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January 31, 2006

War, Profit, and the State

The state is the health of war

by Stefan Molyneux

It has been often said that war is the health of the state – but the argument could also be made that the reverse is more true: that the state is the health of war. In other words, that war – the greatest of all human evils – is impossible without the state.

The great Austrian economist Ludwig von Mises was once asked what the central defining characteristic of the free market was – i.e., since every economy is more or less a mixture of freedom and state compulsion, what institution truly separated a free market from a controlled economy? He replied that it was the existence of a stock market. Through a stock market, entrepreneurs can achieve the externalization of risk, or the transfer of potential losses from themselves to investors. In the absence of this capacity, business growth is almost impossible.

In other words, when risk is reduced, demand increases. The stagnation of economies in the absence of a stock market is testament to the unwillingness of individuals to take on all the risks of an economic endeavor themselves. When risk becomes shareable, new possibilities emerge that were not possible before – the Industrial Revolution being perhaps the most dramatic example.

Sadly, one of those possibilities – in all its horror, corruption, brutality, and genocide – is war. In this essay, I will endeavor to show that, in its capacity to reduce the costs and risks of violence, the power of the state is the root cause of war.

All decent economists know the "fallacy of the broken window," which is that the stimulation of demand caused by a vandal breaking a window does not add to economic growth, but rather subtracts from it, since the money spent replacing the window is deducted from other possible purchases. This is self-evident to all of us – we don't try to increase our incomes by driving our cars off cliffs or burning down our houses. However it might please car manufacturers and home builders, it neither pleases us nor the people who would have had access to the new car and house if we didn't need it for ourselves. Destruction always diverts resources and so bids up prices, which costs everyone.

(In fact, breaking a $100 window removes more than $100 from the economy, since all the time that must be spent returning the window to its original state – calling the window repairman, deciding on the replacement, cleaning up the shards of glass, etc. – is also subtracted from the economy as a whole.)

There will always be accidents, of course, and so repairs are a legitimate aspect of any free market. However, war can never be said to be an accident, is never part of the free market, and yet is commonly believed to be good for the economy – and must be, for at least some people, since it is pursued so often. How can these opposites be reconciled? How can destruction be economically advantageous, when it is so obviously bad for the economy as a whole?

We can imagine an unethical window repairman who plans, as part of his nefarious business strategy, to go around smashing windows in order to raise demand for his wares. This would certainly help his business – and yet we see that, in the free market, this course is almost never pursued in real life. Why not?

One obvious answer could be that business managers are afraid of going to jail – and that certainly is a risk, but not a very great one. Arsonists are notoriously hard to catch, for instance, and there are many other hard-to-trace sabotages that can be undertaken. Poison could be added to the water supply in a manner that would incriminate a water supplier, which would take months to resolve – at which point the trail would be long cold. Foreign hackers could be paid to infiltrate competitors' networks, or mount denial-of-service attacks on their Web sites – sure doom for those who sell over the Internet.

Not convinced? Well, what about eBay? If you have a competitor who's taking away your business, why not just get a hundred of your closest friends to give him a bad rating and watch his reputation – and business – dry up and blow away?

All of the above practices, while occasionally partaken of, are very rare in the free market, for three main reasons. The first is that they are costly; the second is that they increase risks, and the third is the fear of retaliation.

The Cost of Destruction

If you want to hire an arsonist to torch the factory of your competition, you have to become an expert in underworld negotiations. You might pay your money and have the arsonist take off to Hawaii instead of setting the fire. You also face the risk of your arsonist taking your offer to your competitor and asking for money to not set the fire – or, worse, return the favor and torch your factory! It will certainly cost money to start down the road of vandalism, and there is no guarantee that your investment will pay off in the way you want.

There are other tertiary costs to pursuing a path of competition by destruction. You can only target one competitor at a time, which is only partially helpful, since most businesses face many competitors simultaneously – some local, some overseas and probably out of reach. Even if you are successful in destroying your competitor, you have opened a "hole" in the market, which will just invite others to come in – and perhaps compete even more fiercely with you. When it comes to competition, in most cases it is better to stay with "the devil you know." It wouldn't make much sense to knock out a software competitor, for instance, and end up giving Microsoft a good reason to enter the market.

Also, if you are a business owner, competition is very good for you. Just as a sports team gets lazy and unskilled if it never plays a competent opponent, businesses without competition get unproductive, lazy, and inefficient – a sure invitation to others to come in and compete. Successful businesses need competition to stay fit. Resistance breeds strength.

Also, what happens if you do manage to successfully sabotage your opponents? If you do it right, no one has any idea that you are behind the sudden spate of arson. Well, what happens to your insurance? It goes through the roof – if you can even get any! With random arsonists around, your most competent employees will probably start looking for other jobs, hoping to avoid being burned to death – or even just face the risk of a work stoppage due to arson. Thus you have increased your costs and destabilized the loyalty of your best employees – creating a dangerous situation where competitors are highly motivated to enter your field just when you are the most vulnerable to competition. Overall, not a very bright idea!

