Economic Theories of Peace and War

Fanny Coulomb

• Publisher: Routledge
• Year: 2004
• ISBN:
  9781134454198
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

War often comes down to one thing: money. The role of economics in the study of both peace and war is arguably then the most important single factor when it comes to the study of defence. This excellent new book from Fanny Coulomb will be of interest not only to those involved in the burgeoning field of defence economics - it will also be of vital

Part 1: The economy, a factor of peace or war: A theoretical dichotomy which appeared with political economy during the eighteenth century

A first way of presenting the economic analysis of war and peace is to emphasise the existence of two opposite points of view, which both developed before the First World War.

• The idea that an economy serves the national power, which closely links political and economic analyses. Several lines of thought developed, notably the mercantilists, F. List or the historical school. They rely on the study of concrete facts, or even on a historical analysis.
• The idea that an economy generates international peace, through the rise of interdependencies. This point of view is shared by economists who aim to show the validity of free trade and laissez-faire principles. Progressively, this type of economic analysis will stop dealing with political issues such as the international balance of power, war and defence.

This dichotomous presentation isn’t sufficient, however, to grasp all the complexity of these theoretical currents. Indeed, internal divergences on the economic analysis of war exist within each current. They partially show the difficulty in expounding definitive economic principles on issues which don’t exclusively depend on economic factors.

1 National power benefits from the economy

The idea that the economy serves power is present in several analyses, and especially in certain mercantilist texts, in the work of F. List and in the historical school. Their first concern was to give concrete answers to current political problems or to draw lessons from the study of historical facts. These currents give a lot of importance to the issues of defence and war, and thus to national unity, independence and power. Several economic policy principles, which answer political as much as economic objectives, are also developed.

The mercantilist movement and the improbable peace

The mercantilist movement developed with modern capitalism, in a context of the political assertion of nations on the international scene and of monarchic centralization. This new doctrine is pragmatic and nationalist. It suggests solutions to increase the level of the national Treasury, by providing the means to lead wars. The theme of war is evident throughout these studies. The interpretation of mercantilist works later gave rise to numerous debates. In fact, the mercantilist analysis raises the essential question of whether the economy is an instrument of power or an end in itself.

The rise of mercantilism

From the sixteenth to the eighteenth century, the mercantilist doctrine is characterized by its analysis of the State’s role in national economic development. The power of the nation benefits from economic wealth and the nation is associated to the ‘Prince’. Mercantilists share a static conception of international economic relations, which leads them to assert that a country can only progress economically by disadvantaging another country. In this way, they expressed the real theory of economic war. Therefore, the matter of the links between power and national economy is thus central in their argumentation. The development of the mercantilist doctrine occurred during the political formation of the European nations. With the development of the concepts of ‘State’ and ‘natural boundaries’, the sovereigns were confronted with the necessary unification of their political territory, while defending national power with regard to foreign nations. From 1450 to 1750, the mercantilist doctrine developed, while international relations were marked by numerous wars. At the end of the sixteenth century, England overcame the Spanish domination and supplanted Holland during the seventeenth century, before putting a decisive brake on French hegemony at the beginning of the eighteenth century.

The development of mercantilist thought coincided with the progressive confirmation of the British Empire’s domination of all international economic relations. Wars were multiplied as states were initiated. Braudel (1979) defines mercantilism as ‘the insistent, selfish, soon vehement, push of the modern State’. By centralizing power, monarchies established juridical and administrative structures on which traders could rely. Conflicts between European powers occurred for commercial reasons. Their main concerns were the control of colonies and conflicts over commercial monopolies. For example, the commercial rivalry between England and Holland was based on fishing zones. Likewise, European powers were in conflict for the domination of distant territories, particularly when these, following the American example, proved to be abundant in precious metals. In this conflictual context, the mercantilist principles aimed at guiding the Prince’s foreign policy.

The development of mercantilist thought was catalysed by great discoveries which led the way to an unprecedented development of maritime trade and to a massive inflow in Europe of gold and silver from South America. These economic upheavals altered the medieval relation between the individual and the State. The Renaissance glorified the search for power and wealth and rehabilitated industry and business. The conception of war in a general sense, i.e. involving military but also economic forces, was already evident throughout mercantilist theory. Economy was indeed an instrument of national power.

