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27.03.2003, 18:26

War, Peace, and our Economic Future / Artikel mises.org

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War, Peace, and our Economic Future
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by Llewellyn H. Rockwell, Jr.

[Posted March 27, 2003]

[img][/img] The
Austrian economists tell us that a price is more than a price. It is an
objective expression of subjective judgments concerning human wants, now and
in the future. It conveys information to us about how we ought to conduct
ourselves: where capital should be directed, how much of what should be
consumed now or later, which jobs to take and which to pass over. In short,
prices provide the roadmap to the successful navigation of the material world.

How striking it is to see stock prices respond so actively
to the war on Iraq, the dominant event of the day. Since the war began, prices
have risen in response to the prospect that war would end soon and sunk on the
prospect that the war will go on and on. What does this price information
convey? Most likely, it reflects an inchoate sense that this war is doing
nothing to bring us out of economic contraction and into recovery.

A Soft Patch?

That is precisely true. This war could result in a severe
setback, not only prolonging the contraction but deepening it as well. To hear
official voices talk, however, we have not been going through the longest
recession in the postwar period. Instead, we have been through a 24-month
"slow recovery." It is also called a"sagging economy with
sound fundamentals." Greenspan has made references to a"soft patch"
in a foundation otherwise as hard as stone.

Indeed, in the effort to avoid using the term recession, the
Federal Reserve has become a business-cycle phrase mill. Thus, according to
the Fed, this is a"soft economy," a"subpar" economy,"
a"skittish" economy, an economy"weighed down by weak
expenditures," an economy of"persistent weakness," or, my
favorite, an economy facing"formidable barriers to vigorous expansion."
Call it what you want, but don't call it a recession. As for the D-word,
depression, don't even think it!

With the latest data on the Producer Price Index and the
increase in oil prices, we are starting to see other tortuous linguistic
devices at work. It is not inflation; it is"sector-specific price
pressure." In the old days, rising unemployment, sinking production, and
price inflation combined to create what was called"stagflation."
What will it be called this time? Something rather ingenious, no doubt.

The National Bureau of Economic Research officially dates
the contraction from March 2001, fully six months before 9/11. Not a day
has gone by in the last two years when some commentator hasn't either denied
we are in recession, claimed we are already out of recession, or cited
evidence that the recovery is underway and demanded that everyone admit it
already.

Now, until recently, it was possible that the NBER might
have backdated the beginning of recovery to have shortened the total duration
of the recession. Recent unemployment numbers, and worsening contractions in
New York and California, make that increasingly unlikely.

Also, if you look carefully, you find that the fourth
quarter 2002 GDP data paint a grim picture of slow growth, declining household
net worth, and continued deterioration of the non-farm business sector. In the
first estimate, official GDP grew at an annual rate of 0.7 percent, but when
you exclude the government component of GDP, the economy actually shrank in
the fourth quarter.

The revised numbers put growth at an annualized 1.7 percent,
but the two factors driving the GDP remain government spending and
credit-fueled personal consumption. You can try this trick in your own
neighborhood. Steal your neighbor's furniture and replace it with stacks of
counterfeit money. Encourage everyone to spend the money, and then announce
that this amounts to higher economic growth.

General Economic Meltdown

Our time will be recorded as a period of general economic
meltdown. How much worse will it get and how much longer will it last? We
cannot know for sure, but we do know that right now, the government is doing
everything in its power to make it worse.

Those of us who warned in the 1990s that the stock-price
mania could not last were accused of spreading"gloom and doom." Our
warnings were considered self-evidently ridiculous, because, of course, it was
said that we were in a New Economy and such things as profitability and
earnings and savings were old hat and had no bearing on the cyber-world being
created before our eyes. Only the Austrian School economists seemed to wonder
who or what was behind the frenzy.

In contrast to the 1980s, when everyone was watching the
money supply, the markets were suspiciously uninterested in what the Fed was
up to in the 1990s. It funded a bailout of Mexico, then a bailout of East Asia,
and then a bailout of a crazy Connecticut hedge fund that believed it could
predict the future by paying Nobel laureates vast sums to concoct a
mathematical model that perfectly predicted the past.