The Risk of Destruction

Let's say you decide to pay Stan to go and torch your competitor's factory – well, the basic fact of the transaction is that Stan, as a professional arsonist, knows how to work the situation to his advantage far better than you do, since you are, ahem, new to the field. Stan knows that no matter what he does, you cannot go to the police for protection. What if he tapes your conversation and then blackmails you? Then your exercise in amoral competition suddenly becomes a lifelong nightmare of expense, guilt, fear, and rage! Verrry bad!

As mentioned above, what if Stan decides to go to your competitor and reveal your plan? Surely your competitor would pay good money for that information, since he could then go to the police and destroy you legally even more completely than you were hoping to destroy him illegally? No, a basic fact of criminal activity is that once the gloves come off, the results become very hard to predict indeed.

And what if Stan goes to your competitor and says: "For $25,000, I was supposed to torch this place – for $30,000 I can just turn around and set quite a different fire!" This pendulum bidding war can turn into a desperately stressful money-loser for everyone concerned (except Stan, of course).

And who is to say that Stan is even a "legitimate" arsonist? What if he is an undercover agent of some kind? What if he has been sent by someone else in order to get some dirt on you? What if it turns out to be blackmail or a setup by your competitor? How would you know? Again – very risky!

The Risk of Retaliation

Let's say that all of the above works out just the way you want it, and Stan goes and torches your competitor's factory – well, what might happen then? You have just created a bitter enemy with nothing to lose who suspects foul play and knows that you have a good motive for torching his place. He's going to hire private investigators and put an ad in every local paper offering a cash reward of a million dollars for information leading to proof of your participation – so he can sue you and recover far more than a million dollars!

Either your new enemy will find out actionable information, and then go to the police, or he will find out unactionable information – hints, not proof – in which case he may choose to retaliate against you. Since you've been able to do it in a way that cannot be proven – and he now knows how – you have just educated a bitter and angry man on how to torch a factory and escape detection. Are you going to sleep soundly in your bed? Are you sure that he's going to only target your factory?

What does all this look like in terms of economic calculation? Have a look at a sample table below showing costs and benefits of competition through arson. If we assign arson a cost of $50,000, with a 50 percent probability of success, and a resulting economic benefit of $1 million, we see a net benefit of $450,000 (50 percent of $1 million – $50,000 in costs). So far, so good. But if we include a 10 percent risk of blackmail, a 20 percent chance of retaliation, a 25 percent chance of increased competition – all very low numbers – and finally $100,000 in increased insurance and security costs, we can see that the economic benefits are erased very quickly (see below).

Probability of Success
Economic Effect
Net Benefit (benefit x risk – cost)















Increased Competition





Increased Costs (insurance, security)





` $0

(Note that the above table only shows the economic calculations – these do not include the emotional factors of guilt, fear, and worry, which are of great significance but hard to quantify. This is important because even if the above numbers are disagreeable, the emotional barrier would still have to be overcome.)

No, as the above conservative example shows, it's not really worth it to attempt economic gain through the destruction of property. And that is exactly how it should be. We want people to be good, of course, but we also want strong economic incentives for virtue as well, to shore up the uncertain integrity of free will.

How does this relate to war and the state? Very closely, in fact – but with very opposite effects!

The economics of war are, at bottom, very simple, and contain three major players: those who decide on war, those who profit from war, and those who pay for war. Those who decide on war are the politicians, those who profit from it are those who supply military materials or are paid for military skills, and those who pay for war are the taxpayers. (The first and second groups, of course, overlap.)

In other words, a corporation that profits from supplying arms to the military is paid through state taxation – and under no other circumstances could the transaction exist, since the risks associated with destruction (as outlined in the table above) are equal to or greater than any profit that could be made.

Now if those who decided on war also paid for it, there would be no such thing as war, since war follows the same economic incentives and costs outlined above. However, those who decide on war do not pay for it – that unpleasant task is relegated to the taxpayers (both current, in the form of direct taxes, and future, in the form of national debt). The risk of war is delegated to the front-line soldiers, of course, but those soldiers would not be in the line of fire if they weren't paid and armed by state taxation.

Let's see how the above analysis of the costs of destruction change when the state enters the equation.

The Cost of Destruction

If you want to start a war, you need a very expensive military – which must also be maintained when there is no war. How can that vast expense be paid for? Invasion? No. There is simply no way to recover the costs of that military by invading another country – otherwise, the free market would directly and voluntarily fund armies and occupations, which it never does. Trade benefits free-market businesses; invasions do not.

To understand this from a different angle, you can only invade another country by destroying large portions of it, killing many of its citizens, and then fighting endless insurgencies. Given the costs of invasions and occupations – always in the hundreds of millions or billions of dollars – what profit could conceivably be gained from the bombed-out country you are occupying? That would be like asking a thief to make money by fire-bombing the house he wanted to rob – and then staying and holding the occupants hostage! Nonsense. Theft doesn't operate that way – and neither would war, without the presence of the state and the economic distortion of forced taxation.

