The Tariff Is the Mother of the Trusts...and of War and Imperialism

On this date in 1883 Joseph A. Schumpeter was born in Trest (Czech Republic) in the former Austro-Hungarian Empire. Schumpeter wrote on a wide range of economic and social subjects, and is best known for Capitalism, Socialism, and Democracy and History of Economic Analysis. One of his claims to fame is the phrase "creative destruction," by which he indicated the dynamic entrepreneurial element at the heart of the market economy. (Actually, I've never been crazy about that phrase; I prefer Israel Kirzner's Misesian/Hayekian emphasis on entrepreneurial coordination.) Curiously, Schumpeter thought the state socialists had won the economic calculation debate against the Austrians, and he expected capitalism to be replaced one day. Yet, in the free-market economy ("capitalism") Schumpeter saw a force for peace and worldwide cooperation through the division of labor. However, in his view various precapitalist influences eat away at the system, especially the wish for protectionism, setting a country on the path to imperialism and war. He stressed that these influences are not inherent in the market economy. (Note the similarity with Ludwig von Mises's thesis in Omnipotent Government.)

With the U.S. government fighting in the Middle East and possibly more battles on the horizon, it is fitting to contemplate what Schumpeter had to say about capitalism and war. Here is an excerpt from his paper "Imperialism and Capitalism" (1919) reprinted in his posthumous book Imperialism and Social Classes (1951; all emphasis in the original):

A protectionist policy, however, does facilitate the formation of cartels and trusts. And it is true that this circumstance thoroughly alters the alignment of interests. . . . Union in a cartel or trust confers various benefits on the entrepreneur—a saving in costs, a stronger position as against workers—but none of these compares with this one advantage: a monopolistic price policy, possible to any considerable degree only behind an adequate protective tariff. Now the price that brings the maximum monopoly profit is generally far above the price that would be fixed by fluctuating competitive costs, and the volume that can be marketed at the maximum price is generally far below the output that would be technically and economically feasible. Under free competition that output would be produced and offered, but a trust cannot offer it, for it could be sold only at a competitive price. Yet the trust must produce it—or approximately as much—otherwise the advantages of large-scale enterprise remain unexploited. The trust thus faces a dilemma. Either it renounces the monopolistic policies that motivated its founding; or it fails to exploit and expand its plant, with resultant high costs. It extricates itself from this dilemma by producing the full output that is economically feasible, thus securing low costs, and offering in the protected domestic market only the quantity corresponding to the monopoly price—insofar as the tariff permits; while the rest is sold, or "dumped," abroad at a lower price, sometimes (but not necessarily) below costs.

What happens when the entrepreneurs successfully pursue such a policy is something that did not occur in the case discussed so far—a conflict of interests between nations that becomes so sharp that it cannot be overcome by the existing basic community of interests.

This, Schumpeter continues, can set off a malignant drive toward militarization, imperialism, and colonialism, promoted by the tariff-spawned monopolists who need to dispose of their surplus goods. The target countries don't always acquiesce.

Thus we have here, within a social group that carries great political weight, a strong, undeniable economic interest in such things as protective tariffs, cartels, monopoly prices, forced exports (dumping), an aggressive economic policy, an aggressive foreign policy generally, and war, including wars of expansion with a typically imperialist character. Once this alignment of interests exists, an even stronger interest in a somewhat differently motivated expansion must be added, namely, an interest in the conquest of lands producing raw materials and foodstuffs, with a view to facilitating self-sufficient warfare.

What I would add here is that the "conquest" need not be old-style explicit colonization. It can be executed more subtly through a system of client states and friendly, beholden regimes (oiled by the IMF, World Bank, USAID, and arms sales), with "regime change" pulled off periodically when necessary.

The lesson? For the sake of peace, we need laissez faire.

Cross-posted at Liberty & Power.