Saturday, April 21, 2007

War and Economics Part II

War and Economics

Part II

By Richard E. Noble

If we accept all the positive economic attributes of War and we admit that War is economically favorable - Then the question is “how” does it work?
If we can figure out the techniques and the technicalities of “how” war works maybe we can then apply this knowledge to other industries.
If war is in fact a business - a business that works - then its principles should be applicable to other endeavors.
The most profitable sector of war is the production and manufacture of the tools of war.
Of course in ancient times men marched off to war with very little preparation or implements - sticks and stones and their bare hands were good enough. In those times it was not the production or manufacture of the implements of war that made war profitable. It was the plunder; the booty; the slaves, the pillaging along with the joys and pleasures of rape, torture and killing serving as residual spirit enhancers. In those times the armies and the individuals actually profited from the spoils of war - like pirating or thievery.
In today’s world it seems that Wars are not fought for such fundamental principles. Pirating and thievery are rarely even mentioned - though rape and torture are still quite popular on either side of any encounter.
The individuals involved do not necessarily gain personally from their efforts. Many of the participants actually suffer irreparable damage - even death - with no reciprocating financial reward. The profits of war are still democratically distributed but different segments of the warring populations are rewarded differently.
The soldiers are usually some of lowest compensated. Soldiers are the least organized. They have no unions; they have very few rights and a multitude of duties. The bulk of them are traditionally garnered from the poorest ranks of the societies involved. They have been the least educated overall. They are typically the “blue collar” employees working in the factory of War.
Officers and Generals fare somewhat better. Some of the high ranking officers actually do quite well. All militaries are based on a class structure - the higher ranking traditionally coming from the wealthier more prosperous families. They are better organized and consequently fare much better in wages.
The real beneficiaries of war are not the consumers but the suppliers - the manufactures, the producers, the corporation heads, the CEOs, the stockholders and their employees. This has always been the case.
As we all know if you can keep your homeland uninvolved in the actual conflict of the War, and send your armies overseas to war in other lands, the war becomes substantially more profitable. Even when one takes into consideration the costs of exporting the war, the profits are still enhanced by conducting the war abroad. You do, of course, have the dead and maimed who must be transported back to their homeland but nevertheless you avoid the impact and the damage to the infrastructure that the war inflicts on the country of destination.
Although the soldiers carry the war to the enemy they are not a valuable asset in the profiting from war. Similar to the employees in a consumer factory they are an unfortunate but necessary expense. Their value is that they carry on their backs and in their arms the accouterments of the war. They wear or service or harness the equipment; they throw the hand grenades; they shoot the bullets; they drop the bombs; they fly the jets; they sail the ships; they guide the missiles etc., etc.; but just as with the employees in the conventional factory they are considered a cost of production. Their up-keep and maintenance are to be considered as an expense and not as a profit.
But the war produces products which are bought and sold. Who are the consumers of the products of war?
The host country receives the abundance of the factories of War but it does not buy them and in most cases does not pay any of the expenses or cost for their production. They receive all of the products of the war factories free of charge.
The soldiers are not consumers either. They are given their products to dispense also free of charge. So who buys and pays for all the expenses of war?
Governments pay for War. They purchase the products and they then consume them.
They consume them by donating them free of charge to foreign countries. These countries, of course, didn’t ask for these products, nor do they really have any need for them; but they get them nevertheless. It is also not a matter of consequence to what country these products are donated. One country will serve the purpose just about as well as another.
These countries do not usually receive these products in a usable state. They do not receive these products to use themselves, but rather have these products used on them.
Once these products have been used, in most cases, they no longer have any positive value.
So you might say that governments create these products for War while also creating the demand and the market for these products.
Of course governments contend that there is a demand for these products. They usually contend that the countries that receive these products have asked for them.
After a war is over the country who has received the bulk of these products always denies ever having asked for them.
But in any case, from the business perspective, if we delivered these products to planets in outer space the business cycle of profit and loss would be much the same.
In other words, in order to create this cycle of profitability governments really do not need a host country.
The idea of having a viable host country simply makes the war easier to sell to the domestic manufacturing entity or nation.