But still, hardly anyone cared. The phrase"money
supply" elicited yawns. The Wall Street Journal, meanwhile, ran a
few articles explaining why there is no longer any such thing as risk. It was
only the Austrians who seemed to take notice when money creation rates began
to take off in 1995 and climb to 15 percent in late 1998 and 1999, taking the
bull market on its wildest-ever ride. Monetary expansion rates settled down a
bit in 2000, a trend which at first seemed merely inauspicious—like a tiny
tap on a domino lined up against a thousand others.

Once the bear market began, there was no turning back, no
matter how much the Fed inflated. Instead of stabilizing downward as they had
in Clinton's first term, money-creation rates shot up again, reaching an
astounding 22 percent in December 2001 from a year earlier and then fell back
down again, creating a double dip bear market in the course of a mere 24
months. In these numbers we find the secret history of the great boom and bust
of our time. Let me give a brief outline of why, and try to explain why it is
that so few seemed to pick up on it.

Mises and Cycles

At the dawn of the age of central banking, an economist
named Ludwig von Mises set out to rewrite the theory of what money is and how
government can seriously distort its workings. Among the puzzles he sought to
solve was one that most economists, including Karl Marx, had noticed: swings
in business activity from boom to bust.

Marx said that cycles are endemic to capitalism, and a sign
of the final crisis that will sweep in the age of socialism. In contrast,
Mises found that the business cycle is a symptom not of the free market but of
attempts to manipulate the market through unsound monetary practices. Moreover,
he found that these cycles are self-correcting provided that the government
doesn't attempt to forestall the necessary correction that follows an
artificial boom.

Mises concluded by looking carefully at the relationships
among the financial sector, money and banking, and the structure of production
itself. On the free market, he said, the interest rate reflects the extent to
which people are willing to forego current consumption for later investment.
The more businesses and holders of money are willing to put off consumption,
the lower the rate will be. A low borrowing rate for business, which spurs
investment, reflects a high rate of consumer savings, which reflects a
willingness of consumers to purchase the products made in lengthy production
processes.

In testimony the other day, Greenspan claimed the following:
"Economists understand very little about how technological progress
occurs." Perhaps he should have said that he, Greenspan, knows little
about how technological progress occurs. At least as regards the Austrian
economists, his statement is false. Within the framework of the freedom of
exchange, entrepreneurs make judgments about what consumers might want in the
future, including new technologies.

Capitalists and investors assume the risk, employing private
property, that this judgment is correct. Investments that are profitable
attract more resources and those that yield losses are shelved.

This is the free-market capital structure at work in a
complex economy. It is truly a miracle of coordination—extending through all
sectors and across a huge range of time horizons—with no central management,
and needing none. It balances human needs with the availability of all the
world's resources, unleashes the amazing power of human creativity, and works
to meet the material needs of every member of society at the least possible
cost.

It does this through exchange, cooperation, competition,
entrepreneurship, and all the institutions that make possible capitalism—the
most productive economic system this side of heaven. This system of capital
coordination not only works without central management; the attempt to manage
it creates dislocations across sectors and across time.

What We Owe the Free Market

Let us never underestimate the social benefits that flow
from this seemingly technical mechanism. The market economy has created
unfathomable prosperity and, decade by decade, century by century, miraculous
feats of innovation, production, distribution, and social coordination.

To the free market, we owe all material prosperity, all
leisure time, our health and longevity, our huge and growing population,
nearly everything we call life itself. Capitalism and capitalism alone has
rescued the human race from degrading poverty, rampant sickness, and early
death.

In the absence of the capitalist economy and all its
underlying institutions, the world's population would, over time, shrink to a
small fraction of its current size, with whatever was left of the human race
systematically reduced to subsistence, eating only what can be hunted or
gathered. The institution that is the source of the word civilization—the
city—depends on trade and commerce, and cannot exist without them.

And this is only to mention the economic benefits of
capitalism. It is also an expression of freedom. It is not so much a social
system but the natural result of a society wherein individual freedom is
respected, and where businesses, families, and every form of association are
permitted to flourish in the absence of coercion, looting, and war.

Capitalism protects the weak from the strong, granting
choice and opportunity to the masses, who once had no choice but to live in a
state of dependency on the politically connected and their enforcers.