To those aiming to profit from war, the costs of destruction can be reduced to almost nothing by forcing the taxpayers to pay those costs. While it's true that those who profit from a war also pay taxes needed to support the war effort, they pay to an equal degree as all their competitors, and the amount they pay in taxes is far less than they receive in profits – again, facts we know because there are always people willing and eager to supply the military.

Thus are the costs of destruction eliminated through the power of state taxation – and the first central barrier against the prosecution of war is removed.

The Risk of Destruction

Those who decide on war and those who profit from war only do so when there is no real risk of destruction. This is a simple historical fact, which can be gleaned from the fact that no nuclear power has ever declared war on another nuclear power. The U.S. gave the USSR money and wheat, yet invaded Grenada, Haiti, and Iraq. (In fact, one of the central reasons it was possible to know in advance that Iraq had no weapons of mass destruction capable of hitting the U.S. was that Washington politicians were willing to invade it.)

Avoiding the risk of destruction was the reason that the USSR and the U.S. (to take two obvious examples) fought "proxy wars" in out-of-the-way places like Afghanistan, Vietnam, and Korea. As we shall see below, the fact that the risk of destruction is shifted to taxpayers (and taxpayer-funded soldiers) completely reverses the economic equation, turning a net loss into a net profit – and creating a whole new industry of death.

Thus are the risks of destruction eliminated through the power of the state – and the second central barrier against the prosecution of war is removed.

The Risk of Retaliation

The risk of retaliation in economic calculations regarding war should not be taken as a general risk, but rather a specific one – i.e., specific to those who either decide on war or profit from it. The entire military-industrial complex survives and flourishes on the simple fact that profit accrues to the willing few, while the costs of destruction and the risks of retaliation are forced on the unwilling many. Since other people are exposed to the risk of retaliation, the risks of war become almost irrelevant from an amoral economic standpoint. If I receive the pleasures of smoking, but you take the risk of lung cancer, my decision about whether to continue smoking will certainly be affected!

Thus are the risks of retaliation eliminated – and the third central barrier against the prosecution of war is removed.

Externalizing Military Risk

The power of the state to so fundamentally shift the costs and benefits of violence is one of the most central facts of warfare – and the core reason for its continued existence. As we can see from the above table regarding arson, if the person who decides to profit through destruction faces the consequences himself, he has no economic and emotional incentive to act violently. However, if he can shift the risks and losses to others – but retain the benefit himself – the economic landscape changes completely. Sadly, it then becomes profitable, say, to tax citizens to pay for 800 U.S. military bases around the world, as long as strangers in New York bear the brunt of the inevitable retaliation. It also becomes profitable to send uneducated youngsters to Iraq to bear the brunt of the insurgency. Halliburton wins; the taxpayers and soldiers lose (and wounded soldiers are further supported by forced tax dollars).

Externalizing Emotional Discomfort

The fact that the state shifts the burden of cost and risk to the taxpayers and soldiers is very important in emotional terms. If the arson example outlined above could be tweaked to provide a profit – say, by reducing the risks of blackmail or retaliation – then all the other risks would still accrue to the man contemplating such violence. Such risks would cause great emotional discomfort in all but the most rare and sociopathic personalities – and the generation of fear, guilt, and worry would still require more profit than the model can conceivably generate.

Once the power of taxation externalizes almost all the risks and costs of destruction, however, the terror and fear of war must still be obscured. Thus we can see in warlike states an endless dissemination of pro-war propaganda (warnography, if you will). This destruction of healthy emotional functioning – i.e., a fear of death and a hatred of murder – helps ensure that wars will continue until the state collapses or the world flames into ash.

The State Is War

If the above is understood, then the hostility of anarcho-capitalists toward the state should now be a little clearer. In the anarcho-capitalist view, the state is a fundamental moral evil not only because it uses violence to achieve its ends, but also because it is the only social agency capable of making war economically advantageous to those with the power to declare it and profit from it. It is only through the governmental power of taxation that war can be subsidized to the point where it becomes profitable to certain minorities. Destruction can only ever be profitable when the costs and risks of violence are shifted to the taxpayers, while the benefits accrue to the few who directly control or influence the state.

Why Not Just Reform the State?

As long is the state exists, this violent distortion of costs, incentives, and rewards can never be controlled or alleviated, since an artificial imbalance of economic incentives will always self-perpetuate and escalate (at least, until the inevitable bankruptcy of the public purse). As long as the state exists, mankind shall always live with the terror of war. One cannot oppose war without opposing the state. They can neither be examined in isolation nor combated separately, since – much more than metaphorically – the state and war are two sides of the same bloody coin.


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Stefan Molyneux has been an actor, gold-panner, graduate student, and software entrepreneur. His first novel, Revolutions, was published in 2004. Listen to his top-rated podcast by clicking here – or, if you prefer iTunes, you can click here. Visit his blog or his new Web site.

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