But if the consumers of War are governments then we are lead to ask; Where do they get the money to buy and pay for the War?
Most Americans would say that their Government gets its money from taxpayers. But this is not entirely true. If the only money that the U.S. government had access to was what it takes in from the taxpayers then at most points in its history it would not have had the money to manufacture any of its wars.
The difference between what the American taxpayers have paid the U.S. government and the money that the U.S. government has spent is actually calculated and kept in a log book.
This log book is called the National Debt. Unfortunately this does not provide an accurate record because all the unpaid expenditures from past deficit spending are recorded in aggregate.
But the question is if the government didn’t collect this money from the taxpayers, where did this money come from?
Most people would say that the government simply printed it up - created it via the treasury. In which case the logical question would be; If the government simply printed up the money why didn’t it print up enough money to cover any deficit?
The notion that the government prints up money is only partially true.
If they just went to the treasury and had money printed up - much as a counterfeiter would do in his garage or cellar - that would be bad; or good, depending on your point of view with regards to proper monetary policy. But what the government does, seems to me to be worse yet.
They go to the Treasury and print up lOUs that they sell to customers for an agreed percentage of interest in return for cash up front. Why do they do that? Only J. P. Morgan knows.
So not only as critics claim have they created more money (inflating the currency in circulation) but they have also created future debt payments.
Again, why do they do this?
I don’t know.
But even though this is interesting to think about, it takes us away from the fundamentals of our War Industry.
All that we need to know is that the consumers of war are the Governments. And the governments buy the war by taxing its citizens now and in the future via the debt borrowing. So the consumers of the War are the citizens of the countries involved in promoting the War in question.
So then, what do the citizens of the war producing countries get for their dollars (or whatever) invested via their taxes in War?
They get support for their businesses; they get jobs and a prosperous economy. At least this is what most people think and this is what most Americans have come to understand.
So the government collects the taxes and cash from borrowing from the people. The government takes these taxes (money and borrowed cash) and invests it in the industries and products of war. The government uses some of this tax money to pay the soldiers while the industries producing the products for the war pay their employees and extract their management salaries and profits while also paying dividends to their shareholders.
Those that are not directly involved in the industries of war themselves benefit residually by supplying consumer goods and services to all of those employed and benefiting from the War industry. This is no different from the grocery store built outside the automobile factory or the textile mill or the gold mine or whatever. The Boom-town that lives by catering to needs of the gold miners.
So what is the fundamental economic cycle taking place here?
Well, we have several factors. We have people; we have governments; we have money; we have factories; we have products; we have producers; we have consumers; we have soldiers; we have employees; and we have an overall concept that we call War.
The taxpayers give their money to the governments; the governments give their money and the money they have borrowed on their bonds (that will be paid for in future increments by present and future taxpayers via inflation) to the factories and the industries; the industries pay their managers, their stockholders and their employees; the managers, stockholders, and soldiers (or families of) spend the money from their earning on non-war consumables.
But eventually the government spends all of its collected tax revenues plus the money it has borrowed. It then must collect more taxes and borrow more money. The governments get more taxes by taking a portion of the incomes gained from the war industries plus the residual benefiting consumer industries and continue to borrow as is necessary.
Now, since the government only extracts a portion from the wages of those in the society, unless the residual industries surrounding the War industry is greater proportionately than the War Industries themselves - the Government will inevitably run out of money. Because if we theorize that it pays for all of the products and salaries and costs of war; and if the war industry only manufactures for the war at hand - since its products return no revenue it can add no money to the original money invested.
Let’s start at the beginning here once again.
Let us imagine that the whole economy is based solely on the Industry of War. Its factories only manufacture the products and implements of war - all of which are given away in one way or another. The planes, the bombs, the bullets, the tanks etc. are all used in the War effort - nothing is sold.
The war is financed by taxpayers and by extending credit on the collected taxes from future taxpayers. The only increased revenue to the government comes from the taxes collected from the new jobs created by the War Industries and the stimulation generated in the residual economy. If War is the only source of this economy’s income - this society will not be able to sustain itself.
