In dark hours, when people fear for their lives, they eagerly deliver their freedom to the state. Many want the government take control of their lives, because they think it will be better for them. Ludwig von Mises has written extensively about the erroneous belief that in an emergency the state must take control of the economy because the market economy supposedly fails. Specifically, Mises dealt with this subject in his writings on war socialism.
In Human Action, he writes about the reasoning in favor of state planning:
The market economy, say the socialists and the interventionists, is at best a system that may be tolerated in peacetime. But when war comes, such indulgence is impermissible. It would jeopardize the vital interests of the nation for the sole benefit of the selfish concerns of capitalists and entrepreneurs. War, and in any case modern total war, peremptorily requires government control of business.” (1998, p. 821).
In Nation, State, and Economy Mises similarly remarks:
So-called war socialism has been regarded as sufficiently argued for and justified with reference mostly to the emergency created by war. In war, the inadequate free economy supposedly cannot be allowed to exist any longer; into its place must step something more perfect, the administered economy. (2006, p. 117).
The similarity between the reasoning in favor of war socialism and the arguments that have been brought forward during the corona emergency is striking. Today war rhetoric abounds. Emanuel Macron explicitly stated, “We’re at war,” and sent, as in Spain, the military to the streets. US president Donald Trump similarly speaks of “Our Big War” and invokes the wartime authority of the Defense Production Act. We hear the slogan “We are in this together” all the time.
Mises discusses German war socialism during the First World War in detail. He points out that Emperor Wilhelm II basically lost all powers to the General Staff. General Ludendorff “became virtually omnipotent dictator,” he explains in Omnipotent Government (1985, p. 42), and subordinated everything to the war effort.
Winning the war was thought to be the outstanding goal, which could only be achieved by centralizing all powers. These powers were given to the military. After all, they were the experts in military matters.
Today, we face a similar tyranny of experts, to borrow a term from William Easterly. In the medical emergency, enormous power lies in the hands of doctors such as Anthony Fauci in the US or Christian Drosten in Germany. These experts advise governments what to do—for instance, which size of gatherings shall be prohibited (events of 1000, 100, or 3 persons), if and for how long economies shall be locked down, and if the wearing of masks shall become mandatory. And politicians follow the advice of the doctors. After all, they are the experts.
The similarities to war socialism do not end there. Indeed, to different degrees we are experiencing war socialism, because the war against the virus involves a massive central invasion of private property. Almost all economic activity has become subordinated to the war effort. In many countries businesses not considered essential to the war effort are forced to close down, such as retail stores, gastronomy businesses, or hotels. Others are forced indirectly to close, as their customers are confined.
In a sense, the whole population has been conscripted in the fight against the virus. Some people are allowed to continue producing, because it is considered worthwhile. Other people have been conscripted and ordered to fight the war on the home front. They are not allowed to leave their homes, as the experts consider this the best way to fight the virus and win the war. Even children are forced to contribute to the war effort by staying home. The central planners also decide when it is worthwhile to leave the home trenches, i.e., to walk the dog or buy groceries.
As in other wars, borders are temporarily closed and the international division of labor is severely hampered. War is financed in three main ways (Mises 2006, pp. 136–42).
First, goods and services are confiscated. In the corona war, medical material is being seized. Companies are closed and individuals confined. They shift their “production” toward the war effort. They produce “social distancing,” which is considered the main “good” necessary to win the war against the virus. Second, taxes are increased. Indeed, war profit taxes are especially popular. We are already hearing the first proposals in that direction. Third, the printing press accelerates, which we are experiencing as well.
In sum, the government interventions in the corona epidemic can be considered as a form of war socialism.
The next question is: is war socialism true socialism?
According to Mises, true socialism exists when there is a “transfer of the means of production out of private ownership of individuals into the ownership of society. That alone and nothing else is socialism. (Mises, 2006, p. 142).
Mises declares: “the measures of war socialism amounted to putting the economy on a socialistic basis. The right of ownership remained formally unimpaired. By the letter of the law the owner still continued to be the owner of the means of production. Yet, the power of disposal over the enterprise was taken away from him” (2006, p. 143).
In socialism, the central authority decides what is produced. In corona socialism, the government indirectly does that also: it decides which businesses are allowed to open and which are not. Thus, it decides what can be produced (masks, ventilators) and what will not be produced (tourism or sporting events).
Mises clarifies: “War socialism was by no means complete socialism, but it was full and true socialization without exception if one had kept on the path that had been taken” (Mises 2006, p. 144). Of course, corona socialism, as an instance of war socialism, is considered to be temporary, as “exceptional provisions for the duration of the war” (Mises 2006, p. 146).
But does war socialism achieve its aim? The defenders of the centralized effort claim that “the organized economy is capable of yielding higher outputs than the free economy” (Mises 2006, p. 117).
The opposite is true. It is the private economy that wins wars. The private economy is yielding more goods and services to alleviate the corona epidemic. The efficiency of private companies these days is amazing. Uncounted solutions are coming from the private sector, which is switching to the production of masks, medical suits, drugs, ventilators or coming up with safe new ways of delivering goods and services to consumers.
Private companies swiftly shift their production efforts due to anticipated profits. In a market economy, it is profits that direct production, quickly taking all human needs into account. In contrast, the medical production czars tend to have only one end or human need in mind. They want to slow down infection rates at all costs. They disregard other human ends, such as creating successful businesses and enjoying a vast array of goods and services such as vacationing or other leisure activities. When these ends cannot be reached, there may be other health problems, such as heart diseases or psychic issues. The forced lockdown brings economic misery. A general fall in living standards ensues with all its consequences.
The central medical planning focuses only on measurable variables such the infection rate. By not taking into account other ends (and not being able to do so), this planning exerts enormous harm from the point of view of voluntarily interacting individuals. In contrast to the central planning approach, which focuses on one end, all ends in human society are taken into account in the market economy through (expected) profits. Production is adjusted swiftly and efficiently toward the changing ends of consumers.
It is entrepreneurial profit seeking that unleashes human creativity and genius and thereby satisfies human needs as efficiently as humanly possible. The right answer to a war, and to the corona war as well, is therefore to eliminate all barriers to entrepreneurship:
For anyone of the opinion that the free economy is the superior form of economic activity, precisely the need created by the war had to be a new reason demanding that all obstacles standing in the way of free competition be set aside. (Mises 2006, p. 117)
In other words, in order to win the corona war, government should cut taxes and regulations vigorously. Unfortunately, governments around the world have opted for the opposite path, namely war socialism. If they do not quickly rectify their responses and end their war, the socialization of our economies will continue. Mises warns: “in the long run war and the preservation of the market economy are incompatible” (1998, p. 824).
Philipp Bagus is professor at Universidad Rey Juan Carlos. He is a Fellow of the Mises Institute, an IREF Scholar, and the author of numerous books including In Defense of Deflation, The Tragedy of the Euro, and is coauthor of Blind Robbery! , Small States. Big Possibilities: Small states are simply better, and Deep Freeze: Iceland’s Economic Collapse.