But capitalism has many enemies, among them those who would
attempt to gin up economic production through loose credit. What Mises focused
on in his book on money was the effects of this particular attack on the free
market: expansion of money and credit by the central bank, and, in particular,
the attempt to drive down the price of credit to spur business investment.

Doing this through the interest rate injects new money into
the economy. One effect of this has been known for centuries: it causes prices
to rise. But the other effect Mises discovered: it subsidizes long-term
capital investment in a manner than cannot be supported by the patterns of
consumption and saving. As one Austrian economist puts it, when the central
bank drives down interest rates, it causes the economy to bite off more than
it can chew.

The effects of artificially inflating the economy can be to
cause prices to increase. But as we saw in the late 1920s and other times
since, that is not always the case. It often causes a kind of investment
euphoria that leads people to believe that nothing can go wrong.

The monetarists, for example, believe that so long as prices
remain in check, there is no problem associated with money expansion. The
supply-siders, though sound on many issues, have an unfortunate faith in the
power of loose credit to make bread from stones.

Mises developed his theory throughout the 1920s and warned
of the coming of the 1929 stock market crash. His work was carried forward by
F.A. Hayek throughout the 1930s. Hayek later received the Nobel Prize for this.
Indeed, the theory was widely embraced until Keynes dreamed up an alternative
view that resurrected all the old fallacies about the miracles of money
creation and centralized economic management.

Then the Misesian theory languished for decades until the
current downturn. Today it is getting new attention as the leading explanation
of the insanity of the late 1990s and the current bust. Only the Austrians
knew all along that reality would strike back.

The Fed and the administration have worked ever since, using
the only tools they have of regulation, spending, and credit expansion, to
reverse the course of the recession.

When I think of the Fed's spreading money far and wide, I
think of the government in Huxley's Brave New World handing
out soma pills or spreading soma vapors to distract people from reality,
drugging them so they will be content despite the surrounding disaster. If
they start to resist, out comes the soma until the crowds collapse in kisses
and hugs.

The Money Illusion

It is always an illusion to believe that more money is the
answer. The federal funds rate is at a 40-year low, and that hasn't done the
trick. During the 1990s, the Bank of Japan tried again and again to
manufacture a recovery through absurdly low rates, but that didn't work either.
There is no evidence from either theory or history that pounding interest
rates into the ground can create anything resembling a sustainable prosperity.
And yet, people believe it, or want to believe it, because it seems better
than the alternative.

This entire affair illustrates the underlying reality of
American political and economic life: the state's ability to create money and
credit. All other powers of government—regulatory, fiscal, even military—pale
in comparison to this.

Despite that, the Fed is the least controversial institution
in American political life. Apart from Ron Paul of Texas, no sitting
politician understands how it works. When Greenspan comes before Congress, he
is treated like a minor god.

If this worship is ever tempered with skepticism, it is on
grounds that he is not inflating enough, that he is somehow being stingy and
not spreading the wealth. Tragically, there is no organized constituency in
American politics for tighter money, less credit, sounder finance.

Mises distinguishes three varieties of inflationism, that is,
the demand that the state work with the banking industry to flood the economy
with credit. The first is naïve inflationism that sees no real downside to
monetary expansion, the second is inflationism intended to reward debtors at
the expense of creditors, and the third sees disadvantages to an expansionary
policy, but believes that the advantages outweigh them.

The U.S. is right now in the grip of the worst form: naive
inflationism, which, as Mises says"demands an increase in the quantity
of money without suspecting that this will diminish the purchasing power of
the money. It wants more money because in its eyes the mere abundance of money
is wealth. Fiat money! Let the state 'create' money, and make the poor rich,
and free them from the bonds of the capitalists!"

And here we are today enduring the longest recession in
postwar history, a Nasdaq off 75 percent from its highs and a Dow off 40
percent, and the government is still issuing buy signals.

Imagine if you had used George W. as your portfolio manager.
You would have bought stocks when he became president, held onto them through
9-11 and then bought more and more afterwards.

Incidentally, you'll notice that the official rationale for
buying stocks has changed. Whereas once it was said that you should buy
because the economy is on a permanent growth path, after September 11, it was
said that you should buy to display your patriotism.

If that isn't a sell signal, I don't know what is.