The study of the mercantilist theories is based on doctrinal works (Mun or Bodin) as well as on concrete measures of economic policy (Colbert). Mercantilism does not provide a unique and unchanging thought; its principles noticeably differ according to countries and periods. This heterogeneity explains that differences remain in the interpretation of this theory, particularly with regard to the importance of the links between power and economic development. In spite of its significant influence, mercantilist thought has never became a formally established theory.

Its main representatives were businessmen (especially in England), statesmen (especially in France) or professors (Germany). Foreign trade and the advantages of colonization enabled large national companies to grow rich. To be authorized to expand their activities, they first had to solicit a charter. Under these conditions, maintaining good relations with the King and members of government was essential, all the more so as the competition between various national companies was fierce. This explains that this thinking achieved its global theoretical reflection by stating practical rules of economic policy. The emphasis on the concordance between the interests of traders and the sovereign contributed considerably to the doctrine’s development. Willing to satisfy the objective of national power, this doctrine was based on several theoretical explanations of the way the national economy and its foreign trade functioned. In fact, the mercantilist policy did not exclusively benefit traders or financiers. Sometimes, the military and aggressive commercial policies of the States even went against their short-term economic interests. It is, however, necessary to keep in mind that the main purpose of these public actions was to favour the trading classes, especially those controlling domestic trade.

We can’t talk of only one mercantilism, but of several ones, because analyses differed from country to country, and from one period to another. Notably, the most important economic powers of the time (France, England and Spain) each adopted a particular conception of the best way to develop national power, giving more or less importance to the colonial policy, the promotion of foreign trade or the development of national industries.

Spanish (notably Orthiz, Olivarès and Botero) but also Genoese or Florentine mercantilists insisted on the necessity for the sovereign to accumulate precious metals, considered as the basis of military and economic power. This was the main purpose of the Spanish colonial policy and is called ‘chryshedonism’, i.e. the search for the maximum of satisfaction in owning gold. Regarding economic policy, the Spanish policy is characterized by the ‘bullionism’, i.e. the prohibition of gold outflows and the overestimation of foreign currencies. This policy contributed to the decline of Spanish power, to the benefit of industrial England. Indeed, the gold inflow generated a price increase, disrupting the entire national economy, notably by reducing the competitiveness of Spanish products.

French mercantilists gave priority to industrial development, as well as trade expansion which was supposed to guarantee gold inflows, mines of precious metals being monopolized by Portuguese and Spanish. French economic policy consisted of supporting factories, encouraging exports of manufactured goods and prohibiting imports. However, the economic policy was already subtle, refusing exports of products likely to be used as war instruments (particularly weapons) and by carrying out an import-substitution policy (Prebisch, Furtado). Colbert shaped his economic policy in application of these principles. State interventionism was at the heart of economic development, as underlined by Bodin, Montchrestien and Laffemas. However, their points of view varied more than is usually admitted, although they favoured State interventionism and industrialization. The German Cameralists, who taught in universities, training future public administrators, also favoured industrialization, interventionism and protectionism.

English mercantilism (Davenant, Mun and Child) was based on national economic development through trade. Individual initiative was recognized and encouraged. Industry and trade expansion were sought, notably by means of low interest rates. Mercantilism acquired a certain theoretical legitimacy in England, notably concerning the advantages to be gained from an active trade balance.

It is very difficult to have access to an entire economic literature which developed over three or four centuries, in several countries, in ancient languages often difficult to translate. A discussion based on the specific characteristics of national doctrines is therefore out of the question. This is why our analysis intends:

• first to underscore contemporary debates on the interpretation of mercantilist thought;
• then to underline the importance of the general principle according to which the State’s power is the main objective of economic action;
• in chapter 3, we shall show that numerous theoretical differences have appeared within the mercantilist thought, regarding war, peace, defence or national power issues.

‘Contemporary’ debates on the power policy recommended by mercantilist doctrines

Studies on the history of economic thought mention little about the analysis of mercantilism. Numerous authors consider Adam Smith as the ‘father’ of political economy, without mentioning that the study of mercantilist and physiocratic thought holds an important place in The Wealth of Nations. However, mercantilist thought went through several periods of ‘revival’, notably in Germany in the middle of the nineteenth century or during the systemic arms race of the Cold War. An approach to this doctrine by the contrasting analyses of the German historical school, by Heckscher, Viner, Keynes, Schumpeter or Silberner, of power, war and defence issues turns out to be very interesting. The debates were limited to two main subjects:

• what is the priority objective of economy, power or wealth?
• is economic power necessarily a response to an economic situation of conflict?

