Book Review: The Great Illusion
Normal Angell’s The Great Illusion: A Study of the Relation of Military Power to National Advantage, published in 1910, is the author’s attempt to prevent World War I. At the time, tensions between Germany and Britain were running high, inflamed in part by rhetoric on both sides claiming that a nation’s prosperity—and even its ability to feed its population—depended on maintaining military supremacy. Angell dismantles those arguments, desperately trying to show that there is no economic reason for war before the shells start flying. The book is a strong analysis of the relationship between military power and wealth, and while it obviously did not keep Britain from going to war with Germany, Angell’s model predicted the war’s economic consequences with Cassandra-like accuracy. As a result, Angell was awarded the Nobel Peace Prize in 1933. However, Angell’s model utterly fails to describe the economic consequences of World War II, for reasons which expose the limits and assumptions of Angell’s theory.
Angell’s foes are a host of reputable journalists and academics who claim that trade and wealth are ephemeral without the backing of a strong military. Any nation that lacks a strong military, they argue, will lose the commercial war of all against all to nations willing to throw their weight around. Because international trade could be halted by blockade, or wealth could be seized by a conqueror, such events inevitably will happen to Britain unless she maintains military superiority over other nations in general and Germany in particular. (The warmongers Angell quotes speak with exactly the mix of bombast and pique that I’ve seen in cheerleaders for American wars like Iraq, Libya, and Vietnam, along with the preference for generalities and hypotheticals over concrete cases that is the hallmark of political hacks everywhere. Anyone born after 1995 or so should read Chapter 2 just to get a feel for the immortal rhetoric of jingoism.)
Angell’s main counterargument is that, as the world’s economy has financialized, wealth has become harder to seize. Rather than gold and jewels which can be carted away, wealth has come to consist of companies, shares, debts, and a host of complex financial instruments. The value of these instruments is tied up in the arcane web of international obligations and business ties, and in ordinary investors’ faith in market mechanisms. While it’s certainly possible to seize these financial instruments by force or threat of force, Angell argues, this would cause local market crashes, which would spread and become international market crashes, and the “winners” would lose more money in the crash than they gained in the seizure. So, while a conqueror can certainly destroy wealth, Angell denies that they can gain wealth by force.
Angell also notes that the ongoing prosperity and economic security of small states like Switzerland, Norway, and the Netherlands is a crushing counterexample to the jingoist economic model. These states were doing well in Angell’s time, and the century since then has only reinforced his argument that their people’s wealth is not threatened by their military inferiority, whether from raw plunder and extortion or from more complex international trade deals subtly weighted by military might. Since the book was published, some of these countries have in fact been conquered and occupied, and while this was important politically, it has had relatively little impact economically.
The aftermath of World War I would vindicate Angell’s claims more broadly. The Treaty of Versailles imposed heavy reparations on Germany, the main result of which was hyperinflation and the temporary ruin of the German economy. There was no corresponding boom in the victorious nations, and no British or French profiteers getting rich off of markets and businesses that had once been German. The French occupation of the Ruhr led to strikes and the shutdown of more German industry. Little wealth was transferred and much was destroyed.1 Many in France were primarily concerned with weakening Germany and so were content with this situation, but American diplomats and financiers tried to prevent the crash.
However, it only happened this way because the victorious nations limited their confiscations to the realm of finance. Note that Angell’s analysis focuses on financial wealth (e.g. gold, money, stocks) and not on the factors of production (e.g. farmland, labor, machine tools).
Angell is correct in noting that financial wealth became much harder to seize after the value of stocks and bonds eclipsed the value of gold and silver. However, military seizure of financial wealth has never been very important in determining the wealth of nations, even in raiding cultures like the Vikings. At most it allowed a few personal fortunes to be made and personal legends to be built. This sort of plunder has often been popular among the sort of risk-seeking young men who today dream of becoming star athletes or founding billion-dollar startups, but it has never been the economic foundation of a society.
The factors of production are a very different story. Military seizure of the factors of production has always been rare and difficult, and success at this task can reshape entire regions. Before industrialization, by far the most important factors of production were productive land and semiskilled labor to work it, so seizing them could only mean settling land (e.g. the Volkerwanderung or the colonization of America), capturing masses of slaves and integrating them into one’s social system (e.g. the Comanche or the Roman Republic), or conquering a productive agricultural society, leaving it mostly intact, and inserting one’s own people into the elite positions (e.g. the Normans or the Manchus). All of these approaches require far more effort and skill than simple plunder.
Since industrialization, the most important factors of production have been heavy machinery, skilled labor, and groundbreaking technologists. World War II shows that, when they disregard claims of legal ownership, modern regimes are no worse at seizing the factors of production than medieval regimes. The Soviets were notorious for shipping heavy machinery out of captured areas, and sending skilled technicians and engineers to work in slave labor camps. The Nazis transferred factories and shops from Slavs and Jews to ethnic Germans. (The best-known beneficiary of this policy was Oskar Schindler, who received a factory seized from Polish Jews and spent most of its profits on bribing the Nazi death machine to spare the Jewish slaves who worked his plundered machines.) Contrary to Angell’s fears, German financial markets did quite well when foreign capital was being seized. Moreover, Schindler and his peers produced vast quantities of useful goods, and that is the true test of economic value, not piles of gold or numbers in a stock exchange. As the Nazi government collapsed, American industrialists looted German patent files, setting research and development forward by years without concern for intellectual property. More importantly, the American military acquired Werner von Braun and other German rocket scientists, who would design the first ICBMs and the rockets that took us to the Moon. This transferred more wealth than all the plundered machinery put together.
Seizing the factors of production at scale is always a bloody affair. It requires mass graves, tearing parents away from children, kicking in doors at 3 AM, and shooting 13-year-old saboteurs in the back of the head. Most people hate doing this, which is a big part of why it’s so rare. Even the architects of the Treaty of Versailles, who are not known for their soft hearts, refused to contemplate something so extreme. But sometimes it happens anyway.
This essay was originally posted on June 28, 2019.
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There were some French chemical firms that extorted and reverse-engineered intellectual property from German factories in the occupied Ruhr, establishing French production of ammonia and of improved dyes. I suspect similar behavior in other advanced industries. But this was relatively minor at the time.