Peace or Economic Catastrophe

If Americans do nothing very different, most of us will have a better economic future, and so will our children, if we can avoid war.

These five words — if we can avoid war — are crucial. I have in mind war in the broadest sense. It includes terrorism. If we can somehow recover peace as a society and not spread war, which will produce low-intensity, low-tech, low-cost retaliatory domestic terrorism inside our borders, economic growth will do its astounding work.

The magnificent fact of the free market system over the last quarter of a millennium is this: economic growth compounds. Recessions come and go. Wars come and go. Inflations come and go. Economic growth continues. It produces miracles.

Because we do not perceive the daily effects in our lives of 2% per year economic growth, we need years of hindsight to see just how far we have come. We take for granted the effects of that seemingly insignificant but civilizationally astounding 2% per year growth.

Most of my readers are middle class. I grew up in a middle-class household, and while I am no longer middle class in terms of net worth, my tastes, outlook, and lifestyle remain middle class.

Middle-class morality has a tendency over time to produce economic growth. It is thrift-oriented. It espouses personal responsibility for one’s own future. It is devoted to education as the way to advancement. It is monogamous. It produces steadily rising income. From monks who took vows of poverty in the medieval era, and whose orders grew rich over centuries as a result of hard work and reinvested capital, to immigrant Jews whose sons became lawyers and accountants, and whose grandsons became media moguls and real estate tycoons, the story has been the same: middle-class morality produces society-wide economic growth and occasional individual wealth.

Two percent growth per annum, compounded over two and a half centuries, has produced the modern world. In contrast, the lifestyle of the rich and famous rests on capital consumption. Eventually the heirs run out of money.

My grandparents were born in a world without automobiles, airplanes, commercial electricity, radio, and most of the other common features of middle-class life in the West. Their grandparents were born in a world without railroads, steamships, anesthetics, or even something as common as toilet paper. Their grandparents’ grandparents were born in a world that would have been recognizable by Moses. This transformation of the world did not take very long.

Two percent per annum, either up or down, is barely observable in any area of life. Yet over decades, such slow, directional change transforms the social landscape. Middle-class morality can be maintained in the conditions of compound economic growth, just as it was in North America from 1750 to 1960.

If this morality declines, growth will decline. Violence is a corrosive influence on middle-class morality and lifestyle, as we can see in the West’s inner cities and, for that matter, in the cities in Iraq.


Every generation has its signs of economic decline. My parents’ generation went through the Great Depression and then World War II. But eventually things do change. Even in war-ravaged Western Europe and Japan, capitalism and peace combined to produce economic growth on a scale that restored middle-class living to pre-war conditions by 1950. Throughout the West and in Japan in 1955, things were much better than in 1938. Only in the Communist world did economic growth lag. Where men had the economic liberty to make their own decisions with their own skills and money, they prospered.

There is no doubt in my mind that the American economy is facing a series of severe challenges that will cost most Americans the fulfillment of some of their most cherished dreams. One of these dreams is comfortable retirement at the expense of the U.S. government. But that dream deserves to die. Another dream is the idea of the typical American as the richest average Joe on earth — a common dream of children in my youth. Urban Asians are catching up fast. My grandchildren will live in a world in which Americans will not be kings of the hill. But so what? If the rest of the world catches up by way of increased productivity, consumers around the world will benefit. It is better to be middle class in a rich world than upper class in a poor world. It is far better to be a two-eyed average Joe than a one-eyed man in the kingdom of the blind.

The addiction of Americans to consumer debt has limits: insolvency. The growth-stifling effects of government regulation of the economy have limits: the competence of bureaucratic regulators to pursue their plans. The growth-hampering effects of high marginal taxation has limits: the unwillingness of American voters, so far, to turn this country into Scandinavia. The United States government absorbs about 25% of American output. This percentage has not changed significantly in several decades. It is too high, but limits placed on new spending by rising Social Security and Medicare costs will keep new programs from becoming budget-busters. The existing old-age programs will succeed at busting the budget all by themselves.

Tax cuts would help. Stable money would help. A wave of future-orientation would help most of all: a widespread desire to invest rather than the desire to borrow. We are unlikely to get and keep any of the three over the next two decades. Still, the fact remains that the ability of politicians to extract significant new revenues out of the wallets of American taxpayers is limited. The bond market is the hammer, and Washington does not hold it. The central banks of Japan and China hold it.

