Embed Doc
Copy Link
Readcast
Collections

CommentGo Back

Download

Economics of War

By Garda Ghista

Introduction

For the past century, human beings had the agricultural capacity, the technology and theorganizational skills to feed every last person on the planet. Yet, marching along into the 21

century, 80 percent of the world’s population lives in absolute poverty - economically defined asmissing one or more of the five fundamental necessities of life, i.e., food, clothing, shelter, healthcare and education. Millions of people have died of neglect, disease, malnutrition and starvation.In large part they have died because precious funds went instead to feed the war machine, alsocalled euphemistically as ”military expenditures” or “milex.” More recently these costs arereferred to not even as military expenditures but as “defense expenditures.” This change waswrought in 1947 when the extant Department of War was renamed to Department of Defense.

[1]

George Orwell referred to these nefarious terminological twists as “doublethink” and“doublespeak.”The driving force behind the Cold War, which was continued by Ronald Reagan through the1980s and continued to the extreme with 9/11, was fear. If a government can manage to instillhigh levels of fear into the populace, that government can do anything it wants, in the name of alleviating that fear. Hence the American people always said ‘yes’ to wars.Professor Chalmers Johnson, formerly of the CIA, describes the present Pentagon as analternative government, with control over 725 official military bases around the world and scoresmore unofficial bases. In addition, the Pentagon runs the Army, Navy, Air Force and MarineCorps, plus has huge stockpiles of weapons of mass destruction that could wipe out our planet ina moment.

[2]

American military expenditures (milex) are huge. These expenditures reflect agigantic waste of man, money and material.According to Doug Dowd, the socio-economic importance of milex can be measured two ways:(1) the percentage of milex to GDP, and (2) the percentage of milex to total federal governmentexpenditures.

[3]

Dowd says both these figures are routinely understated. The official percentageof milex to GDP is about four percent. In reality, he says, the figure is more than ten percent.John L. Boies, in his thorough analysis of milex, says that if we assume “the share of the US debtresulting from security expenditures is equivalent to the share of on-budget expenditures tonational security,” then we conclude that “since 1948 national security and national security-related interest on the debt has absorbed 57 percent of state resources.”

[4]

The War Economy in Theory

Does war help or hurt an economy? Numbers reflect that in previous wars such as World War Iand World War II, the American economy was benefited. It received a boost. However, thesefigures seem to be changing, partly as a result of advanced technology. Paul Poast, in his book

Economics of War

(2006) has created the term, Iron Law of War, which states that war is good for the economy.

[5]

The logic is that in order to fight a war, the government must raise an army andproduce weapons. Both these actions mean thousands or hundreds of thousands of jobs, either directly in the army, air force or marines, or in corporate factories producing weapons rangingfrom cluster bombs to weapons of mass destruction.

There are two prime effects of war. People get scared, and war is expensive. Thefear in the general population leads to decreasing consumer confidence and hencereluctance to spend money. Corporations also become hesitant to spend, unless theyare directly in the munitions or other war-related business. This causes the economy

to initially slow down. However, statistics show that soon after the onset of a war, thepeople tend to forget, and again begin to purchase goods and services, driving upthe consumption level back to normal. These statistics, however, are based on warswhich all occurred overseas on other continents, thus making it relatively easy forAmericans to forget that the war is still taking place, particularly with the complicityof the media.The other real effect of war is its cost. The cost comes in the form of militaryexpenditures (also referred to as ‘milex’) and manpower, in the form of severalhundred thousand soldiers to physically fight in the war as well as thousandsemployed to produce the requisite weaponry. Thus, if we take the standard macro-economic theory Y = C + I + G (X – M), where Y = national income, C =consumption, I = business investment, G= government spending, and (X-M) = netexports, we will see an initial decline in C but a growing increase in G due to milex.

Poast lists four points to help us determine the cost of war, i.e., its real effects on the economy.They are (1) the state of the economy prior to the onset of war, (2) the location of the war, (3) theextent of the mobilization, i.e., manpower and weapons, and (4) the duration of the war, the cost,and how the war is financed.