Power and/or wealth: which priority objective for mercantilists?

In his presentation of mercantilism, by way of an introduction to his work on war and peace in economic doctrines, Edmund Silberner (1957) insists on mercantilists’ bellicosity, in opposition to liberals’ pacifism. He comments on several characteristics of mercantilism, notably the search for autarky, the xenophobia and the idealization of war. According to the author, mercantilism was dominated by the war factor and shared an antagonistic conception of international relations, which determines its monetary and commercial ideas, its will to economically and politically dominate other nations, and its rejection of foreigners. Silberner considers that the great majority of mercantilists did not mistake money for wealth. But precious metals played an important part in warfare and in support of defence.

However, numerous economists qualified this bellicose interpretation of mercantilism. In his famous book, Mercantilism (the first edition of which was published in 1931), Eli F. Heckscher devoted an entire part to mercantilism as a system of power. For the author, mercantilism was basically aimed at the objective of the State’s power. Jacob Viner (1948) believed this interpretation was excessive. He considered that, for mercantilists, economic progress was a purpose as important as the promotion of a strong or dominant State. Moreover, he noticed that, often very critical of the governments economic policies of the time and little interested in general welfare, mercantilists were above all concerned with the defence of their own advantages. In answer to these criticisms, Heckscher (1955) admitted that economic and political objectives were strongly interdependent in mercantilist thought. If the State’s power is an important economic factor, it cannot, in the long term, disregard neglect of citizens’ welfare without being contested. But power also benefits from wealth as stocks of resources are at the Prince’s disposal for him to satisfy his political objectives. Therefore, there is no basic disagreement in the analyses of mercantilism by these two authors. This interpretation found a broad echo among contemporary economic literature, which insists on the fact that politics and economy are inextricably connected in ‘mercantilist’ texts. Thus, for Albert O. Hirschman (1945), policies recommended by mercantilists aimed at a double objective: the country’s enrichment and the increase of its power. The balance of trade theory made wealth increase and the search for a national power increase by disadvantaging rival states compatible (see also, more recently, the work of Lars Magnusson (1994) on this question).

The policy of power as an answer to a political and economic situation of conflict

Subject to repeated attacks by classical and neo-classical economists, mercantilism fell into disgrace at the end of the eighteenth century. But the protectionism rebirth in Europe and the 1870 war revived the economists’ interest for this thinking. Mercantilists were then presented as defenders of ‘realistic’ measures, in the economic and political context of the time.

The conviction that ensuring the State’s power was the objective of the mercantilist economic policy was expressed by William Cunningham (1892), the main figure of the historical school in England. In Germany, Gustav Schmoller (1857) wrote a short book on the ‘historical meaning’ of the mercantilist system. Mercantilism is presented as a response to a historical necessity, deriving from the States’ wish to assert themselves with regard to foreign nations, but also to strengthen their authority at the national level, through a policy of power and warfare. This was the first expression of economic nationalism.

The economic crisis in the 1920s and 1930s coincided with a strong protectionist revival, in a political context marked by international tensions. John Maynard Keynes, in General Theory (1936), used his defence of mercantilism (against the attacks of ‘classical’ economists) to confirm his conviction that an unsuitable international monetary system contains the germs of international conflict by making the various national interests antagonistic. As stated by the author, the mercantilists’ bellicosity was mainly a realistic answer to the monetary problems of the time. They realized the organization of international monetary relations led to economic war. In the fixed gold standard international system, the balance of payments is a decisive factor for the money stock and the interest rate, and thus for the national economic health. It is therefore necessary to promote national exports to attract the maximum of precious metals, at the expense of other nations. In this context, the preservation of international peace seems highly improbable because the international monetary system prevents the realization of full employment in all nations.