So, we should maintain an attitude of long-run optimism, on this condition: if we can avoid war. The problem is, we are becoming more likely to see the war brought home to us. The political-strategic promise of 2003 that war in Iraq and Afghanistan will keep the terrorists “over there” was never realistic. Terrorists are ever more mobile. Our southern border is as porous as ever. Finally, the costs of effective terrorist violence are constantly falling because of the very productivity of technology and capitalism.


My father was a great fan of George M. Cohan, so I grew up with Cohan’s music. Like most Cohan fans, he loved “Over There.” I can think of no song that more encapsulates the message of America as the liberating policeman of the world. “For the yanks are coming, the yanks are coming, there’s drum-drum-drumming everywhere.” There is, indeed: on approximately 750 military bases in over 100 countries. Each country contains prospective terrorists who want revenge for our being over there.

The voters’ assumption has been that our troops will keep terrorists occupied over there. But why should we think that all terrorists with a grudge against America are occupied over there? Islam is an international religion. It has 1.2 billion adherents. It does not take a large percentage to put together a team of terrorists who could bring the U.S. economy to its knees.

I think 12 men could do it. That is not a large percentage.

We live in an era of asymmetric warfare. Small groups of mobile, dedicated terrorists can create havoc with large organizations, as we saw on 9-11. Add to this a desire for revenge, coupled with a particular variety of Islamic warriorism.

In June, 2007, an important article appeared in Military Review. The author was Thomas Hammes. Col. Hammes is a retired Marine. He is the author of a book on 4th-generation warfare, The Sling and the Stone (2004). The title refers back to David’s use of a sling and a stone against Goliath. That was surely low-tech technology warfare. Its effect on Goliath was to destroy the confidence of the opposing military forces, who fled.

Fourth-generation warfare has to do with moral confrontation. Any technology used is a means to an end. If a group can undermine the enemy’s will to resist, Sun Tzu-like, it can achieve a victory. If it can break the enemy’s economic system, so much the better.

Hammes’ article is titled, “Fourth Generation Warfare Evolves, Fifth Emerges.” It deserves your consideration. The fact that it was published in Military Review is also worth considering.


Hammes writes that modern warfare has moved from organizations that are loyal to a nation-state to those that are loyal to a cause. They are likely to use their resources to attack a nation-state that is perceived as damaging the cause. The members of these organizations see their cause as a moral cause. This leads to fanaticism. The organization does not feel restrained by conventional standards of morality. Hammes could have used the example of the 9-11 hijackers. They cared nothing about the lives of those who were on the planes or in the towers. The Geneva Convention meant nothing to them.

Matching this transformation is the problem Hammes calls “no return address.” The 9-11 terrorists are classic examples. They were mostly Saudis, but this fact did not lead to an invasion of Saudi Arabia by the United States. Instead, it led to an invasion of Afghanistan, followed by an invasion of Iraq. The supposed mastermind, Osama bin Laden, is still at large.

In the aftermath of a successful terrorist attack using low-cost biological weapons of mass destruction, what could the President do? The perpetrators are unknown. Who put them up to it? If the technology is off-the-shelf technology available anywhere on earth, how could the sources of the devastation be traced back to a nation-state?

If the cause is international, and if the target is internationally perceived as a local invader, the recruits can come from anywhere. If they speak the same international language, such as Arabic, this identification offers nothing specific to the revenge-seeking government. The victim can strike out blindly, but this undermines its legitimacy in the eyes of the new victims. A new pool of recruits appears overnight.


First, the capitalist system is driven by price competition. Second, there is a fundamental law of economics that says, “When the price of anything drops, more is demanded.” Col. Hammes did not mention this law. It seems applicable to the process he describes.

He focuses on a potential weapon of mass destruction: a laboratory-created strain of the smallpox virus. He says that he could have picked another virus, but smallpox is convenient. Here is the basic story.

He begins by reporting the findings of Dr. Craig Venter. Dr. Venter and his team have synthesized a specific virus by using readily available base pairs. He used these base pairs to synthesize a completely different virus. The components are commercially available. There are no restrictions on their purchase. This was an expensive experiment, but he said that in less than a decade, a competent graduate student in a university laboratory will be able to achieve a similar synthesis.

This experiment so impressed a science writer named Paul Boutin that he went back into a biology lab. He had not worked in one since high school. There, with assistance from a biologist who kept him away from life-threatening experiments, he created a glowing yeast. He used the same techniques that could be used to create a smallpox virus.