Of course no one in his right mind would let the president
of the United States manage his stock portfolio. Why, then, do we trust his
government to spend wisely the $2.5 trillion it will extract from the private
economy this year? Of course, we don't really trust the government to do that,
but we do not have much choice in the matter. This money is taken from us
through force and is thereby, by definition, directed toward uses that are not
those owners would choose. This is power, not market, at work.

Enron, WorldCom, and the Market Economy

What is striking to note, however, is all the ways in which
power is not only destructive but also ineffective against the market economy.
The government did not know that firms such as Enron and WorldCom were
unviable. All the regulators put together could not anticipate the
consequences of what private traders alone were to discover: that these
businesses had wildly overextended themselves.

Leaving aside questions of ethical lapses at these companies,
the most significant lesson we should learn from their collapse is that the
market economy has built within it a fabulous internal check against illusion.
Companies that could not sustain themselves on their own merits were simply
abandoned by investors. It counts toward the enduring shame of the Bush
administration that it attempted to blame the market for the bust of so many
companies, rather than having given credit to the market for having discovered
the problem in the first place and having done something about it.

But as F.D.R. demonstrated after the depression, there are
political points to be made by skewering the private sector to distract from
the failures of the public sector. The alleged crime the Bush administration
seized on was"accounting fraud"—even though it is not at all
clear that what WorldCom, Enron, Computer Associates, Global Crossing, or
Qwest did, often with the blessing of respected auditors, amounts to that at
all.

In each case, the accusation was similar: their books
counted spending as profitable investment before the revenue was in the bag,
and when the economic tables turned, their optimistic projections proved
unsound and even, in retrospect, absurd.

WorldCom was the worst case of the batch, which is why the
government has made such a big deal out of the arrest of two former executives.
Their spectacular shifting of a total of $3.8 billion from expenses to capital
began small, in mid 2000 as the bust was hitting and their accounts were
starting to appear unimpressive.

No one disputes the facts. WorldCom's expenses for last-mile
leases on other companies' communications networks were rising very quickly.
Managers wanted to move these expenses out of their operating account (filed
quarterly and watched carefully) into the capital account—which is something
akin to treating the electric bill like the mortgage.

Now, understand that there was no lying going on, and no
graft or theft or anything else of that nature. What we have here is an
imprudent reclassification designed to impress investors who, at the height of
the bubble, demanded nothing less. Unless you are an accounting whiz, there is
no way to say that this is a priori evil. In any case, it didn't fool
everyone. Many skeptics drew attention to the crazy finance of WorldCom's
books. But in the boom times made possible by the Fed, most people didn't care.

Most of the other cases of corporate fraud that came under
the microscope were far less serious than WorldCom, and none are obvious cases
of theft or fraud. Mostly it was just bad forecasting reflected in optimistic
accounting methods. The supposed damage caused by their behavior was that
their pretty books kept their stock price rising even as the financial
condition of the company deteriorated. That's probably true, but it is also a
short description of what it means to be in a bubble economy. If this be fraud,
the entire economic boom is fraud.

Hitting closer to the truth, the New York Times called
D.C.'s anti-business frenzy"the vital center of the administration's
strategy for reducing the political vulnerability for the White House."
In other words, the Republicans were up to their old trick of behaving even
worse than the Democrats in order to keep the Democrats from coming to power.
If you disagree with this approach, you must be some sort of libertarian
utopian who doesn't understand the need for compromise.

The underlying assumption was the view that it is always a
terrible thing for a business to go under, which in fact it is not. It is
merely a reflection of human preference as expressed in buying and selling
decisions. The only option to going under, in some cases, is to operate
uneconomically. But that is precisely what the government had in mind for the
steel sector last year.

Soviet-Like Tariffs

As a way of dealing with domestic inefficiencies and growing
imports, the U.S. imposed a 30-percent tariff on steel. The idea was to help
one inefficient, bloated, and pampered industry at the expense of all U.S.
consumers of steel, including U.S. businesses, and all producers in Europe,
Asia, Brazil, and Australia. This is brazen protectionism, deeply harmful all
around, not to mention morally repugnant.

Did it help the steel industry? In the short run, yes. But
we have to ask ourselves whether this kind of help is a good thing in the long
run. The tariffs permit an inefficient industry to continue to produce
inefficiently, and forestall improvements in technology and cutbacks in wages
that are necessary if the industry is to adjust to twenty-first-century
realities. There is no virtue to keeping dying technology humming along so
that workers and managers who might be better employed elsewhere can continue
to enjoy fat checks doing outmoded work.