In his History of Economic Analysis, Joseph A. Schumpeter (1954) also defended mercantilists against those who accused them of having supported irrational and contradictory economic policy measures. According to the author, mercantilist policies were, on the contrary, based on a strong practical argument. The policies based on the public monopoly of exports and on the control of imports and exchange rates (embargo on precious metals) are rationally explained by the situation of conflict and the international tensions of the time. As stated by Schumpeter, mercantilists were not theorists, but rather interpreters of the popular common sense, in a political context of international confrontation. Besides, most mercantilist authors belonged to business circles, which directly benefited from aggressive foreign policy. They put forward the arguments of the King’s wealth and of England’s security to hide their (real) imperialist motives.

For John K. Galbraith (1987), according to the mercantilist doctrine, economy is subordinated to political objectives and is of benefit to national power. But, gradually, there was an evolution in the identification of the power’s economic bases, modifying or substantially qualifying the too abrupt analysis of the mercantilists’ bellicosity. We shall try to bring this evolution to the fore in Chapter 3.

The general principle of the Prince’s power as a cause of economic action

Whereas English classical economists will later aim at economic development through the expansion of peaceful trading relations, mercantilists have underscored the power and the domination relations of a nation through economic weakening, or even military conquest of neighbouring countries. Above all, economic development was of benefit to military power, by providing the means to ensure the State’s defence and by financing military expeditions abroad. Politics benefited from trade.

The precious metals trade surplus: a factor of power

Mercantilism was characterized by a few main principles, which justified economic and military conflicts between European states, as well as colonial conquests. The trade surplus enables the constitution of a treasure (or of public savings) likely to protect national wealth. Mercantilists then developed the balance of trade surplus theory.

In the sixteenth century, while the economy had gradually monetized, insufficient credits explain the importance given to the accumulation of precious metals. But, above all, the State was newly in charge of permanent mercenary armies, and the changes in military techniques had created substantial financial needs that only the constitution of an important war chest could meet. Antoine de Montchrestien (1615) pursued the idea stemming from Antiquity that money is the ‘sinews of war’. Many other authors, notably Jean-Baptiste Colbert in France and John Locke in England, also shared the view that the power of a State depends on the importance of its Treasury. The dominant idea was that the power of a State was determined by its capacity to have sufficient monetary resources available at any time to achieve its foreign policy, in particular to finance its wars (this point of view was illustrated by John Hales (1581) for example). Thus, there is an immediate relation between supply and demand, in the sense that the money disposal (of which neutrality is an underlying hypothesis) leads directly to the ownership of desired goods. Therefore, the existence of a war chest composed of precious metals or the concrete availability of weapons in case of conflict are assumed to be two equivalent situations. This analysis contains the premises of ‘Say’s law’.

However, the role played by the precious metals stock in war success was later minimized. English mercantilists in particular insisted on the importance of manufactured goods exports and of the national production of goods necessary for warfare.

The mercantilist argumentation was based on the ‘balance of trade’ theory which was first expressed, as far back as 1616, by Francis Bacon (1625): the development of trade is of benefit to the country if it generates an excess of exports over imports, the trade balance returning to the nation as money. As stated by Charles Davenant (1696), the Prince’s interest implied an aggressive commercial policy, because precious metals reserves could only be acquired through trade. However, conflicts between private interests and public interest could occur. Although they favoured the development of English exports, most mercantilists were opponents of currency exports, therefore hindering trade development. Some of them, like Milles (Spiegel 1971: 100), did not hesitate to prescribe the control of foreign trade, in the medieval tradition of ‘bullionism’. We notice the concept of treasure explains both budget surplus and trade surplus, as if they had to go together and as if the Prince could take possession of the trade surplus.

In fact, mercantilists considered that only production leading to an export surplus was really productive and could create wealth. According to Simon Clément (1695: 371), trade within the national territory does not create wealth, but only represent transfers from one person to another (the profit of one making up for the loss of the other). In this way, the production devoted to exports and the traders’ role were glorified. Mercantilists therefore favoured import limitations and encouraged exports.

According to certain mercantilists, currency was necessary...

Table of contents

• Cover Page
• Studies in defence economics
• Title Page
• Copyright Page
• Illustrations
• Introduction
• Part 1: The economy, a factor of peace or war: A theoretical dichotomy which appeared with political economy during the eighteenth century
• Part 2: War or peace, resultant of an economic system: New economic analyses on defence-related issues since the mid-nineteenth century
• Part 3: From new debates opened by economics on peace and war factors to a resurgence of the political economy perspective
• Notes
• Bibliography