It turns out that the smallpox genome has been published on the Web. Boutin found it within 15 minutes.

So, the fact that smallpox no longer exists outside of specialized research laboratories that deal with deadly viruses is no longer a major restraining factor on its reappearance in the general population.

Hammes then sums up the present situation. Here, we see the power of technology coupled with the free market’s price competition.

The nucleotides to make smallpox can be purchased from a variety of suppliers without identity verification.

Smallpox has about 200,000 base pairs. DNA with up to 300,000 base pairs has already been successfully synthesized.

An Australian research team heated up mousepox virus by activating a single gene. The modification increased its lethality from 30 percent to over 80 percent. It is even lethal to 60 percent of an immunized population. They posted their result on the Internet. It turns out smallpox has the same gene.

The cost of creating a virus is dropping exponentially. If Carlson’s Curve continues to hold true, the cost of a base pair will drop to between 1 and 10 cents within the decade. Thus, a researcher could order all the necessary base pairs to create a smallpox virus for between $2,000 and $20,000. The equipment he needs to assemble the virus will cost an additional $10,000.

Hammes then refers to a simulated smallpox terrorist attack that was conducted in the summer of 2001 at Johns Hopkins University. The list of observers was high level. It was called Dark Victory. The attack was assumed to involve three states. The source was unknown. With the incubation period of nine days, there was no way to trace its origins.

The simulation covered only 13 days. Then it was mercifully shut down. Of course, in the real world, there would be no shutdown after two weeks. It would spread. Here is a summary of the simulation’s findings on biological warfare (BW).

1) An attack on the United States with biological weapons could threaten vital national security interests. Massive civilian casualties, breakdown in essential institutions, violation of democratic processes, civil disorder, loss of confidence in government and reduced US strategic flexibility abroad are among the ways a biological attack might compromise US security.

2) Current organizational structures and capabilities are not well suited for the management of a BW attack. Major “fault lines” exist between different levels of government (federal, state, and local), between government and the private sector, among different institutions and agencies, and within the public and private sector. These “disconnects” could impede situational awareness and compromise the ability to limit loss of life, suffering, and economic damage.

3) There is no surge capability in the US health care and public health systems, or the pharmaceutical and vaccine industries. This institutionally limited surge capacity could result in hospitals being overwhelmed and becoming inoperable; could impede public health agencies’ analysis of the scope, source and progress of the epidemic, the ability to educate and reassure the public, and the capacity to limit causalities and the spread of disease.

4) Dealing with the media will be a major, immediate challenge for all levels of government. Information management and communication (e.g., dealing with the press effectively, communication with citizens, maintaining the information flows necessary for command and control at all institutional levels) will be a critical element in crisis/consequence management.

Hammes continues. The contagion could be spread merely by having a few infected people get on several airliners bound for the United States. The numbers: 3 million infected, one million dead, in 25 states. In 13 days.

How’s that for a suicide attack?

What would you do about it on the day you hear about a smallpox outbreak? Remember, there is a nine-day incubation period. On the day you saw a report on the Web regarding an outbreak of smallpox, what steps would you take? I know what I would do. Before. For my recommended ten steps, click here.


We live in a society that is rich because of the division of labor. The problem we will be facing for many years is simple to describe: blowback. The decentralized systems that keep us alive rely on such factors as a fractional reserve banking that is licensed by the government, a public health system run by various governments, a government-operated road system that has concentrated populations, and government-funded public utilities.

In those end-of-the-world movies about a planet or meteor heading for the earth, the entire economic system functions normally until the handful of chosen ones board the escape rocket (When Worlds Collide), or get on the rocket that will blow up the meteorite (Armageddon), or go to work on the coasts, despite the inevitable tidal wave (Deep Impact). It is all nonsense. The division of labor would collapse within weeks of the announcement. That is why there will be no announcement.

Peace is indispensable to the maintenance of social order, which is in turn indispensable to the division of labor. Our government’s senior officials for over a century have failed to understand this. Our foreign policy has reflected this: “Over There.”

Today, the price competition of the free market, when coupled with advancements in biological science, is moving toward blowback: “Over Here.” The politicians have not counted the costs of their actions. Neither have the voters. They have underestimated the cost of worldwide intervention.

One more time: “When the price of anything drops, more is demanded.” This includes high-risk foreign policy that is perceived as low risk.

October6, 2007

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 19-volume series, An Economic Commentary on the Bible.

Copyright © 2007