2010/05/30

War and economic growth

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Oliver Stone's documentary "South of the Border" apparently includes this account of the former Argentine president Kirchner about a conversation with GWB:


It's not exactly uncommon that people believe in positive economic effects of warfare, but those effects are mostly illusions, caused by tunnel vision.


In the realm of macroeconomics, expenditures for warfare are about equal to expenditures for a program to build buildings, then blow them up, build again, blow them up, ... it's consumption that does not stimulate anything and doesn't meet the consumption preferences of the population.
Investments usually increase the economic output (depending on circumstances), while additional consumption does so at most by a factor of 1 unless the economy was running at significantly less than full potential (and only if the circumstances allow it).

A war can of course erase unemployment, but keep in mind that all the mobilised soldiers don't really "work" in the economy during war. They're the equivalent of unemployed people, adding nothing to the nation's economic output.


There is one valuable thing in war, though: War - and especially the emotional mobilisation of the population by it - can provide motivation, break up resistances and such. Re-distribution fo income becomes fairly easy during war.
Motivation is the key in every economy, it drives them. It's what comes before the worker even raises his hand. A very detailed research into the motivation effects on the micro and macro scale could consume the whole career of hundreds of economists, and economists tend to be more interested in researching peacetime economies.

It's therefore difficult to tell what exactly changes due to the changes in motivation, but it's quite safe to say that these effects do not apply significantly to peacetime military spending.
Even IF the motivation of the population in wartime would change enough to enable a net positive economic effect; that effect would not mean that peacetime military spending could be considered as an economic advantage. It's simply a form of government consumption actually.


There are additional reasons why a look at the economic effects is almost excessively difficult; most wars are short. It's possible in wartime to postpone the replacement of old machinery and buildings, for example. These investments are a huge factor in normal, peacetime economies. You can postpone them - which merely postpones investments and frees production potential for other production.
There's also the problem of waste. The GDP metric is generally under fire for being a poor indicator for welfare. To raise a building and then blow it up does increase economic output just as two neighbours helping each other does not while them doing the same and paying each other an identical sum does.
The welfare effect of economic output isn't shown in GDP. The GDP merely shows the extent of official economic activity.
The economic activity of warfare has very little to do with welfare (private consumption drops significantly in major wars), and even worse - much of the war expenses are usually wasted. Again, this waste is not being subtracted from the GDP.


In short; even if (and that's not for sure) warfare does increase the GDP on paper, it's among the most crappy tools for economic recovery. High peacetime military spending is similarly crappy for the purpose.

Then again, it's not surprising or even unbelievable that GWB recommended war as economic policy.


Sven Ortmann
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5 comments:

  1. There is one issue where warfare can help an economy.

    In a situation of global overcapacity destroying the productive capacity of the enemy enables on to bring the own capacity to good and very profitable use.

    This was a bit the (intended?) situation of the U.S. after WWII. U.S. cars found lots of well paying customers all over the world because production capacity was destroyed in many industrial countries.

    The current second world depression can be seen as such an overcapacity situation and some might be tempted to destroy Chinese(?) industrial capacity to then regrow productive capacity in the "west".

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  2. Well, that may work if you assume that trade balance surplusses are advantageous.

    The example still completely fails the test of value for price.
    Waging a world war is extremely costly, after all. The debt from W2 never fully went away for the U.S., and the small advantage of increased exports (world trade wasn't that big at that time) was definitively unable to justify the war's expenses.

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  3. What about the fundamental economic benefits of war booty? On a small scale Afghans trading captured NATO equipment comes to mind. The pillaging of the Iraqi copper reserves and antiquities is another example. However war booty only helps if the profit/cost ratio is high enough, which probably is not the case in modern wars. I have (only) a hunch this ratio was a lot higher in the past.

    The "neo-colonial" scenario would likely be some kind of indirect debt slavery by financial means, kept in place by corrupt puppet regimes. War in this case would only be used to surgically neutralize the dangerously competent leadership and intelligentsia of the targeted nation in the political arena.

    The most profitable and also highest risk possibility could be war as a means to annex territory. This has worked for many nations (like the union of the USA) in the past. Although it has also backfired dramatically in many other cases.

    Although I must admit that all these methods in fact only see war as a means towards productivity and not as something productive in itself.

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  4. Neither Stone nor Kirchner has a whole lot of credibility here. Stone hates Bush with a passion that can only be described as pathological, admires Third World tyrants like Chavez and Castro, and is a long-time believer that there are fascists under every bed. Kirchner's main accomplishments as president were to default Argentina's debt and renege on the amnesty with the military. Not exactly the guy you'd want to talk economics with.

    No American president has the power to suddenly change the country over to a war footing. In fact, one of the problems in both Irag and Afghanistan was that Bush tried to fight the war "on the cheap" without expanding the military so as commit more troops. Most of the US defense budget goes to big ticket items like carriers, aircraft and the like, whose development cycle far exceeds the term of any president. You of all people ought to know this. In the US the House of Representatives controls the purse and can cut funding for any weapons system or war, as they did for the Vietnam war.

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  5. The GWB thing was only about 5% of the story here.
    It's rather difficult to illustrate such a topic without resorting to war profiteer caricatures and a video still serves the purpose of breaking up the block of text and please the eyes a bit. ;-)

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