How long must such tariffs remain in place? The steel
industry says they are only necessary in order to get the industry back on its
feet. But that belies the question of what, precisely, is going to inspire
this sector to clean up its act? Protecting an industry from competition is a
method that permits everything wrong with the industry to persist. 

If you think about it, Soviet socialism survived for
seventy-two years on precisely such policies. The Soviet state protected all
its industries from market competition under the alleged need to build
socialism. Factories were never closed, and workers were never let go except
for political reasons, when their services were employed in the Gulag. The
system worked only if your standard is not efficiency but merely the guarding
of the status quo. Eventually this system collapsed, as it must, and the
Russians woke up to a world that was horrifically backward and decayed.

The steel tariff imposed by the Bush administration was
different from Soviet socialism only in degree. It was an attempt to
circumvent the market process through a centrally administered system of
rewards and subsidies, to ensure that an industry abides by political
priorities rather than market dictates. In the meantime, every purchaser of
steel, whether a consumer or a business, has been harmed by being forced to
pay a higher price for an inferior product.

The same pattern repeated itself with the punitive duties on
softwood imported from Canada. Canada refused to obey a U.S. demand that it
place a new tax on its softwood, and so the U.S. struck back. The new duties
raised the price of softwood, used for building nearly every home in America,
by 27 percent.

In economic terms, tariffs are indistinguishable from taxes.
They take people's property by force, requiring businesses and consumers to
pay higher prices for goods than they would otherwise pay in a free market. To
that extent, they harm the prospects for economic growth. If anyone says
otherwise, he is ignoring hundreds of years of scholarship, and the entire
sorry history of government interference with international trade.

Here again, this can create the illusion of prosperity, but
we must also remember that first lesson of economic science: the world is a
finite place where the use of any and all resources is constrained by scarcity.
This is just another way of saying that you can't always get what you want,
and when you do, it must come from somewhere. When the government spends
resources, it must drain them from the private economy through taxation and
borrowing, or by inflating the money supply.

Economics doesn't deny that redirecting resources from one
sector where they are valued by consumers, to another sector where they are
valued by government, can create pockets of expansion. What economics suggests
is that this is not an efficient or sustainable use of such resources. Only
the unhampered competitive market economy, with its system of market prices,
profits, and losses, can reveal to us with any certainty the most desirable
destination of economic goods.

If credit expansion, protectionism, and government spending
were a path to prosperity, mankind would have long ago created heaven on earth.
However, the politicians engaged in these activities have to contend with
reality, and the reality is that economic forces in society must be mutually
sustaining. To have production and borrowing, there must be savings, which
only occurs when people forestall consumption today to prepare for tomorrow,
and investment that pans out in the form of consumption. Absent such
conditions, economic growth lacks a foundation in reality and turns to dust
when conditions change.

Terrorism, War, and Recession

Recession, inefficiency, and bankruptcy are not the only
man-made disasters with which government threatens us. Hardly a day goes by
when the government doesn't issue some maniacal warning about an impending
terror attack. And the sense of uncertainty and confusion that follows can
only forestall recovery.

How much is real and how much is propaganda or merely
bureaucratic risk aversion? We cannot know. They recently urged us to buy duct
tape to seal the windows in a suitable spot in our house in order to hide from
chemical warfare. They told us that they may use nuclear bombs against enemies
real and imagined.

When the warning was given in February, gullible Americans
cleaned out the stores of duct tape. Buried in the news a week later was the
fact that the person who gave the tip that led to the orange alert was lying.

Of course, the revelation didn't do the government much harm,
and the crisis environment that the tip engendered did much good for our
masters, who want to keep us in a relentless state of insecurity and therefore
dependent on them.

That helps them keep doing what they want to do anyway: for
example, spend money and inflate away the debt thereby incurred. Politicians
say they must run deficits of hundreds of billions of dollars to avert an
impending calamity that will make 9-11 look like a warmup. They say this,
but have yet to issue a sell signal.

The government continues to downplay the economic calamity
before our eyes while talking up the prospects for a calamity that can only be
solved, they say, by use of the biggest big-government program of them all:
war.

