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Markets Are Peaceful but the State Is Not

In this article, I would like to present some fundamental economic thoughts on the cause of war, as war has chronically plagued human history, particularly the more recent history. In 1919, the economist Ludwig von Mises (1881-1973) published a book entitled Nation, State, and Economy, presenting an explanation as to why the catastrophic First World War could come about.

Mises’ answer many people today: the war occurred because of the departure from the idea of free markets, free trade, individual freedom and equality before the law. In short, it was the abandonment of liberalism and the rise of the state as we know it today that led to World War I.

The modern state is aggressive both internally and externally, and it also has an incentive to wage wars against other states in order to assert its interests by force. State and war go hand in hand, so to speak. To explain this in more detail, I would like to put forward a few economic considerations.

It is a logical, undeniable truth that man has goals that he seeks to reach by employing means. Also, man prefers more means over fewer means and prefers an earlier satisfaction of wants to later satisfaction. As a rational being, he realizes sooner or later that the division of labor is advantageous for him, as it increases the output of his work. Division of labor means that everyone carries out the work they can do at the comparatively lowest cost.

The division of labor requires exchange. After all, if they organize themselves based on the division of labor, most people no longer produce for their own direct needs, but almost everyone produces for the needs of their fellow human beings.

It is the division of labor that brings people together. It makes people recognize each other as mutually useful in dealing with their life challenges. To put it simply, the buyer of a product is interested in ensuring that the good’s manufacturer is doing well – because otherwise, he cannot buy the goods.

The division of labor is a natural phenomenon in a system of free markets. In free markets, consumers are free to demand the goods that meet their needs best; and producers have the freedom to offer their fellow human beings the goods they demand voluntarily.

A system of free markets, if practiced, would sooner or later allow people around the world to grow into a very tightly-knit division of labor. The result would be permanently peaceful and productive cooperation among the people.

Because war is entirely alien to the system of free markets, people who know and experience the productive effect of the division of labor on a worldwide scale have no incentive to engage in something like war, as It would be against their personal interests. But, unfortunately, there is no system of free markets in this world that is, or would ever have been, truly free.

For many centuries, especially since the beginning of modern times, there has been the state. Initially, there was a state in the form of the feudal lord, the king, then the emperor, in the more recent past the republic, the dictatorship, or the modern democratic state.

We may ask: What exactly is the state? If you think about an answer, you probably think of something like: “The state, that’s all of us”; or: “We cannot do without the state, because who would build roads and schools, support the needy, ensure justice and security?”

However, the logic of action brings to light a rather different kind of answer. From the human action logic point of view, it is obvious that the state (as we know it today) is a coercive monopoly of power, the use of force. The American economist and social philosopher Murray N. Rothbard (1926-1995) defines the state (as we know it today) as follows: the state is the territorial, coercive monopolist with the ultimate decision making power over all conflicts in its territory, and the state also takes the right to levy taxes.

This kind of state is, of course, not an unnatural institution, and has not been created by voluntary action of the people, nor could it have arisen in a system of free markets. Because in free markets, there is only voluntary exchange; there is no forced action brought about by coercion and violence.

The German sociologist, physician, and economist Franz Oppenheimer (who incidentally was the doctoral supervisor of Ludwig Erhard, the father of the German social market economy and the second chancellor of the Federal Republic of Germany) formulated unequivocally that the state is in fact based on coercion and violence. Oppenheimer writes that the state is:

… in its genesis, essentially and almost completely during the first stages of its existence, is a social institution, forced by a victorious group of men on a defeated group, with the sole purpose of regulating the dominion of the victorious group over the vanquished, and securing itself against revolt from within and attacks from abroad. Teleologically, this dominion had no other purpose than the economic exploitation of the vanquished by the victors.1

Rothbard and Oppenheimer inform us that the state is an aggressive institution and especially aggressive inwards. The ruling class, through use of state power, strives not only to maintain its power over the ruled class but also to expand it through prohibitions and bans, regulations and laws, higher taxes, and much more.

The reason for this is obvious: If the state has the territorial monopoly of power to ultimately decide all conflicts on its territory, and if it also has the power to levy taxes (including inflation tax), then the state (the people who exercise its power) will, of course, make greater and more use of it.

The ruling class prefers more means over fewer means and it prefers an earlier satisfaction of wants over a later satisfaction. Put simply, the state (as we know it today) becomes larger and more powerful over time, and the citizens and entrepreneurs under its command are increasingly pushed around, their freedoms curtailed. However, the state will not only become larger and more powerful “internally” but also externally as soon as it gets a suitable opportunity to do so.

States that feel ideologically linked to each other have an incentive to form a cartel, to eliminate competition between them. An example of such a state cartel is the European Union. It allows the states to become bigger and more powerful.

But if states pursue different interests and follow different ideologies, they have an incentive to aggressively and belligerently build up and expand their power. World history is full of wars between states motivated this way.

Large states are, of course, particularly aggressive towards the outside world because they can relatively easily obtain the means necessary to pursue an aggressive foreign policy, such as money, weapons, and soldiers. When large states follow different ideologies, the danger of war between them is very great. An example of this is the military conflicts, especially in the form of the many proxy wars, between the USA and the former Soviet Union.

From an economic point of view, one can see that the modern state is aggressive, so armed conflicts between states are not a tragic coincidence but a logical consequence. Incidentally, this is a fundamental insight that the Prussian general Carl von Clausewitz formulated in 1832, declaring: “War is a mere continuation of politics by other means.”

So if we want to prevent war effectively, as Ludwig von Mises said, we must limit the state and thus place firm limits upon politics and politicians. Wrote Mises: “Whoever wants peace among nations must seek to limit the state and its influence most strictly.”2 And we must also unconditionally embrace the concept of the free market, because it, and not the state, guarantees peace and prosperity for the people on this planet.

There are only two ways human cooperation occurs: through voluntary means or the use of violence through coercion. The free market stands for voluntary cooperation; Coercion and violence are the means of the state.

There is an important point that we need to make: law and security are indispensable if people in a community want to get along peacefully and productively. But the goods of justice and security can, of course, also be provided in the system of free markets. A state monopolist is not needed to provide them.

Economics can do much to make the world more peaceful and thus ethically and morally better. Anyone who learns how a system of free markets works, what it does, will have no reason to call for a state. This helps us to understand why small states, or small political entities, are more peaceful and prosperous than large states, and large political entities. It is no coincidence that the people who rely on the system of free markets and organize themselves in small units are peaceful, while also earning the highest per capita income. Switzerland, Lichtenstein, Monaco, Singapore, and Hong Kong come to mind.

In light of the Ukraine-Russia conflict, anyone who thinks that the solution to the war problem lies in the further re-armament of states, in sanctions and the end of the cross-border division of labor and trade is making a serious mistake. The problem of war is not solved when the aggressor is defeated, but only when the ideologies that lead to war are completely discredited and no longer appeal to the people.

The Königsberg philosopher of the Enlightenment, Immanuel Kant, wrote: “Peace must be established; it does not come by itself.” I would add that peace comes when people voluntarily cooperate with each other in free markets. Peace is not established by the state. Rather, the opposite is true.

1. Oppenheimer, F. (1907), The State, p. 15. 2. Mises (1983 [1919]), Nation, State, and Economy, p. 124.