[6]

At this time, the Gross Domestic Product (GDP) is the best measure of the well-being of aparticular nation’s economy. If an economy is sluggish, then according to Keynesian economicsthe government can step in and start spending in order to raise the GDP, also equal to Y, or national income. This can be done by starting new public works projects such as roadconstruction, dam construction, national parks, etc. This can also be done by the purchase of munitions for war, which is referred to as Militaristic Keynesianism. If there is unemploymentbefore a war, the government will justify starting a war as it will supposedly have the effect of leading to full employment. The drawbacks are that Militaristic Keynesianism can lead toproduction shortages due to high government and continuing public demand. As a result,companies will raise their prices to slow consumption, hence causing inflation. Inflation damageseconomies by diminishing people’s purchasing power. If prices rise and salaries do not rise, thecommon people are no longer able to buy the same quantity of goods as previously. Likewise,banks / creditors need to maintain purchasing power of the nominal interest rate on moneysloaned. The value of this interest rate goes down when prices increase.

[7]

If this inflation isanticipated, workers and creditors can plan accordingly. However, if it is unanticipated, then it willhave a negative impact on the economy.

The location of the war

is a critical factor in its effect on the domestic economy. If country Ainvades country B and the war is fought in country B, then it will wreak economic devastation oncountry B. Europe was ruined by both world wars. Distant wars in country B may or may notaffect the economy of country A. If, for example, oil supplies are disrupted causing a rise in oilprices, it can have a severe effect on the economy of country A, because as oil prices rise, GDPfalls. In contrast, a war in country B can boost the economy of country A if, for example, the war causes a bigger demand for weapons. During World Wars I and II, the US exported iron, steeland coal to Europe, which helped bolster the US economy.

A war’s cost is a direct result of the war’s length.

Table 1 shows the cost of six Americanwars: World War I, World War II, Korea, Vietnam, Persian Gulf and the present Iraq war.Table 1

Cost of Major Wars to the United States

WarDurationTotal Direct GDP in final Total GDP Cost as % of Cost as

Costwar yearduring war period GDP in finalwar year average of GDP per year In billions of current year dollarsIn billions of current year dollarsIn billions of current year dollarsTotalcost/totalGDP duringwar periodWorld War I2 years2671.312836%20%World War II4 years288218923132%31%Korea3 years 54380137514%4%Vietnam10 years 111138396778%1%PersianGulf 8 months61591759171%1%Iraq3 years +10/mo120/year N/AN/AN/AN/A

Source through Persian Gulf: Paul Poast,

Economics of War

, McGraw-Hill-Irwin,2006Source for Iraq costs: Jonathan Weissman,

Washington Post,

April 2006

We need to know also

how the wars are financed.

They can be financed by governmentborrowing (via war bonds), raising taxes, cutting non-military spending (for example, educationand social service programs such as Medicare and Medicaid), and creating money (printing morecurrency, increasing bank reserves, or receiving reparations (for example, stealing iraq’s oil andcalling it reparations). Of all these possibilities, money creation is the most common. The growthof money supply invariably peaked during each American war. The inevitable consequence of printing more currency is inflation – an increase in prices, as represented by M (supply of moneyin the economy) multiplied by V (the velocity of money, or the number of times in a year money isspent) equals Y (goods produced in a given year) times P (how much each of the goods cost).Hence we have M*V = P*Y, also called the ‘quantity theory of money.’

[8]

Hence following thisequation, as M rises, then P will also have to rise.The fourth point in determining the cost of war is the factors of production, meaning land, capital(machines and factories), and labor that are used in producing war supplies. During war, thegovernment may claim land for factory construction or nationalize companies to controlproduction of war goods. There are two types of resources: physical resources and labor.

Thefirst is physical resource mobilization. However, if those resources are for war purposes, thentheir production may not stimulate the economy, in contrast to consumer/civilian goods, which dostimulate the economy, as those goods produced in turn cause the purchase of more goods byconsumers.Labor resource mobilization means the percent of the population in the military and the drop inthe unemployment rate. If there is an increase in government military spending, factories willhave to produce more, which will mean workers putting in overtime pay and new workers being