At the end of the Cold War, many of us hoped that normalcy
would return, that the U.S. would become again a peaceful commercial republic.
But Bush the elder had a different idea. He decided to bomb Iraq and to impose
sanctions that would last 12 years, kill untold hundreds of thousands, inspire
terror plots all over the Muslim world, and provide a new rationale for why
the U.S. must continue to squander hundreds of billions a year on military
public-works programs.

We are often told we must go to war because some swarthy
foreign head of state is not a big fan of the U.S. president. This year, the
person fitting that description is Saddam Hussein. Before that it was the
Mullah Omar. A few years earlier, it was Milosevic. Before that, it was some
ward-heeler in Somalia. Moving backwards in time, we had to take out the
strongmen in Panama and Haiti. The story goes on and on. It seems that the
U.S. government is addicted to conflict. It just can't seem to give it up.

Now, I know there will be plenty of disagreement when I say
we ought to be trading with Iraq, not bombing it. But let's at least be clear
on what we are talking about when we refer to the U.S. military machine. The
U.S. will spend $400 billion on its military this year—and that doesn't
include V.A. hospitals, most spying, the atom-bomb building at the Energy
Department, the military part of Nasa, or the Pentagon's huge"black"
or secret budget.

The second highest military budget in the world is Russia.
Going down the list, next comes China, then Japan, then the U.K. You have to
tick through 27 countries and add their total spending together to equal what
the U.S. spends per year. Not since the Roman Empire has a single country been
so militarily dominant.

Let's look at the relative strength of the U.S. versus Iraq
in particular. Quantitatively, Iraq spends one quarter of one percent of what
the U.S. government spends on its military. Qualitatively, the Iraqi military
machine is crippled, with no spare parts for its ancient equipment. The
soldiers are teenage conscripts in rags with old rifles. The idea that this is
going to be a fair fight is a joke.

Those who worry about Iraq over-arming ought to look a bit
closer to home. As for the shooting war, some military commentators have
compared its ease to drowning puppies. Thanks to a combination of misrule and
punishing sanctions, this once prosperous country has been reduced to rubble.
The U.S. proposes to reduce it further, though in doing so the U.S. faces a
difficult foe: the desire of a people not to be invaded by a foreign army.

The longtime emphasis of the old liberal tradition with
regard to war is this: even the victor loses. We lose resources. We lose tax
dollars. We lose trading relationships and good will around the world. Most of
all, we lose freedom. And herein lies the biggest cost of war to us, for there
is no way that the U.S. can maintain a free market that is the foundation of
prosperity while at the same time attempting to create a global military
central plan.

Big government abroad is incompatible with small government
at home. To the extent we cheer war, we are cheering domestic socialism and
our own eventual destruction as a civilization. But perhaps you do not need
persuading on any of these matters. I know many people who look at the economy
and the military belligerence of the US government and they react with despair.
I reject this posture. For one thing, I am firmly convinced that the
government has reached too far.

When you consider the full range of social, economic, and
international planning on which it has embarked, you can know in advance that
this cannot work. Government is not God, nor are the men who run it impeccable
or infallible, nor do they have a direct pipeline to the Almighty. The method
they have chosen to bring about security and order is destined toward failure.

The Impossibility of the War on Terrorism

The war against terrorism is a good example. Everyone in
Washington is terrified of the next attack. To shore up the war, there has
been no shortage of rhetoric. No expense is spared on arms escalation. There
is no lack of will. The effort has the aid of plenty of smart people. It is
backed by threats of massive bloodshed.

What is missing is the essential means to cause the war to
yield beneficial results. Of all the millions of potential terrorists out
there, and the infinite possibilities of how, when, and where they will strike,
there is no way the state can possibly stop them.

Behind terrorism is political grievance, mostly having to do
with frustration at the activities and arrogance of the state and its
violations of rights. This is not speculation. This is the word of the
terrorists themselves, from Timothy McVeigh to Osama Bin Laden to the suicide
bombers.

The pool of actual terrorists (like the pool of the poor in
the war on poverty) is limited and can be known, and they are the ones the
state focuses on. But the pool of potential terrorists (and potential poor
people) is unlimited, and unleashed by the very means the state employs.