If the industries of war do not sell their products to someone other than the taxpayers or the War itself does not produce spoils - war conducted in this fashion will be unsustainable.
War for the sake of war; war that gains no outside spoil; wars that are solely sustained by the taxpayers will eventually bankrupt any nation.
But what if the war is financed by future taxpayer debt and alternative weapons sales?
Well, financing via future taxpayer debt is basically a Ponzi operation. The scam will be sustained until the debt reaches a point beyond which the economy and the earning population has expanded.
This would be comparable to reaching a point in your personal debt where you must borrow money each week to be able to meet the interest payments on your credit cards.
The only way this could be sustained is if your borrowing power is infinite.
Unfortunately War is not profitable. And it must follow that it is being sustained by the legitimate business world - or simply creating debt on future taxpayers. The only way that a war can pay for itself and be profitable is if the country manufacturing the weapons and instruments of war is not expending them itself but selling them to other countries who are bankrupting their national economies.
This is much like the drug business - if you’re a user you’re a loser.
In the United States of America we do both. We fight wars and we manufacture and sell the weapons of wars. Oftentimes we do both at the same time. In many instances while our government sends weapons and soldiers to a selected country at the taxpayers expense, our businesses and manufactures sell their wares not only to our government but to surrounding countries including the country being attacked - World War II being a prime example.
But the theoretical question remains: How is war profitable?
Making War is only profitable if booty is attained. If there is no booty the only way a nation involved in a war can profit is via employment - soldiers and workers participating in the war efforts receiving wages. This will increase revenue to a nation by way of new or additional income taxes; but the income taxes collected are only a portion of the tax dollars expended - even if the profits of the war industries are taxed also - rather than subsidized. We have the Law of Diminishing Returns setting in here. But if the people employed in the War Industries spend their money on homes, refrigerators and the like and this creates jobs and consequently additional tax revenue to compensate for the war expenditure then one could theorize a profitable situation.
Let’s say that taxpayers pay one third of their incomes in taxes to the Federal Government. If a residual industry is built around the War Industry at least three times the size of the War Industry in profits and employees - then the nation could theoretically break even. If the residual industry is greater than 3 to 1 then the nation could actually make a profit.
So, we must assume that this is the theory of the profitable Military Industrial State. This is how we merchandise and capitalize War. To use and old phrase this is how we become established “Merchants of Death”.
Now that we have established the method for making War profitable, how can we use this method to establish other industries - possibly industries that do not involve Death and Destruction? Let’s review the business of war.
Governments “create” money through debt and establish additional revenues via taxation. The money created through debt and taxation is invested in the production of war. The majority of the products produced for war are destroyed via the war - and are given away for free. The government gets it “profits” from the war by taxing the new war industries and their employees and managers. But this alone would not give a return to compensate for the initial investment necessary to produce a war. There must be secondary sources of revenue to compensate for the enormous investments necessary to conduct war.
One compensating source of revenue is the sale of weapons and explosives or whatever to “observer” countries or third parties who watch the war taking place and realize that they must prepare themselves for the inevitable war that may strike them at any time.
Another source of return for investments is money gained through additional borrowing - this, of course is an eventual loser but it keeps the ball rolling and like all Ponzi scams it could go on forever as long as people “keep the faith”.
Probably the major source of war revenue comes with the cleanup and exploitation (spoils) after the host country is devastated. Of course if you lose the war or the aggressor nation gives up the war before it is brought to a conclusion - all of these potential profits go down the drain. But even this operation is a “catch-22” because there is no one capable of paying for the cleanup investment. Consequently the money for the clean up must be advanced once again via taxation, inflation or borrowing (debt).
The bottom line of this industry should be becoming obvious. The only way to continue to profit from war is to promote another war. As with all Ponzi scams new blood must be continuously brought into the equation. This would be the same for any business idea that is based on investment without sales. If you have no product to sell - or you blow it up or throw it away - you have eliminated the main source of revenue for any business adventure. Even if the business is service orientated - some one must “buy” the service.

[This has completed part II of War and Economics. Part III will be my next entry.]

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