflected the judgment of the stock market that a war today would have a drastically adverse effect on the prospect for profits. Though war means huge war contracts, it also means a huge increase in corporate taxation. But what caused the violent market break on June 26 was not merely fear of the inevitable consequences of war per se, but fear of the kind of economic policies which might be put into effect.

Modern war, aggressive or defensive, is necessarily a collective enterprise and must necessarily invoke compulsion. But the preservation of a certain irreducible minimum of the individual’s economic liberty, together with the kind of economic deterrents and incentives that normally guide him, is necessary not merely for its own sake, but for maximum and most efficient war production.

It is precisely this that is forgotten by most of those who come forward with plans for rigid economic controls to be imposed immediately upon the outbreak of war. The files of the National Security Resources Board are presumably stuffed with proposals for ready-made legislation and plans to be handed to Congress and Federal agencies on M Day. And most of these plans are known to be based on the assumption that what will be necessary in case of war is a more or less completely regimented economy.

One of the favorite proposals of these war planners, for example, is an overall freeze of prices and wages as of the day before the outbreak of the war. The idea behind this (apart from control for its own sake) is “to prevent war profiteering.” But it is hard to think of any economic measure that would more surely embarrass and slow down the transition to an effective war economy.

The relationship of prices to each other, and of prices to costs, is based on the constellation of supply and demand at any given moment. These are the prices and costs, wages and incomes, calculated to maximize and balance production in accordance with the relative demand for thousands of different commodities and services at that time. But relative war demand is radically different from relative peace demand. And there is no more certain way to slow up the transition to a war economy than to try to freeze for wartime the price relationships adapted to peacetime.

It is commonly thought that blanket price ceilings are necessary in war to prevent a general rise in prices. But the way to prevent this is through money and credit policy. Speaking broadly, there cannot be a general rise in prices in wartime unless there is a corresponding increase in the volume of money and credit. If no increase in the volume of money or credit were encouraged or permitted, the tendency would be for rises in the prices of “war” goods to be compensated by declines in the prices of “peace” goods. The price “level” would remain virtually the same.

It is the shift in relative prices that tends to produce the quickest transformation from a peace to a war economy. Producers are attracted by the higher prices and profits in the war goods to start producing them immediately, while they are driven out by losses from the production of “peace” goods. The higher prices of war goods, moreover, permit producers of them to offer higher wages to workers than those obtainable in peacetime production, and so facilitate the quickest shift of labor as well as management into war production.

If this sort of quick voluntary shift is prevented by blanket price and wage controls, then the government has to fall back upon an enormously complicated set of coercive orders. This compulsory bureaucratic system—which is almost certain to be influenced by political pressure-group considerations—can never be as effective as flexible free markets.

We should always do what we can to prevent wartime profiteering, but this must always be subordinated to the chief end, which is the most effective conduct of the war itself.