Hence, not only does the state not accomplish its stated
goals, it recruits more people into the armies of the enemy, and ends up
completely swamped by a problem that grows ever worse, as the target
population is able to make a mockery of the state through sheer defiance.

In the war on poverty, as more and more were added to the
ranks of the poor and the intended beneficiaries of the programs themselves
began to mock the state's benevolence, people began to speak of the failure
and collapse of the Great Society. Of course the welfare state still exists,
but the moral passion and ideological fervor are gone. In the same way, we
will soon begin speaking of the collapse of the War on Terror.

Bin Laden is still on the loose, and everyone knows that
there are hundreds or thousands of additional Bin Ladens out there. Terrorism
has increased since the war began. Israel suffers daily, and in constantly
changing ways, ways in which even the most famous and empowered intelligence
and military units cannot anticipate or prevent.

But can't the state just kill more, employ ever more
violence, perhaps even terrify the enemy into passivity? It cannot work. Even
prisons experience rioting. A bracing comment from Israeli military historian
Martin van Creveld:"The Americans in Vietnam tried it. They killed
between two-and-a-half and three million Vietnamese. I don't see that it
helped them much." Without admitting defeat, the Americans finally pulled
out of Vietnam, which today has a thriving stock market.

Can the U.S. just back out of its war on terror? Wouldn't
that mean surrender? It would mean that the state surrenders its role, but not
that everyone else does. Had the airlines been in charge of their own security,
9-11 would not have happened. In the same way that the free market provides
for all our material needs, it can provide our security needs as well.

In all the talk of war on Iraq, I've yet to hear anyone
claim that taking out Saddam or bringing about a regime change will make the
world a more peaceful, happy place. No one believes that. The last war on Iraq
gave rise to al-Qaeda, due to sanctions and Christian troops in Saudi Arabia,
led to the bombing of the Oklahoma City federal building, and emboldened an
entire generation of Muslims to devote their lives to fighting America. What
will the next one bring?

The War on Terror is impossible, not in the sense that it
cannot cause immense amounts of bloodshed and destruction and loss of liberty,
but in the sense that it cannot finally achieve what it is supposed to achieve,
and will only end in creating more of the same conditions that led to its
declaration in the first place.

In other words, it is a typical government program, costly
and unworkable, like socialism, like the war on poverty, like the war on drugs,
like every other attempt by the government to shape reality according to its
own designs.

The next time Bush gets up to make his promises of the
amazing things he will achieve through force of arms, how the world will be
bent and shaped by his administration, think of Stalin speaking at the 15th
Party Congress, promising"further to promote the development of our
country's national economy in all branches of production." Everyone
applauded, and waded in blood, pursuant to that goal, but in the end, even if
he did not know it, it was impossible to achieve.

Mises on Peace

Mises, who was so brilliant when it comes to issues of money
and credit, also saw the need for a thriving economy to operate amidst an
environment of peace."War," he said,"is harmful, not only to
the conquered but to the conqueror. Society has arisen out of the works of
peace; the essence of society is peacemaking. Peace and not war is the father
of all things. Only economic action has created the wealth around us; labor,
not the profession of arms, brings happiness. Peace builds, war destroys."

Our age is dominated by the state and its errors. The state
has given us recession and war, while liberty has given us prosperity and
peace. Which of the two paths prevails in the end depends on the ideas we hold
about freedom, capitalism, and ourselves.

May we never forget the great truth that our founding
fathers worked so hard to impart: tyranny destroys, while liberty is the
mother of all that is beautiful and true in our world.

I make no apologies for being a champion of prosperity and
its source, the free-market economy. It is what gives birth to civilization
itself.

It is fashionable to reject concerns about the economy as
narrow and uninteresting, a merely bourgeois interest. If this attitude comes
to prevail, we have great reason to be concerned about our present age.

If, on the other hand, we can educate ourselves about the
workings of economic forces, and the way in which they are the foundation of
freedom and peace, we will not only emerge from this recession prepared to
enter onto a new growth path; we will have gone a long way to protecting
ourselves from future assaults on our right to be free.


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Llewellyn H. Rockwell, Jr. (Rockwell@mises.org)
is president of the Ludwig
von Mises Institute in Auburn, Alabama, and editor
of LewRockwell.com.
This text is drawn from the keynote address at the spring conference of Sage
Capital Management in Houston, Texas, March 12, 2003.