Mises and Rothbard On War Finance

Inside the «economics of war» field of study, very few economists have tried to build a systematic theory of the consequences of the different methods of financing wars. Even fewer economists have ever attempted to elaborate a theory that meets both efficiency and ethical criteria. The first studies in this field can be traced back to the late scholastics. Francisco Suarez (1548-1617) and Francisco de Vitoria (1486-1546) are well known as founders of international law studies. The latter, using his characteristic juridical approach to ethical problems, concludes that the prince can use no neutral person or private property in order to wage a war1. But it was Juan de Mariana (1536-1623) who first tried to unite the ethical and the economic dimension of war finance. Mariana started by analyzing the question of the resources the prince is allowed to use for waging a war. His answer could be described as a libertarian answer; the king is not the owner of the properties of his subjects, and thus, he cannot dispose of them at his whim but only after having gained the acceptance of the owner. Then he turned to the different financial tools, and he described the economic consequences of their use. After dealing with the effects of taxation, inflation and the king’s credit, he recommended that both the king and the citizens be aware of the ethical and practical point of views2. After Mariana, very few thinkers have worked on war finance combining both approaches. In this last century the Austrian School of Economics has contributed to the development of the war finance theory by the hand of Ludwig von Mises and Murray N. Rothbard. The first, concentrated his analysis on the possible use of the means to wage a war, and their consequences. On the contrary Rothbard´s approach is known for its focus on the ethical approach to war finance.

Economic Inequality, War Finance and the Pursuit of Tax Fairness

It is widely acknowledged that a fair tax system is one of the most crucial foundations for any country to pursue stable development and human values. So how does a country accomplish tax fairness? This article argues that war finance and domestic economic inequality are two critical conditions. Historically, wars usually create opportunities for countries to enact progressive tax reforms. However, countries’ war finance choices are conditioned by domestic economic inequality. When inequality is low, the political leadership is more likely to secure a consensus of ‘equality of fiscal sacrifice’ between domestic wealthy elites and ordinary citizens. As a result, the leadership can more successfully enact progressive taxation, money creation and non-military spending cuts to pay for the war. Conversely, when inequality is high, the societal redistributive conflict could be more serious. Unable to strike a bargain of fiscal sacrifices without severe social instability, the leadership is expected to resort to a debt-financing strategy, which stifles tax progressivity and fairness. This article compares the United States’ war finance in the Korean and Vietnam Wars and finds supportive evidence. This article has important implications for the pursuits of tax fairness, democratic accountability, and the prospect for peace.

War, International Finance, and Fiscal Capacity in the Long Run

In this article I revisit the relationship between war and state making in modern times by focusing on two prominent types of war finance: taxes and foreign loans. Financing war with tax money enhances the capacity to assess wealth and monitor compliance, namely fiscal capacity. Tax-financed war facilitates the adoption of power-sharing institutions, which transform taxation into a non-zero-sum game, carrying on the effect of war in the long run. Financing war with external capital does not contribute to long-term fiscal capacity if borrowers interrupt debt service and, as part of the default settlement, war debt is condoned or exchanged for nontax revenue. The empirical evidence draws from war around the world as early as 1816. Results suggest that globalization of capital markets in the nineteenth century undermined the association between war, state making, and political reform.

The Entitlements of Merit

This chapter shows how the moral and social dimensions of the subject of army reform grew out of the range of questions that it generated about property and inheritance, as against merit and distinction, in determining both the composition of the French nobility and its relationship to the French royal government. Getting the peacocks to pay raised a number of political dilemmas, however. These, in turn, helped to rule out the old vision of a powerful reforming monarch as the solution to absolute government's financial problems. The political history of the French Revolution thus began with the unavailability of this alternative. Irrespective of the damage done by the argument over military reform to any plausible prospect of relying on Louis XVI to be a patriot king, the model itself pulled strongly against both the realities of modern war finance and the more urgent political need to consolidate the royal debt.