I think that, like the broken window fallacy, people forget about the loss and how resources could have been otherwise used.
Friday, April 30, 2010
Does Military Conflict Boost the Economy?
Is it possible that when people talk about the ability of military conflict to "stimulate" the economy, this is what they have in mind?
I think that, like the broken window fallacy, people forget about the loss and how resources could have been otherwise used.
I think that, like the broken window fallacy, people forget about the loss and how resources could have been otherwise used.
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Does military conflict boost the economy? For some reason it seems to me like that is what I've always been taught in school. Or at least when I look back at what I know about World War II, it seems like there was quite a bit of prosperity afterwards. But here you're saying that this isn't always necessary. What are the other factors that play into it?
Erin,
One has to consider at least two aspects, and probably more.
First, the loss of life. This represents a huge loss of human capital. The skills that are lost with the casualties can be significant. Add to that, time spent fighting and producing weapons is not spent on producing other goods and services that are beneficial, rather than destructive.
This brings us to the second factor. Capital (and natural resources) used in fighting - an inherently destructive process - are not used on more productive activity. This represents a huge
opportunity cost.
Think of the classic "production possibilities curve" example of guns and butter. Resources used to produce "guns" are not available to produce "butter."
Much of the prosperity that followed WWII was due to pent up demand - the Great Depression lasted through most of the 1930s. And the War caused rationing in the first half of the forties. But even with that, there were recessions. One in 1945, as the War was winding down, and one in 1949. There were more in the 1950s.
Militaries are always parasites, in economic terms. Wars are even worse, like economic predators.
Yes, one can boost production artificially through massive deficit spending and wartime controls, see WWII. We also, btw, paid down the debt from that conflict for the next several decades.
Interestting side note: The oft-quoted Milton Friedman believed that military campaigns should be financed by a progressive consumption tax.
Many people stop quoting MF at that point.
The reason why it boosted our economy was because everyone was directly working for the military. One company made boots, the other shields, and so on. Jobs went up and the economy was growing. After the war ended, it all crashed. So now that we've changed it to avoid a depression again, what will the effect be if another great war were to happen?
Megan,
It may be a bit of an overstatement to say it all crashed after the war. There was recession, but the pent up demand kept the economy from going into a prolonged, deep downturn similar to what had been experienced in the 1930s.
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